A couple of percentage rent/gross sales issues this week
January 21, 2018
This week, we were working on an acquisition of a property in the southeast. One tenant occupied the majority of the property, with a handful of other tenants accounting for about 10% of the leasable area, but about 20% of the income. There was a restaurant tenant that had a unique name that I had thought I recognized. I did a quick search and, sure enough, it had been featured on a popular food related show a couple of years back (my 19 year old son can watch those shows all day long when he is on break). The thousands of reviews of the place were out of this world, with descriptions of hours long waits at any time of the day. And, there were numerous photos of their many catering events on their website. Yet, while they were in percentage rent, the reported sales were mediocre. While the food did, the sales clearly did not pass the sniff test.
It really is incumbent upon a property manager to determine if sales as are being reported make sense. In this case, based upon average ticket, number of tables, number of turns and ancillary (catering revenues), sales being reported are likely 30-35% of actual. For $800-$1000, the seller could have done a sales audit and realized not only the additional revenue, but would have realized the additional value on the sale.
While discussing this internally, one of the guys in the office, Bob, was talking about a Greek restaurant that he had been to last weekend. While paying, the manager’s phone buzzed, the manager looked at it and then relayed to the kitchen an Uber Eats order that he had just received. Bob said that the order was relayed verbally and was not entered into the POS/register while he was there. It may have happened later, or it may have happened automatically, but he did not see what was likely a $30+ order recorded.
It used to be common for landlords to perform sales audits on 10-20% of their portfolios on an annual basis. Those percentages have been way down since the last recession. But, if you have tenants above, or at least within 5-10% of their breakpoint, you should at least be considering a three year rotation of that group of tenants for sales audits. Especially now, as technology changes delivery, and where sales “in, at, on or FROM the demised premises” are included in reported gross sales, there is additional percentage rent out there.