The New World of All-Inclusive Leases and their challenges
Just one of the many ways the real estate industry is changing is the way that rents are calculated. This is largely driven by tenant demands for rents to apply to the physical store performance and to provide more flexible, shorter-term lease agreements.
The all-inclusive system combines rent and service charge which have historically been billed separately. More and more tenants are demanding this style of lease as it simplifies the agreements, reduces legal costs, speeds up delivery and puts the onus of managing service charge firmly in the landlord’s camp. Moorgarth have already embraced this new system, learning from our own serviced office company ‘Boutique’ and completed a number of deals on this basis.
It is our view that this will become increasingly commonplace in our industry. What this also requires is a closer working relationship and collaboration with your Property Management team (read article).
All-inclusive leases can be configured in four ways:
1. Fixed rent, service charge and insurance,
2. Base rent and turnover top-up, plus service charge and rates
3. Pure turnover based rent plus service charge and rates
4. Turnover inclusive of all costs
Each of the four categories above carry different risks for the landlord, and consequently different values are applied to that income by a valuer, depending upon the certainty of receipt. The more speculative the income, the lower the value attached. Sadly the occupational market is well ahead of the valuation and funding market in embracing the need for change. Likewise, if any tenant is wanting a landlord to accept a turnover rent, they must understand the importance of a supporting robust business plan, giving the landlord comfort that these levels of turnover are achievable.
The challenge for the landlord, is that the business plan presented requires honesty and transparency. Importantly retailers must be prepared to accept that all sales from a store, whether physical or online, via that store, contribute to the turnover rent. We have already seen unscrupulous retailers encouraging customers to order products online from within the store, offering discounts, click and collect or home delivery to avoid the sale contributing to their turnover rent. This abuse of the system is incredibly complex to police when occupiers claim they cannot trace where sales have originated; that their systems are apparently unable track this information. In this day and age this sounds like an implausible claim - it is simply a flagrant and deliberate untruth.
In order for the new world of turnover rent to operate successfully it requires an open and honest disclosure of a store’s true performance.
Omni-channel retail must be embraced by all parties, but this requires compromise from both landlord and tenant. From the tenant’s perspective a true and fair disclosure of total sales from a store is of paramount importance, otherwise the distrust will continue and the market will stall.
By Tim Vaughan, CEO