Covid-19 Rent Breaks for Retailers Are Becoming the New Norm

While most landlords tend to prefer the reliability of a fixed monthly rent payment, the wider use of percentage leases reflects how much retail has become a renters’ market.

Many retail businesses have struggled with competition from e-commerce, then took another blow when they faced pandemic-related lockdowns. Some didn’t survive, leaving landlords with excess space and compelling shopping-center owners to offer generous terms just to fill it.

“More brands are demanding it,” said Philippe Lanier, principal at EastBanc, a property developer, owner and manager of dozens of open-air retail properties in Washington, D.C.’s Georgetown neighborhood.

The growing use of percentage leases is the latest instance where agreements or behavior that was once considered a temporary response to the pandemic looks more long term, or even a permanent fixture. For example, more companies are allowing employees to work from home, and food delivery is continuing to boom even as restaurants resume something closer to full service.

Fixed-rent agreements aren’t disappearing entirely. In most cases, percentage-rent agreements are limited to the first year or years of a lease, which would then revert to a fixed-rent model.

Percentage leases also aren’t without conflict. Tracking sales to determine rent levels can be a thorny problem, since tenants are typically reluctant to share their sales data with their landlords, unless they are asking for rent relief due to falling sales.

“Tenants love it; landlords hate it,” said Michael Rielly, managing principal at Rielly Retail Solutions, a real-estate consulting firm for retail and hospitality brands.

Still, landlords are trying to find ways to regain a measure of control, such as lowering the minimum amount of sales at which an owner can begin collecting a portion of that revenue.

Many retailers see percentage-rent deals as a way to keep their costs manageable. This means more work though, including additional sales audits. Some landlords privately say they are bracing for litigation in coming years over sales data.

Some of the more successful retailers frown on the percentage-rent model, preferring to keep any profits from booming sales to themselves. Apple Inc. and T.J. Maxx, for example, typically negotiate fixed rents, landlords said.

But such retailers are asking landlords for bigger subsidies in fitting out new stores. These so-called tenant-improvement allowances are typically reimbursed to the tenants after they complete the store renovation, but some retailers are asking landlords themselves to pay for and oversee construction.

“Landlords are taking on more risks on behalf of the tenant,” said Jahan Moslehi, managing principal at Bridge33 Capital, which owns dozens of shopping centers across 18 states. Landlords who undertake the construction work are now on the hook for fluctuations in construction and labor costs, he said.

Write to Esther Fung at [email protected]