The challenges and uncertainty caused by the current COVID-19 pandemic have brought turnover based rents to the forefront, with many landlords under increasing demand to consider the leasing model for their commercial properties. Although the concept of a non-fixed rental income could be daunting, especially for landlords, turnover-based rents can actually support both landlords and tenants and is especially beneficial in the current economic climate. It actually brings a host of advantages for both parties. As one of today’s leading tenant management system providers, the team from Eurostop has helped many switch to a turnover-based rental model.
Here, we discuss some of the benefits, as well as precisely how it works.
What is Turnover-Based Rent?
In the simplest of terms, turnover-based rent is a form of commercial renting in which the amount of rent is dependent on the tenant’s turnover, or the amount of business a commercial tenant does.
It’s most often used for retail properties and may be calculated in various ways. One option is where a tenant pays a “base” rental price that’s a fixed figure or percentage of the market rate for a particular property, in addition to a flat fee or percentage based on their turnover. Another way turnover-based rent is calculated is by having a tenant pay the open market rental price, then an additional rental fee should their turnover exceed a pre-determined cap. Alternatively, the entire rent may be turnover dependent.
Challenges of Turnover-Based Rent Models
- Disputes Over Turnover Details: One of the biggest hurdles of turnover-based renting arises when it comes to turnover calculations and rent payments. This is especially true when there are conflicting views regarding what constitutes turnover. In most cases, turnover is defined as all payments received while on premises such as those from subtenants and concessions.
- Clear Communication: To maintain a successful turnover arrangement, communication is key. This means clear expectations and written agreements between landlords and tenants as well as secure and accurate processes for submitting specified turnover data throughout the term of the lease.
- Navigating Complex Issues: Unlike traditional fixed-rent leases, turnover-based ones can be more complex and challenging to manage if you don’t have the correct system in place. In the age of unified commerce, there are additional considerations alongside traditional store sales to be factored in when calculating accurate turnover. For example how click and collect orders picked up in store, or similar, contribute to agreed turnover..
- Property Value Assessments: Due to the fluctuating nature of turnover rents, it can also have the potential to affect the valuation of commercial properties since rental income is not fixed.
How Do Turnover-Based Rents Benefit Tenants?
A turnover-based rental model can assist tenants and provide some leeway in difficult trading conditions; which could be the differentiator especially in the current situation on the high street where non-essential retail has faced multiple store closures and shopper trepidation. It essentially means their rental fees will decrease accordingly during downturns. This can make it easier for retailers and other businesses to keep their doors open when experiencing a lull.
It is important however for those renting a commercial property or searching for one with a turnover-based rental model, to go over every aspect of the lease thoroughly so they are aware of the complete terms of the agreement and how their rent can vary.
Are Turnover-Based Rent Models Good for Landlords?
For commercial property owners, turnover-based rent models can be beneficial because although rents may fluctuate, even if a tenant is retained on a lower rent, they’ll still be responsible for maintaining the property and paying their share of insurance and service charges. Additionally, it’s much more beneficial than having the property sit vacant for any period of time.
Another point to consider is that this leasing model can bring with it a wealth of information on how your tenants are performing. By collecting and having access to tenant turnover data, with the right business insights you will be able to identify prime locations in your shopping mall and also analyse the results of promotions and external factors, such as the weather or seasons, on trading. This is particularly beneficial if you are invested in optimising your real estate and focused on initiatives to drive footfall and improve business, which obviously brings mutual benefits for both landlord and tenant.
It’s important to note that legally, landlords aren’t obliged to accept a turnover-based rent proposal. However, if you do agree, you and the tenant will need to sit down to determine how turnover will be calculated and then draw up a turnover lease. This turnover-based rental contract will include the pricing model, as well as how turnover will be proven.
Key Takeaways on How Turnover Models Benefit Landlords
Despite the challenges previously mentioned, turnover rents do offer significant benefits for landlords mentioned above. The key takeaways include:
- Minimal Risk of Vacancy: Because turnover-based rent is linked to business performance, there’s much less of a risk for landlords to have vacant properties and it makes it easier to retain tenants.
- Added Income: When tenants’ businesses are performing well, landlords in turn also benefit, earning more income than if they were using a traditional leasing method.
- Shared Interests: Since turnover-based renting aligns the interests of both landlords and tenants, both parties benefit from a business’s success. This means that it can often be more of a strategic and dynamic partnership as higher turnover also means higher rent for landlords.
How is Turnover Proven?
Most often, this is by basing an annual rental amount on the previous accounting period or having tenants provide a turnover certificate. However some Tenant Management Systems, like the one from Eurostop, can use actual turnover figures collected on a daily (or even more frequent) basis. This not only gives you a more accurate model for your rental figures, but it also means that rent can be adjusted quickly in response to an increase or decrease in turnover. Having real-time data also facilitates marketing initiatives to optimise footfall in response to changing promotions, as discussed previously.
For those with a tenant renting multiple properties on a turnover-based rental model, things can become a bit more complex. For bricks and clicks retailers with multiple channels, the turnover agreement must also consider different customer fulfilment options such as collect in store – would this sale be attributed to the store or the online channel?
A Few Important Considerations
There are a few important factors to consider before switching to a turnover-based rental model, the first being that doing so might increase the amount of administrative work for both parties. This can be especially significant if you don’t have the right system to support you in place.
Additionally, commercial property owners will need to determine with their mortgage lender whether or not they’re able to allow a fluctuating rent for their property.
Carefully considering the reputation of tenants/businesses before agreeing to a turnover-based rental model is also essential.
The Benefits of Eurostop’s Tenant Management Systems
When it comes to keeping track of your tenants, investing in the tenant management software from Eurostop can make things much easier. We offer an automated means of collecting accurate turnover data in an environment that is mainly manual. This means you’ll save hours of time, reducing the need of collating all of that data usually sent via email, as well as chasing turnover data from tenants. Since all of the turnover is based on current sales figures generated directly from the POS, it means that both landlords and tenants can rely on accurate data and agreements.
When you place your trust in Eurostop, you’ll be outfitted with one of today’s most effective and efficient tenant management systems available. Our system collects turnover data on a daily basis, or even more frequently if deemed necessary. This makes your turnover data much more accurate than gathering it at the end of the month or simply basing it on historical estimates or sales figures.
Not only will you be provided with exceptional data collection services, but you’ll also be given an in-depth analysis of such data with e-mall, and our business insights tool for slicing and dicing your mall turnover data. As a commercial property owner, this type of insight can help you determine the right retailers for your properties and choose ones that will attract the most customers.
Contact us today for tenant management solutions and more!
For those considering a turnover-based rent model, Eurostop would love to tell you more about how our tenant management software can help you. In addition to our tenant management solutions, we also offer comprehensive retail software services, such as stock control, mobile retail apps, total retail POS packages, and more.
We boast more than 30 years of experience in providing cutting-edge global EPOS and retail solutions. Founded in the UK in 1990, Eurostop has grown rapidly and developed a reputation for delivering quality retail solutions to many fashion, footwear, jewellery, and general merchandise retailers today.
To learn more about Eurostop, contact us online today or call +44 (0) 20 8991 2700.
E-commerce & Marketing Manager at Eurostop Ltd.
Deborah is passionate about digital, retail innovation and the engaging experiences they drive today. With background in ecommerce, and traditional retail systems, she heads up the Marketing Department at Eurostop and digital experience with the brand.