Journal of Property Management

NegotiatiNg with Retail teNaNts

Retail tenants have the same concerns about occupancy cost as office tenants, but they are also concerned about operating in a location that isn’t profitable—or operating at a loss. To help alleviate these concerns, some retail tenants will negotiate for a tenant improvement and equipment allowance. This is a fixed dollar amount which can be a few thousand dollars for a small retailer, to hundreds of thousands of dollars for a very successful retailer or restaurant chain.

In addition to negotiating the base rent, rent step-ups and pass-through charges, the retail tenant will often attempt to negotiate a percentage rent provision as well. As the property manager, you need to determine if the tenant’s sales would ever achieve the level to pay percentage rent. You can determine this by reviewing the sales trends of a prospect’s other stores and comparing the tenant’s sales breakpoint to the national sales

In a weak market, tenants will ask for the moon. As the property manager or leasing agent, you must be prepared to respond to that request.

averages for this category of retailing, found in the Urban Land Institute’s bi-annual publication, Dollars & Cents of Shopping Centers.

If the shopping center has similar retailers or restaurants, their sales can be compared to the prospective tenant’s breakpoint. The sales breakpoint is the amount of annual sales the tenant must generate before it starts to pay percentage rent. If this is not likely, you may be able to acquiesce and use it to gain a concession from the tenant. If the percentage rent provision is negotiated, the tenant is likely to request a lower percentage rate and possibly a high artificial breakpoint. An artificially high breakpoint is a sales amount above the natural sales breakpoint. The natural sales breakpoint is determined by dividing the tenant’s percentage rate into its annual rent. The resulting number is the natural breakpoint and the tenant pays percentage rent on all sales above the natural breakpoint. If the breakpoint is negotiated higher than the natural breakpoint, the tenant pays less percentage rent.

Again, you should determine what the tenant’s sales are likely to be and how much this request will cost the landlord in lost percentage rent. Using the tenant’s average sales in its other location is a good starting point to determine what its sales would be after a start-up period. The tenant may negotiate for a percentage rent-only lease and no base rent. If this is agreed to, you should then negotiate the percentage rate a couple of points higher. Another counter would be to make the lease percentage rent only for the first year or two, and then have it revert to a base rent.

Retailers may also negotiate to cancel their lease if their sales are below their projections. This is an added concern for retailers who are leasing space in a weak shopping center or mall, or when the economy is in trouble. The better retailers may negotiate for the right to lease cancellation. You should resist giving this right, but if it becomes a deal breaker for a good retailer, the cancellation right should be negotiated to lessen the chance the tenant will cancel the lease. First, you need to make sure the lease cannot be cancelled unless the retailer’s sales do not exceed a specific volume during the third calendar year of the lease. The sales volume should be a realistic number and no less than the average sales of the tenant’s other stores after three years of operations, and no less than the national averages.