The Case for Airport-Style Deals in Triple A Malls
By Brett C. Kelly
Mall Developers have been extremely successful in evolving deal-types in order to get deals done. Speaking specifically of Retail Real Estate, it can be argued that Triple-Net, One-Bucket, Gross, and Percent-in-Lieu deals all evolved to balance risk and responsibility within a real estate lease in order to get the deal done. As the Retail Real Estate landscape changes, it may be time to challenge these deal types still, and evolve yet again.
Acknowledging that times have softened a bit from the hard-driving 2000’s, in today’s era of major mall developers, it still seems that traditional mall leases call for beefing up the guaranteed money, including extras, and participating in a tenant’s over-performance only through percentage rent calculations that have grown increasingly less likely as base rents have grown. Colleagues of mine used to argue for the abolition of Percentage Rent because of the difficulty and expense involved with properly tracking, accounting for and collecting it, when the real skin was in the guaranteed money anyway. Unless you had a great name and a flagship store on 5th Avenue, the average leasing rep was focused on maxing out the base rent and if the sales justified it, then all the better. To this mix, may I enter the airport-style lease.
Airport retail deals are different in some very key ways. And although most airports have Master Concessionaires which operate all stores (retail and food & beverage), I’m speaking specifically of airport deals done by airport developers, using the European privatization model – which happens to cause it to resemble a traditional American mall.
These deals favor maximization of the top line sales, and tweak the BMR/Percentage Rent relationship in a way that truly does create a win/win (if only in the event that the tenant performs). The typical airport lease has a guaranteed BMR and a semi-natural breakpoint -- which starts at “dollar one” -- with the tenant paying the ‘greater of’ the two numbers. It differs from a straight “percent-in-lieu” deal in that there is a decent “floor” to the rent that the LL can expect. It is similar in that there is no ceiling. Further, these deals routinely have “second-tier” thresholds (possibly three or four), in which the tenant’s percentage of rent paid to the LL grows the higher the sales go; i.e. 16% up to $500,000, 18% between $500,000 and $600,000 and 19% over. Raising and lowering the breakpoints and tweaking the percentages can be creative ways to de-risk the front end for high-value deals without missing out in the event the concept really pops.
These deals may not be the greatest value for the average regional mall, but in hyper-productive environments – like “can’t miss” Triple A malls – they could be an excellent way to maximize performance. From a tenant’s perspective, they would be highly desirable in that they’d “pay for play” in the event that they over-perform, but obviously have mitigated their risk in the event that they don’t. The downside is always a lack of tenant performance, but with today’s environment, it better equips a tenant to weather the storm if one-off events occur. It may have been hyperbole, but I remember a Senior Buyer from a national chain retailer saying to me that his company was always one bad buying season away from bankruptcy. Much of that, he argued, was that, with high guaranteed rents, the snowball affects of a bad sales quarter are immediate and deadly.
Doing deals of this type would require a true shift in the retail real estate paradigm. And though I would hardly recommend them for all environments – and most likely not even all Triple A mall environments – they effectively emphasize performance, something that a mall developer should encourage and in which it should participate. Perhaps the truest shift in the model would be leasing with an eye for high hopes and expectations, as opposed to leasing with an eye for the risks of non-performance.
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