Should landlords get a cut of online sales?
Retailers are pushing property owners for more flexible lease terms due to the extraordinary disruption caused by the pandemic. One of the tradeoffs landlords are seeking in return is rent as a percent of online sales.
The requests come as many property owners struggle to meet mortgage obligations. Vacancies are on the rise and many retailers and restaurants have been unable to pay rent.
Omar Eltorai, analyst at Reonomy, told GlobeSt.com that he believes percentage lease agreements, typically used by large retailers, will become more widespread “to accommodate significant business interruption better.”
Typically, the percentage-leased concept involves a fixed component of lower base rent plus a variable component based on a percentage of sales generated at the property.
Adding a variable component tied to a proportion of a tenant’s online sales has been explored for several years given the “halo” boost physical stores provide to online sales. A 2018 study from the International Council of Shopping Centers found opening a store helps boost traffic to a retailer’s website within a given market by some 37 percent on average during the quarter that follows.
The appeal for online rent attribution is reportedly being heard louder given the accelerated digital shift amid the pandemic. Fast-growing omnichannel practices, including BOPIS, curbside pickup and ship from store, all require stores to work.
Retailers in the past have countered the threat of rent tied to online sales by noting that online sales often earn lean margins. They also assert that they’ll be paying rent on both stores and online warehouses.
Figuring out a formula to compensate landlords for in-store’s influence on online revenues promises to be complex. Stores are already facing challenges compensating in-store associates for omnichannel actions.
Exploring the issue for The Wall Street Journal, Carol Ryan suggested retailers entering new lease agreements would have to “open their books to landlords in a way they aren’t used to” to explore the links between online and offline sales. She wrote, “Rather than passively collecting rent, property owners will more than ever be partners in their tenants’ business. Negotiations between the two sides aren’t going to get easier any time soon.”
- The Percentage Lease Concept is Poised to Spread – Globest
- 2017 ICSC Canadian Shopping Centre Law Conference – International Council of Shopping Centers
- Physical stores key to retail success, study finds – International Council of Shopping Centers
- Store Landlords Face a Battle for a Cut of Online Sales – The Wall Street Journal
- Malls File for Bankruptcy or Shut Their Doors as Pandemic Pain Spreads – The Wall Street Journal
- Retailers, landlords battle over who foots the pandemic bill – Crain’s New York
- Retailers reject landlords’ plan for a cut of online sales – The Australian Financial Review
DISCUSSION QUESTIONS: Would including a share of online sales in store leases make sense? How would such lease arrangements be structured to be fair to both retailers and landlords?