This is a controversial but an interesting idea that warrants further investigation. The pandemic has fundamentally changed the economic relationship between some retailers and landlords. The sad fact is that both groups are being negatively impacted. While the concept has merit, the devil is in the details. I doubt that a one size fits all approach will work. Finding a formula that will be equitable for both parties will be challenging and vary greatly depending on the retail category and the unique characteristics of the retailers and the landlord.

This is a very interesting idea. I am curious to see where this goes and how something like this could be scaled up across the country – a lot of rules would have to be in place to define if and when this would happen.

So if I’m a national retailer, with multiple locations in a market, will I be expected to include the performance of all my locations in the market in the calculation for my lease payments in one given store? That’s exactly the implication I see here. Digital channels are another channel, just similar to another store. Thinking of the halo effect, if a retailer has multiple stores in a market, that bump in sales due to physical locations is most likely being influenced by exposure to a number of locations, not just one.

Um…no.

What? absolutely not. Not unless the landlords want to chip in on the shipping costs.

Maybe 10 years ago or even more I went to the Levi’s store to get the correct size and preferred style. I didn’t buy the jeans then, but went home and bought them on Zappos. Since then, I have probably bought more than a dozen pair online.

Should the landlord get a cut? It makes sense. But how is it accomplished? The complexity could be mind-boggling. It may be easy to attached my sales to my local store here in NYC. But how do you deal with the shopper who lives in California or Texas or even NJ?

Net-net, a retail space has value. As more and more and more business goes online, the value related to brick-and-mortar sales decreases, but the value of the space does not for the retailer. The answer is write the agreement for what the real value of the space is to the tenant and move away from the override on sales.

My initial and visceral reaction to this idea was a resounding “no way.” Paying commissions to landlords based on online sales certainly has many potential downsides, and admittedly I have not spent a lot of time considering them all. However after spending a couple moments contemplating this idea, I wonder if there are upsides to landlords being paid commissions only on e-commerce orders that are fulfilled in the store? That would eliminate the issue of landlords double-dipping on e-commerce sales from multiple stores in any given market. It would also minimize stores’ exposure to commissions for online sales outside their market. And it might even incentivize landlords to play a more active role in supporting their tenant stores with order pickup logistics and marketing. Definitely worth further consideration, in my opinion.

Percentage rental leases were much more predominant in the past. Years ago we did shared risk leases. A lower dollar rental base followed by a percentage of sales, normally 3 percent of cash sales, 4 percent of credit sales. Today, if I were doing this, I would expect any smart landlord to go along to keep the tenant, but there would be a ceiling sales limit and then a return to the base lease agreement.

The idea certainly has lots of merit. The line between the physical store and the online site has been completely blurred. There’s a direct line between seeing a brand in real life (the store) and the success of the online business. If I were a retailer demanding a straight percentage of sales deal for my rent, I’d be open to the idea. Of course, if I’m paying 8 percent for the store, I’m not paying 8 percent of my online sales. But certainly there’s a win-win angle here to explore.

It makes no sense unless the retailer is out of other cost reduction options. Perhaps the physical store aids online sales. I’m not convinced by the causality of the relationship. However landlords need to manage space and retailers need to operate their stores.

They say in Vegas, the house always wins. While mall landlords would love to apply that saying, the playing field, or gaming tables, have moved to a digital space that continues to disrupt the role and function of space and the redefinition of consumer value. Sorry landlords, that dog won’t hunt.

In short — it makes a great deal of sense, but only if you are a landlord. If you are a retailer, not so much — as in none.

Shades of grey. Technically (accounting wise) the sale occurs when (maybe not where) the product is fulfilled.

So if it’s curbsided … probably … if it’s buy online and ship from store … less clear.

From a practical standpoint, the landlord probably has the right to anything that goes through that store’s POS device, and a right to audit and balance to that. If the product is reserved online, and picked up in store, the landlord probably gets a cut, yes. If the retailer’s systems are set up so that a ship from store goes through the store POS (like Instacart), also likely yes.

Beyond these not completely clear delineators, it quickly goes to really muddy. In principle, the retailer owes the mall for the traffic the mall generates. The claim to the physical mall generating online sales gets rather but not completely tenuous.

It all comes down to negotiation. But I’m be cautious on both sides. Location is worth a lot — so a good location which increases store sales will probably also have some impact for online sales.

BUT — I’ve never liked contracts which dig for money too far removed from the value that’s being added.

If the negotiation leads to a desperate need for a variable rate, then maybe a bonus from online sales would be appropriate. But a share of online sales? All I see is disaster on both sides at some point in the future.

Regardless of how interesting it is, it doesn’t align with the value to the retailer. The only piece that might make sense is the advertising or brand value appeal for having a physical location. Don’t expect retailers to dive into this option unless they are distressed or are able to cull a fire sale deal from their landlords. If anything, it will result in successful retailers increase buying of property rather than leasing.

Percent of sale is not a common or sought after model for many businesses, not just retail (though there are exceptions) — and to focus on just the digital sale as a non-digital entity makes it all the more misaligned. Where this will work is where landlords or PE already have some level of ownership of the retailer or retail brand.

Commercial rents tied to online sales is a flat “no” for me — and probably not such a great idea for landlords if it causes retailers to recalculate the value of remaining in physical locations.

BIG however: Enclosed malls, especially, are not well configured to enable low-friction store pickup. It might not be out of line for a landlord to invest in an attractive, easily-accessed curbside pickup facility and charge reasonable service fees to tenant retailers.

Fellow BrainTrusters: Have any of you observed a model like this? It is worth exploring?