Two words that STILL don’t exist in commercial real estate (this time related to sales reporting and percentage rent)
September 29, 2019
Last year, upon returning from ICSC’s John T. Riordan School of Professional Development in Minneapolis, I felt the need to write a blog entry on the use of “ALWAYS” and “NEVER” when referring to commercial leases. In short, the only absolute that may exist in commercial real estate is that there are no absolutes.
This year, the JTR school was back in its former home in Scottsdale. There are tracks for Management I and II, Leasing I and II, Development, Marketing and Leadership. While the entire program is exceptional, one particular highlight is Case Study day. The students in the various disciplines are paired together with other disciplines to develop game plans for a particular property – grocery anchored for Level I and a more complex lifestyle center for Level II. The information provided to the students is thorough, with some of the most insightful geofenced data available for each property (provided by David Lobaugh of August Partners).
But, in the Level I program, we unfortunately did not provide tenant sales data. Wanting to determine how the tenants were performing, whether there might be percentage rent, and to help shape future rental rates, a few of the students asked if we could provide it.
The immediate response to the students was disappointing for two reasons. It used an absolute and it was incorrect. The students were told that tenants in grocery anchored centers NEVER report sales or pay percentage rent.
There are certain parts of the country where landlords are a little more likely to concede to tenants’ requests to delete percentage rent requirements. But, even in those areas, the landlord still makes every effort to keep the sales reporting requirements in the lease – perhaps not at the same monthly level, but quarterly or annually.
“Whether you have Percent-In-Lieu (Gross Deals), Early Termination Rights clauses, POP-Up Stores, Rent Relief, Specialty Leasing or other ‘Risk Sensitive’ leasing financial exposure, industry ‘Best Practices’ dictate you keep Sales Reporting and/or Percentage Rent requirements at a minimum.”
According to Ken Lamy, president and CEO of The Lamy Group, an international retail sales assessment and consulting firm, “Whether you have Percent-In-Lieu (Gross Deals), Early Termination Rights clauses, POP-Up Stores, Rent Relief, Specialty Leasing or other ‘Risk Sensitive’ leasing financial exposure, industry ‘Best Practices’ dictate you keep Sales Reporting and/or Percentage Rent requirements at a minimum.”
Lamy states that “These two provisions (percentage rent and sales reporting) currently appear in leases 65-70% in “Open-Air” properties and 99% in mall / outlet / lifestyle properties. As a 21st century industry professional, transparency along with quality data sharing is the norm.”
Even in those instances where the specific sales reporting requirement is deleted, there may be another useful clause buried elsewhere in the lease – Landlord’s right to request financial information. This clause requires the tenant to submit financials (income statements and balance sheets) upon request – often no more than once a year, or in conjunction with a sale or refinance of the center.
Because thorough sales data is critical to the health and operation of a center, landlords are firm in their resolve to keep the sales reporting clause in their leases.
And, to reiterate, always and never really do not exist in commercial real estate.