Customer Footfall Analysis
February 12, 2025
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In the previous article, we have already seen what a variable lease is and how it is different from traditional leases which are used by retail companies across the world. We are now also aware of the manner in which variable leases are structured.
We know that the popularity of variable leases has been rapidly increasing over the last few years. In this article, we will have a closer look at the pros and cons related to variable or percentage-based lease arrangements between landlords and retail companies.
The main advantages of variable leases have been mentioned below:
The landlord is no longer interested in benefitting at the expense of the tenant. This is because of the fact that their rent will only go up if the sales go up. As a result, landlords tend to become more co-operative and provide all the required facilities which enable the sales of the store to increase over a period of time.
The percentage based variable method ensures that both the landlord and retail company share the profits made in the upside as well as the risks borne if the business makes losses.
In months where the sales go down, the rental expense also goes down. As a result, the retail company gets a cushion and is not immediately pushed into financial disarray.
Retail companies are willing to pay a higher percentage as lease rentals if they get they flexibility to alter the rental payments during times of distress.
There are several disadvantages related to this method as well. Some of the disadvantages have been mentioned below:
Firstly, the landlord as well as the retailer need to ensure that they clearly define what is meant by sales with respect to the lease rental agreement. However, even if they make an attempt to clearly define what is meant by sales, there is still room for ambiguity. There is always a possibility that the contract might be legally challenged by either party at a later date.
Hence, the landlord always has to face an information asymmetry. There is a slight chance that the data might be manipulated by the retailer in order to pay a lower rent. To prevent this, the landlord has to ensure that they have the administrative capability to monitor the sales data. This is an added expense for the landlords and hence is considered to be a disadvantage.
Sales based rental agreements make it necessary for such companies to share their financial information with a third party. The sharing of this information means that there is always a chance that it can reach the hands of competitors. Many retailers want to keep their information private and hence are opposed to sales based variable rental agreements.
Hence, the overall financial position of the landlord ends up being negatively impacted. There are many landlords who prefer receiving a stable rent as opposed to taking on the vagaries of the marketplace.
Banks and other financiers are only willing to discount the base rent and provide cash to the landlord in the form of a lumpsum. The inability to raise finances using lease rental discounting means that the landlord has to rely in expensive financing in order to meet their financing needs.
It can therefore be said that sales based variable rental agreements have both pros as well as cons. The applicability of these pros and cons depends upon the financial goals and risk appetite of both parties.
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