I was excited today – my SCT Magazine came!! (Shopping Centers Today) You know what that means – some "Ctrl Key C" time – WOO HOO! So as I was reading, I came across an article about retail rent structures and how our systems of charging rent compares to those around the world. As you read below – you might find the various forms interesting.
General RE Info to think about as your read below:
- Lease terms: In Ohio, depending on the size of the retailer: 3, 5, and 10 yrs leases are typically what you see with a mess of renewal options following your initial term. (Although, some Rx stores prefer 20 yr leases. ) In other countries a typical lease runs 25 years.
- Each of the big 10 economies, where retail and "mall shopping" are a new thing and each country is in a different place politically – each has a different legal and political standard. (Ie: You can't walk into a conservative country and put up a big "Hooters" sign.)
- Most rents in the US are charged on a monthly basis. I have never run across any other required increment of payment. (Some tenants have requested to pay more but they are typically smaller/ mom & pop based owners.) In Ohio, rent is 99.9% of the time a monthly payment. (ie: You pay $1000/ Month throughout the year vs $12,000/Year on day one of your lease)
- CAM (Common Area Maintenance) is a "pass through" to your tenants. (Ie: if your snow plowing for the year is $2000 then it is divided among your tenants to pay based on the # of units, SF, or some other agreed upon number but it is based on actual expenses vs just some number the LL felt like using. It is a non-negotiable number (again – it is based on actual expenses for the property)
- Percentage Rents: An additional number you pay in rent based on your sales or your rent might be just a percentage sales for that store. Restaurants and big box tenants typically pay this type of rent. (Ie: The lessee would pay 2% of gross sales once the restaurant had earned over $100,000 on top of their $5,000/ Month)
- Rents during the initial term are not always fixed rates. They typically increase over time to reflect the CPI. (Consumer Price Index)
With those really basic things to remember – lets take a quick look at International Real Estate. I am going to break it down by country below ;
Latin America:
- Malls have been sold as piece meal to their tenants for years. (70s & 80s – there was a lack of good long term financing and uniform lease structure.) Now – developers keep the new malls and lease.
- They use a "variable rent" – it is either a minimum fixed rent or a percentage rent of sales – whichever is HIGHER! (miz)
- In Brazil/ Uruguay - shopping centers charge 13 months (vs 12 mo) because tenants pay double rents in December.
- Argentina/ Brazil/ Chile, Mexico, and Uruguay have a "key money" fee. (aka: fees to enter a mall. This practice is slowing being eliminated)
Middle East/ India:
- Percentage Rents are a newer concept and disliked (at first) – sales reporting was not required by the government but people are getting use to it and now more comfortable with the system.
- Most rents are paid a year in advance and include a 10-15 percent premium for CAM and Marketing. (According to Walter Kleinschmit)
Asia:
- National differences are influenced in part by colonial histories. "There a common law system spells out the relationship between landlords and tenants in a way that is familiar to Westerners", says Morgan Parker (President of the Asia Unit of Taubman Centers)
- South Korea has a system called Chonsei. This means that the tenant pay all the rent for the lease upfront and at the end of the lease the tenant is returned the money without interest. (how ya like them apples) The LL either invests the money for the duration of the lease or finances construction with the money. "It works when there is no other form of capital." (Morgan Parker)
- The chonsei is giving way to walsei, or monthly rents, as ownership becomes more institutionalized and debt markets more mature.
- Japan has the most interesting rent arrangement (I thought) of them all. Because Japanese retailing has been dominated by department stores, centralized point-of-sale systems have evolved in which landlords, not tenants, collect sales. “What they do is they collect sales from the actual customer and then they send the retailer everything but what the landlord share is,” said David Simon, chairman and CEO of Simon Property Group. LL have a point of sale system connected to every register.
- China also has its own form of chonsei, according to Parker, “particularly in High Street scenarios where it’s not uncommon to pay one, two or three years’ rent deposit. But that’s becoming a dated concept, with the emergence of shopping centers and monthly rent.”
- Lastly – CAM is not a pass through – it is whatever the LL can get the tenant to pay. “In a sense, it becomes another form of rent,” he said. “At the end of a deal in China, you can end up with 150 different tenants and 150 different service charges. If you do a good job negotiating, maybe you’ll make a profit on CAM. If you do a bad job, the landlord will have to subsidize it.”
Europe:
It has the longest record of finance and retail according to Western trends. Monthly payments are the norm. "It might seem that Europe, where Western retail and financing have longer track records, would have achieved a higher level of standardization. But there, too, variety rules. Take the hot-button issue of quarterly rents. Monthly payments are the norm in many European nations, but Italy and Ireland continue to follow the U.K.’s example of quarterly rent, says Jonathan Riches of CBRE"
The article: The Wide World of Rent Structure by Curt Hazlett is very interesting and should be read. (Click on the clink to read the full article)
If anyone is familiar with other international real estate practices – it would be interesting to hear.
