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USE OF PERCENTAGE RENT GROWS IN LATIN AMERICA’S MALLS

By María Bird Picó

Not only do Latin America’s mall owners increasingly own their retailers’ spaces, more of them are sharing their tenants’ risk by adopting the percentage lease structure.

Percentage leasing, under which the rent varies according to a tenant’s sales, has long been the norm in U.S. malls and also in Latin American countries with mature mall industries, such as Argentina, Brazil, Chile, Paraguay and Uruguay. But it is gaining popularity in Colombia, Ecuador, Venezuela and certain Central American countries, where tenants have long favored owning their own space.

As in the U.S. and elsewhere, Latin America’s landlords adopting the percentage rent structure require tenants to pay a low flat rent, plus a percentage of any sales over a certain threshold.

Mall executives believe this arrangement is perfect for Latin America as a whole, where economies are subject to sharp cycles that affect retail sales. Thus, in bad times, tenants would not be left paying rents they cannot afford, and in good times, landlords would share in the bonanza.

Percentage leases also work well in countries where the government controls the inflation rate, as in Venezuela, says Irene Abramovits, leasing manager at Centro Comercial El Recreo, in Caracas, Venezuela. “If I adjust my rates based on the government inflation rates, they remain too low and do not reflect the increases in our expenses to make the mall attractive,” she said. “That’s why we are looking for alternatives and believe that this type of structure works well for both [retailer and landlord]. In slow months, tenants pay less rent.”

And yet when times are good, percentage rent does not favor landlords at the expense of retailers, sources say. “If you are a successful retailer, lease percentage is not a disadvantage,” said Luciana del Río, leasing manager at Larcomar, a 323,000-square-foot (30,000-square-meter) retail-entertainment mall in Lima, Peru, that is fully leased under a percentage lease contract. “If you are selling more, it is precisely because you are in a strong-performing mall.”

Not-so-successful retailers, meanwhile, get some breathing room. The landlord becomes, in effect, a “business partner” of such a retailer, sharing in the struggles and cooperating in the search for solutions, says Sandra Tenorio, general manager of the Cali, Colombia-based Jardín Plaza Shopping. “When your sales go down, I need to find a way to shore them up because it doesn’t work for me either,” she said.

Centro Comercial El Recreo, in Venezuela, has long used percentage leases for its anchor, food court and entertainment tenants. But like many, El Recreo is drafting new contracts that will offer percentage leasing as an option for the rest of the tenants, Abramovits says.

“We are laying the infrastructure now to introduce it in our malls,” said Abramovits. “But tenants will ultimately decide, since adopting this new leasing structure will be voluntary.”

Abramovits says one tenant already objects vehemently to any percentage lease contract. Other landlords have also run into some degree of resistance from certain retailers.

All the tenants in Jardín Plaza Shopping are currently on the percentage rent system, but it was not easy to convince them of the benefits, Tenorio says. Wariness on the part of local tenants to disclose real sales, owing to fear that tax authorities and rivals will use the information, mall executives say. “The industry needs to overcome this lack of trust and reassure retailers that we will abide by confidentiality agreements,” said Abramovits.

To be sure, such fears are understandable, says James C. Bieri, president of The Bieri Co., a Detroit-based retail real estate consulting firm, but overcoming them is important for landlord and tenant alike. The idea behind a percentage lease is that retail real estate is worth a percentage of what a retailer can accomplish at a particular shopping center, Bieri says. “If retailers don’t report their sales to the landlord, how can you evaluate a shopping center? It limits tenants’ development,” he said.

Furthermore, malls that have access to a tenant’s sales data can play an informed role in pushing up those sales through promotions and advertising, sources say.

“It is the most objective way of supporting each other and of becoming business partners from the start till the end,” said Claudia Campos, general manger of Inversiones Simco, which owns eight open-air centers plus the Centro Comercial Galerías, in San Salvador, El Salvador. Five years ago only two Galerías tenants were on a percentage lease (not coincidently, the retailing units of Grupo Simán, the holding company of Inversiones Simco). Since then, the number of such tenants has risen to 15. That still only represents 10 percent of the mall’s tenants, but it’s a trend nevertheless.

“Tenants are pleased, since they are sharing their sales information with us to attain the same goal,” Campos said. “It is important for our industry to migrate to this leasing format — a win-win for all.”

Grupo Roble, Central America’s biggest mall operator, with 19 shopping centers, has evaluated percentage leases and found them “interesting and attractive,” though the firm is not ready to switch over its entire portfolio just yet, says Alberto Poma, Grupo Roble’s general manager.

“It will be of great use if we could have access to all our tenants’ sales data to identify economic and market trends and also to help us measure the retail success of our projects,” Poma said. Nevertheless, the majority of the firm’s tenants are small or regional retailers that lack the experience, operational efficiencies or marketing savvy of the large chains, so tying the landlord’s fortunes to their sales is not considered prudent, Poma says.

Venezuela’s Grupo Sambil resorts to percentage leases when tenants at its six malls ask for a rent reduction. As a result, nearly a third of them are now paying percentage rent. “It works for us, since access to their numbers allows us to conduct studies to determine how well the malls are performing,” said Alfredo Cohen, Grupo Sambil’s vice president.

Most malls include a clause in the contract giving them the right to audit a retailer’s sales. Mexico-based Grupo Acosta Verde has been using percentage leases for the past 15 years, though not with all tenants. “In reality it cannot be used with all because of lack of veracity of the information some tenants supply with the idea of paying lower rents,” said Jesús A. Acosta, the group’s director of shopping centers. “We have lease percentage contracts with 10 tenants per mall, all established chains that have worked with the system for many years and whose numbers are trustworthy.”

Guatemala-based MultiProyectos, too, uses lease percentage only with certain retailers besides food court tenants.

“With all probability, the industry will continue to move more to that type of lease as tenants start favoring it,” said Ricardo Díaz, president of MultiProyectos. “As more malls come to the market, lease percentage contracts are a viable option for tenants that have doubts of going into a particular shopping center. If the base rent is low, it would not really matter to enter a new mall, since the risk is shared with the mall.”

That’s the carrot. But a stick is needed too for the lease percentage structure to take further hold in Central America, says Díaz. Landlords must be allowed to kick out tenants that come short of the agreed upon sales minimum, he says. “Our financial systems need to evolve as well to offer loans based on lease contracts with less income certainty.”