Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)
Issue link: https://sct.epubxp.com/i/617826
a n n u a l r e n t s t e p s . Landlords can collect more income with an- nual hikes, as the rent is calculated in a com- pounding fashion from the previous year. As the base rent grows, the amount of the increase also grows. But tenants often prefer a fixed rent for five years, with a larger increase after t h e f i f t h y e a r , s a y s Watson. Fixed rents are easier to budget in the tenant's pro f o r m a , a n d t h e i n - crease compounds af- ter five years instead of each year, she says. Of course, while t h e r e n t i n c r e a s e s help landlords boost revenues and cash flows, they are harder on tenants. Oftentimes, retailers apply their rents as a line-item expense or li- ability for accounting purposes. Essen- tially, retailers public and private have to account for their rent liability on the balance sheet. If the rent is $100,000 and a retailer has an annual increase of 3 percent, on the balance sheet it may not necessarily account for that $100,000 rent in year one. The ten- ant will actually run a spreadsheet on the average rent over the term of that lease and then show that average rent each year. At the beginning of the lease, when the tenant is actually paying a lower amount, there may be some ben- efit to cash flow, as opposed to in the latter part of the lease term, when the rent will be greater. Ultimately, when a retailer looks at the financial viability of those locations near the end of the lease term, the higher rent liabilities during the latter part of the lease make the location look less favor- able in an economic model. "It is really not in the retailer's best interest to have these significant increases," said Ezra. Retailers are pushing back not just be- cause of the way that hurts the financial model, but of late also because the mar- ket is starting to cool, Ezra says. "I think you are seeing more and more retailers slowing down and sales starting to flat- ten out," he said, "and they feel like they need to stop the bleeding, so to speak, on the rent increases." SCT 50 S C T / J a n u a r y 2 0 1 6 icscfoundation.org • foundation@icsc.org • +1 646 728 3628 • #ICSCFoundation Thank You to the generous and loyal sponsors of the ICSC Foundation Bigger Better Party . Without your support we could not fulfll our mission to fund industry scholarships and promote community outreach. 1% 1% 1% 1% 1% 2% 2% 2% 3% 3% 4% 4% 5% 1% Prime Rent