Malls · Retail leases · Shopping Center · Uncategorized

Gross sales/percentage rent considerations when backfilling a department store/big box

Site plan of King of Prussia Plaza from the early 1960s with an Acme Supermarket:

02_KOPP_1963 plan

Since the 1970s, it has not been common to see certain types of tenants in regional malls as department stores enforced certain types of use restrictions that existed in their leases (often to protect parking).  However, as closures of former destination tenants have occurred and regional malls are becoming the community centers and all-in-one centers they once were, we are seeing a resurgence of these categories back into regional malls. As it has been so long that mall developers have had to deal with these categories, today’s blog addresses a few of the sales-related issues in those categories that can have a material impact on percentage rent.

Health Clubs – Most gross sales definitions include sales, whether on cash or credit. When an individual signs a contract for a year, paid monthly, the sale is for the entire amount. If the customer does not follow through with the contract, it is a bad debt. Unless a health club has specifically negotiated a deduction for bad debts, the full amount of the sale must be included. Also, if a health club allows personal trainers to operate out of their facility, the revenues generated by those personal trainers must also be included.

Supermarkets – There are quite a few gross sales issues related to supermarkets. Manufacturers’ coupons (like the ones you get in the Sunday paper) are reimbursed by the manufacturer. Therefore, the use of these coupon should not decrease the sale (whereas store coupons are a true discount by the supermarket chain and are not reimbursed). Slotting fees are significant fees paid by manufacturers for shelf space in supermarkets. Often, the slotting fees can be more than the profits supermarkets realize on the actual sale of product. Consideration must be given to the fact that supermarkets often sell lottery tickets. Depending upon the lease language, it is usually the commission realized on the sale of lottery tickets that must be included rather than the sale of the tickets itself. However, it is possible that the sale itself should be included. Among the many other considerations are whether the sales of goods and services by subtenants or the rents paid by those tenants should be included in reported gross sales, and whether the tenant specifically negotiates the exclusion of alcohol or tobacco sales from reported gross sales.

Theaters – Theaters will often try to negotiate either one of their two biggest sources of revenues from reported gross sales – tickets sales or concessions. Theaters are charged a material portion of their ticket sales as royalties, sometimes approaching 100% for blockbuster/Oscar winners. If the theater can make a good case for the exclusion of a specific type of revenue, the breakpoint and percentage rent rate should be adjusted appropriately (no longer a natural breakpoint).

One other quick note – There was an article in Globe Street earlier this week about Amazon being surprised by some of the restrictions that they were discovering in their Whole Foods’ leases that are affecting what Amazon could sell in Whole Foods (due to other big boxes’ exclusives), and specific restrictions against Amazon’s locker delivery system. Many supermarket leases are excepted from other big box exclusives or allow the incidental (typically defined as less than 5% of sales or less than 500 sf) sales of restricted goods, so these issues may be fewer and farther between than the article may have presented. However, there is a sales/percentage rent issue not addressed in the article. Typically, gross sales is defined as sales “in, at, on or from” the demised premises. If Amazon does install the lockers in their own Whole Foods stores, the “locker-delivered” sale will have occurred “from” the demised premises and will, therefore, have to be reported as part of reported gross sales. A potential boon for landlords!

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