Revenue Share – the “Soul” of a Prosperous Shopping Mall

Having spent over one and a half decade in the shopping mall industry now, if I had to choose one thing that ensures the success of a shopping mall in the long run, it would be the concept of?Revenue Sharing.?Revenue share is an important consideration in the shopping mall industry, as it determines how much of the retailers’ revenues are shared with the mall developer. Generally, shopping mall developers collect a percentage of the retailers’ sales as rent, in addition to a base rent, commonly known as Minimum Guarantee. This percentage is known as the?Revenue Share.

There are so many aspects one has to get right for making a mall successful, be it the location, the design, circulation, right zoning and tenant mix, great marketing, excellent mall management to name a few. But if the concept of Revenue Sharing was missing, other aforementioned aspects would not be enough to extract maximum business potential for both retailers as well as the mall developers.

Inherent Benefits of Revenue Sharing Concept for Shopping Malls:

• First and foremost, when a retailer and developer, gets into a revenue sharing arrangement, the?relationship between the two?changes from that of a tenant and landlord to that of?business partners.
• When there is Revenue Share component in the deal, there is a?perpetual interest of the Mall developer?to see, how he can augment the revenues of the retailer.?
• There is a?higher likelihood?that mall developers will help their retailer partners on account of their visibility within in the mall and in their marketing campaigns if the retailer is struggling with its sales.
• In absence of Revenue Share with the retailers, mall developer's may have little interest and incentive to go out of their way to ensure high quality of housekeeping, security, parking management, events, promotions, beautiful decor during festive season etc. All this is done to?attract more and more footfalls?to the malls, and thus the upside from revenue share with retailers to the developer.
• If the arrangement between retailer and mall developer is that of?fixed rental, then there is?not enough incentive for the developer?to do all of the above mentioned requisites for managing a successful mall.
• In certain cases, where the retailer is not confident of a certain city/ location/ mall, a revenue share deal from the developer,?demonstrates the confidence of the mall developer in the brand and the potential it has?to do great business in that particular mall/ city.
• Revenue Share deals?offers?time for brands to settle down?and establish their business over a period of time.

Some Caveats to be Keep in Mind:

• Pure Revenue Share deals are better avoided for certain reasons. Minimum Guarantee (MG) or Revenue Share, whichever is higher, is the ideal model?to get into a relationship between a mall developer and a retailer for the following reasons:

o??It has been seen at times, that there is not enough pressure on the retailer, especially at the store level to perform to their full potential, when retailer doesn't have a fixed rental liability.?

o??There is a risk that the retailer, especially if it is operated by a franchise to manipulate their revenues, to pay lesser rentals.

• Having said that, Pure Revenue Share deals are not a strict no-no as long as the developer is getting into a relationship with a listed or credible retailer. There are various permutations and combinations both parties can work with; some of them can be as follows:

o???Pure Revenue Share for only 1st year and then come to pre-fixed MG/Rev Share model.

o???Pure Revenue Share for a year or two and then covert that average monthly rentals from 1st year into MG from 2nd or 3rd year as the case may be.

o???Pure Revenue Share till a certain occupancy (say 50 percent) in the mall or on that floor is achieved or certain retailers (like multiplex, hypermarket, department stores) are operational. Once the condition is met, then the MG/ Revenue Share model can begin.

Important Points to Be Noted?

• In case of Pure Revenue Share, developer will get rent in succeeding month as against advance rent (MG) in a MG & Revenue Share deal.
• Developer will have to take into account, the reconciliation clause (monthly/ quarterly/ bi-annually/ annually) which will have an impact on their revenues.?
• Developer will need to incorporate various clauses (like installing common software for POS, permission to Audit accounts etc) with regards to safe guarding his interests, especially in Pure Revenue Share deals.
• ?There can also be some clauses, which penalises retailer for not hitting Revenue Share component and sticking to MG only over a certain period of time. This puts some pressure on the retailer to perform to its maximum potential.
• There should be a clause on the minimum value of the stocks/ inventory per sq. ft, the retailer has to keep in the store at all times, to ensure the sales are not less due to under stocking. This is critical for Pure Revenue Share deals.
• Even though the deal may be a Pure Revenue Share, the retailer will still have to pay the Interest Free Security Deposits assuming a nominal MG.
• Getting LRD (Lease Rental Discounting) Loans for Mall developers is easier in deals with MG component as against pure revenue share deals.

Let me also add here, while most developers apparently appreciate the concept of MG/ Revenue Share model, but when it comes to evaluating deals on the table, they treat MG as Fixed Rental and discount the Revenue Share part. They hardly discuss on the business potential of the retailer and the rental they can potentially earn from revenue share. Very few Mall Developers in India, really understand and appreciate the power of Revenue Share.

P/S: Since Beyond Squarefeet represents the Mall Developer’s during negotiations, this?article?is written more from their perspective. However, we also take into account the retailer's view point and try to make it a win-win deal for both sides.