Campus-based entrepreneurs recently requested rent reductions from the university, as they are not generating any turnover during the corona crisis and would otherwise end up in serious financial problems. The rental price of campus-based entrepreneurs is currently partially fixed and partially based on a percentage of the turnover these entrepreneurs generate. The reduction requested by entrepreneurs applies to the fixed part of the rental price. The university was prepared to suspend the rent of the campus-based entrepreneurs, but the entrepreneurs actually wanted a discount, which is more complicated.
Wynstra observes that entrepreneurs everywhere are struggling with rental prices and that the most promising solution for tenant and lessor in this time of crisis is usually forgotten about. “Usually, two options are discussed: suspension or discount. A third, more promising, option usually loses out: increasing the part of the rental price that’s based on turnover. In times of crisis, this can prove to be a highly effective solution.”
How does turnover rent work?
“If your rent is based on turnover, you’re agreeing with the lessor that the rental price is linked to the turnover you generate. That connection usually takes the form of a percentage of the company’s turnover. There are also intermediate variations that have a fixed basic rental price, but a percentage of all turnover above a certain threshold goes to the lessor as well.”
That might sound appealing to the tenant, especially in hard times. But why would the lessor agree to a solution like that?
“It prevents the unnecessary vacancy of your property. This also benefits the lessor: after all, low rental income is better than no rental income, and the latter could come about because the tenant is bankrupt or needs to leave the property. This would leave the lessor in a sticky situation, as hardly anyone will want to rent hospitality or retail property in times of crisis. Moreover, offering a turnover-rent solution as a lessor will make it easier to find a new tenant if your property ends up vacant after all. Once the crisis has passed, the lessor will likely receive higher than average rent.
“Furthermore, and as is often the case in retail, a single lessor might be letting multiple properties. Examples of this are covered shopping centres or the on-campus food court. Working with turnover rent stimulates the lessor to make the environment as attractive as possible. After all, they make more money if more people come to visit.”
But how do you stimulate the entrepreneur to generate the highest possible turnover if the rental price is based on turnover?
“That is something to look out for: are there enough stimuli to increase turnover, even though this will also lead to a higher rent? If you agree on clear percentages, this should work out OK. In case of doubt, an intermediate solution with a fixed basic rental price can also be a good solution. It might be necessary to allow the lessor to inspect the entrepreneur’s administration, to prevent entrepreneurs from trying to keep their rent down by leaving part of their turnover off-book.”
Where does the idea of turnover rent come from?
“Entrepreneurs and lessors in Great Britain have been working this way for quite some time. The British branch of H&M has agreed to turnover rent with its tenants. There was a debate there recently about returns. If customers return online orders to you that they did not specifically purchase from your subsidiary, should you be able to deduct those from the rent? They’ve not reached a conclusion on that ethical discussion yet.
“Turnover rent is also quite usual in Hong Kong. During the 2019 protests — which were about a controversial extradition law — turnover rent turned out to be a good safeguard: shops needed to close and weren’t making a lot, but their rental costs also decreased significantly. At the end of the protests, most shopkeepers weren’t seriously affected by having to close down temporarily.”
Why would and should this work on campus?
“There are a couple of reasons. Firstly, the on-campus entrepreneurs are completely dependent on the number of EUR students and students from the university of applied sciences — those are their potential customers, after all. Image the university introducing an intake restriction or performing poorly in student evaluations; this would lead to fewer students on campus and therefore fewer potential customers for the entrepreneurs. This has a serious impact for the shopkeepers and it therefore makes sense to share the responsibility.”
“The second reason is that the entrepreneurs of, for instance, the food court are similarly dependant on the university as shopkeepers are in shopping centres with a single lessor. Just like in a shopping centre, the exterior of the food court is the responsibility of the lessor: the university decides on the furniture and other conditions, which has an impact on attracting customers. It therefore makes sense to stimulate EUR to make the food court look its best.”
Is this something that should receive more national attention?
“It would certainly be interesting to consider turnover-rent solutions for hospitality and retail properties throughout the country, as long as the aforementioned arguments are taken into account. It should receive more attention. I can’t imagine people not discussing it; however, during the last crisis in 2008 people were talking about the option of turnover rent, but I haven’t heard much about it during this one.”