The Anchor Tenant's Turnover Clause and Market Rent
You are determining market rent for a 1,200 m² retail unit in a regional mall for a rent review. The lease provides for a base rent plus a turnover clause: 6% of gross turnover above a threshold. The tenant, a national clothing chain, reports annual turnover of R48 million at this store. Comparable mall rentals in the node are R2,800–R3,200/m²/year base, plus 5–7% turnover. The mall has 92% occupancy; two national tenants have recently vacated. The landlord argues the tenant's strong turnover justifies the top of the range. The tenant argues the vacancies prove the mall is declining.
1. How do you reconcile the base-rent comparables with the turnover clause to arrive at a market rent?
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Step 1 - Establish the base-rent benchmark. Comparables R2,800–R3,200/m²/yr. At 1,200 m², that is R3.36m–R3.84m base per annum.
Step 2 - Analyse the turnover clause. 6% of gross turnover above a threshold. If threshold is, say, R30m, the turnover rent = 6% × (R48m − R30m) = R1.08m. Total rent = base + R1.08m. But the base in comparables already reflects typical turnover expectations - you must avoid double-counting. The correct approach: treat the total effective rent (base + turnover) as the comparable measure, and ensure the base you set is consistent with the turnover structure.
Step 3 - Adjust comparables to a common basis. Convert each comparable to an effective rent (base + expected turnover) or to a base-only basis by stripping out the turnover component. Use the tenant's actual turnover (R48m) only to the extent it reflects sustainable trading, not a one-off spike.
Step 4 - Weigh the vacancy evidence. 92% occupancy with two national departures is a negative signal for the mall's draw. It argues against the top of the range and for a base toward the lower-middle, with turnover upside captured by the clause.
Conclusion: Set base near R2,900–R3,000/m² (lower-middle), preserving the turnover clause so the landlord shares upside if turnover holds. Justify the vacancy discount.
2. What risks does the turnover clause create for the landlord and how should they be reflected?
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Risks:
- Turnover volatility - retail turnover is cyclical; a downturn reduces the turnover rent. The landlord bears this risk, unlike a pure base rent.
- Reporting/verification risk - turnover figures are tenant-reported; under-reporting or definitional disputes (what counts as 'gross turnover'?) reduce recoveries. Recommend audit rights.
- Threshold gaming - a high threshold may mean the clause rarely bites; a low threshold shifts risk to the tenant (who may resist or vacate).
- Vacancy/departure risk - if anchor/national tenants leave, footfall and turnover fall, hitting both base sustainability and turnover rent.
- Double-counting - if base is set at the top of the range and turnover is layered on, the tenant is over-charged and may relocate.
Reflection in the rent:
- Set base at a sustainable floor (lower-middle of range) so the landlord is protected if turnover falls.
- Keep the turnover clause as upside sharing, with a realistic threshold.
- Recommend audit/reporting provisions and a turnover definition schedule.
- Note the mall's 92% occupancy and departures as a risk factor justifying a conservative base.
- Present a range and state the assumptions about turnover sustainability.