Retailers who are uneasy about paying the sky-high rents that new malls are charging have a new option. A small—but growing—number of stores are opting to pay a percentage of their store revenues to landlords instead of a flat lease rate.
It’s a way of minimizing risk, and provides them a cushion if the mall fails to attract customers. Most of all, it’s a built-in incentive for the landlord to make the mall successful. In turn, the landlord can secure tenants during periods when business is slow.
“It makes the developer half a retailer himself,” said Pranay Sinha, president and chief executive officer of Select Infrastructure Pvt. Ltd, which is building the 1.4 million-sq.ft Select Citywalk mall in Delhi’s Saket area. “Then the developer does everything he ought to do to make the place popular with shoppers.”
The so-called revenue-sharing model is common in developed countries but only recently adopted in India.
The models vary. Sometimes, tenants pay only a percentage of sales. Or it could be a combination of rent and a percentage of sales. A third option is a below-market lease payment or a percentage of revenue, whichever is higher.
The Select Citywalk mall, expected to open by the end of the year, could be the country’s first all-revenue-sharing mall, said Sinha. Nearly 150 brands have signed up. They will pay a percentage of revenue unless the agreed-on minimum lease rate is higher.
Minimum guarantees in the mall range from Rs60 per sq. ft to Rs400 per sq. ft, and the percentage of revenue shared with the mall owner ranges from 4.5% to 22%, Sinha said. It depends on the location of the store, the type of business (food and drink establishments generally pay the highest percentage and grocery stores pay a lower percentage) and when the deal is signed. Deals tend to be better for tenants who sign up early, long before the grand opening, when the risks are highest, Sinha said.
Manoj Motta, general manager of leasing and business development for Inorbit Malls India Pvt. Ltd, said the company plans to follow a lease-plus-revenue model for all of its new malls starting with projects in Mumbai, Pune and Hyderabad. At the Inorbit Mall in Mumbai’s Malad suburb, new tenants have started paying either the minimum lease rate or the revenue-share percentage if it is higher.
Bangalore-based apparel company Madura Garments has signed “revenue sharing” contracts with four malls: Nirmal Lifestyle Mall in Mumbai, Prestige Forum and Sigma malls in Bangalore and Select Citywalk. That’s because with so many malls opening, not all will be successful, said S.M. Farooqi, Madura Garments’ chief operating officer for retail and international markets. He said Madura figures it could end up paying above the market rate if profits are high, but revenue-sharing protects it from having to pay high rent when a mall is failing.
“As a brand owner, we invest in interiors, stock and rent,” Farooqi said. “If a shopping mall is not successful, we bleed on all three areas.”
Manjula Tiwari, India brand head for Esprit, an international lifestyle brand based in Germany, expects to have revenue-sharing agreements with some key malls.
“It ensures that they just don’t build a project and leave it to the tenants to make it successful,” Tiwari said. “Both tenants and the mall management ensure that a project takes off.”
Vivek Kaul, head of retail and leisure advisory for real-estate consultants Jones Lang LaSalle, said retailers are willing to share sales with landlords in part because market rents have spiralled and are cutting into their earnings.
In large cities, stores of about 1,000 sq.ft can pay rent that represents 18% to 22% of their sales, said Subhranshu Pani, president of retail services at Trammell Crow Meghraj, also a property consulting firm.
A recent proposal in the Union Budget to impose a 12.36% service tax on commercial rentals could push up costs further for retailers. Pani said revenue-sharing arrangements may not escape the service tax net because it is a form of rent. But the tax imposed could fluctuate from month to month based on revenues.
Kaul said most malls are still selling space, a growing number are leasing space, and only a handful of malls are going in for the revenue-sharing model. But he expects that to change.
“Intelligent developers are willing to get into this format. You want your tenants to do well because if they do well, you do well,” Kaul said. “The tenant gets a little discount on the rental and also understands that the developer will partner with him.”
India’s malls are no longer for shopping alone—they offer an experience that can keep customers busy for hours. The sprawling buildings with high ceilings often feature multi-screen movie theatres, glass elevators and a host of restaurants and shops under a single roof. To keep business coming and outdo competition, malls offer sweeteners from free parking for shoppers, a play area for kids, and lucky draws and competitions.
Pratyush Pandey, northern India head of retail, Trammell Crow Meghraj, said the revenue-sharing concept began a few years ago in Mumbai and Delhi as the mall boom gained strength as a way to reduce risk for the landlord and tenant.
Mall owners “don’t only want to be known as people who make real-estate developments,” Pandey said. “They want to be known as people who made a development and are running it successfully.”
Motta of Inorbit said the model works well in growing markets where retail sales are likely to rise over time.
Before a mall opens, “typically, retailers are sceptical about paying pure market rentals, which are commensurate with high street rentals,” Motta said.
“What we try to do is give that much credit to the retailer for signing up earlier.”
Mayur Toshniwal, vice-president and head, north India, Pantaloon Retail India Ltd, said the benefit of a revenue-sharing model depends on the location of the mall and a tenant’s confidence in the project. It might be advantageous, for example, in a small, relatively untested market. Sometimes it’s initiated by the developer, sometimes it’s insisted on by the tenant, he said.
“It all depends on the way the negotiation happens,” Toshniwal said. “Sometimes the builder is very confident about property and he demands a high rent. As a tenant, you may not feel that it can command that high a premium. Sometimes it gets down to revenue sharing.”
Sinha said there are hidden advantages for the landlord. For example, the project’s asset value will stay high if the landlord stays invested in the project’s upkeep and success.
“You incentivize the landlord who will do more sensible leasing,” Sinha said. “If you do a percentage of sales from a cosmetics guy, you’re not going to want put two competitors next to him.”