Offer ‘Seasonal’ Rent to Struggling Retail Tenant

If you've got a struggling retail tenant that asks for a rent break, consider letting the tenant pay rent based on a “seasonal” rent schedule, suggests Virginia attorney Paulette B. Peltz. What is seasonal rent? It's rent based on the tenant's annual gross sales cycle. It recognizes that during certain months of the year the tenant's sales increase—for example, during the year-end holiday season—while during other months, sales drop—for example, right after the holiday season ends. Rather than charge the tenant the same rent all year long, you can help the tenant meet its rent obligations by decreasing its rent during weak sales months and increasing its rent during strong months, Peltz says.

This win-win strategy won't hurt your bottom line. You still collect the same annual minimum rent—it's just allocated differently during the year, Peltz explains. In Peltz's experience working with Charter Oak Partners, an owner of factory outlet shopping centers throughout the United States, she has found that when a struggling retail tenant is offered the opportunity to pay rent seasonally, the tenant readily accepts the offer. The tenant can then pay its rent on time—and, as an added benefit, if faced with a lease renewal option, gives it an incentive to exercise the option, she says.

We'll give you an example of how seasonal rent works. Plus we'll tell you how long the seasonal rent should last and how to set seasonal rent amounts. We'll also explain how to spell out the seasonal rent schedule in your leases. And we'll give you Model Language that you can adapt and use in your leases.

How Seasonal Rent Works

Here's an example of how seasonal rent works:

Example: The tenant's annual minimum rent is $120,000. The tenant's monthly sales typically are lowest from January through April. Sales usually increase slightly from May through October and typically skyrocket in November and December. Instead of charging the tenant $10,000 per month, you might charge rent this way:

• $5,000 per month from January through April;

• $10,000 per month from May through October; and

• $20,000 per month for November and December.

How Long Seasonal Rent Should Last

You should set up a seasonal rent schedule on a temporary basis only, Peltz suggests—such as for a one-year period. That way, if the tenant's business picks up when the year ends, you can revert to the original rent structure. But if the tenant still has financial problems, you can always agree to continue seasonal rent, she says.

How to Set Seasonal Rent Amounts

To figure out how much rent the tenant should pay during any given month, you must determine when a tenant's sales are strong and when they are weak, says Peltz. To do that, review the monthly sales reported by your tenant. Or if your tenant doesn't report sales, review the sales of your center, she says. But be aware that the tenant's sales may not track the center's sales. For instance, a swimwear store in Colorado may have stronger sales in the summer, when the weather, of course, is warm and people are swimming, while other stores in the center do better in the winter, when tourists start arriving for the ski season.

Practical Pointer: Keep in mind that many centers have a unique sales curve, depending on their location, says Peltz. So don't make blanket assumptions, such as sales peaking only during the year-end holiday season. A center in New Hampshire, for example, may have very strong sales in the autumn, when tourists arrive to see foliage changes, she says. But a center in South Carolina may have strong sales in the summer because tourists come to the beaches there all summer long, she adds.

How to Spell Out Seasonal Rent Schedule

If your lease with the tenant has already been signed, you'll probably have to amend the lease to set up seasonal rent for a year. Peltz recommends setting up the seasonal rent payments in a chart. For example, your amendment could say something like this:

Model Language

Effective as of [insert month and year, e.g., January 2003] through [insert month and year, e.g., December 2003], Landlord hereby agrees to allow Tenant to pay its Minimum Rent on a seasonal basis. Therefore, Tenant's Minimum Rent due under Clause [insert # of rent clause in lease] shall be modified so that during said period, Tenant shall pay the following:

Months	Monthly Minimum Rent
January-April	$1,600
May-August	$3,200
September–December	$4,800

If, after a year, you decide to let the tenant continue to pay seasonal rent, you'll have to sign another lease amendment, says Peltz.

CLLI Source

Paulette B. Peltz, Esq.: Senior Vice President & General Counsel, Charter Oak Partners, 8000 Towers Crescent Dr., Ste. 950, Vienna, VA 22182; (703) 905-4400.