Co-tenancy clauses, and the sales fall that follows the anchor out of the door, make the anchor’s own rent a poor measure of what its departure costs.
On a grocery-anchored centre of 28 000 m², the anchor’s departure exposes €1 985 894 of rent a year — 3.5 times the €561 600 the anchor itself pays. Only 28 per cent of that is the anchor’s own rent. The rest is €705 719 of co-tenancy abatements triggered in the specialty leases, and €718 575 of further rent pushed past what the remaining tenants can sustain once specialty sales fall 18 per cent without the anchor’s traffic.
Worked in full in Retail Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Ashfield Centre is a 28 000 m² grocery-anchored centre offered at €66.0 million. The grocery anchor occupies 7 200 m², a quarter of the lettable area, and pays €561 600 a year — 10.0 per cent of the rent roll. Pricing its departure at that figure is the error, because three other things move on the same day.
Assume 35 per cent of the specialty rent roll is protected by a co-tenancy clause and that the trigger produces a 40 per cent rent abatement. Assume, separately, that specialty sales fall 18 per cent without the anchor’s traffic. That second assumption moves every specialty tenant’s sustainable rent, because sustainable rent is a function of sales.
| If the anchor goes | EUR a year |
|---|---|
| Anchor rent lost | €561 600 |
| Co-tenancy abatements triggered | €705 719 |
| Rent at risk before, on the unprotected share only | €588 137 |
| Rent at risk after the sales fall, same share | €1 306 712 |
| Increase in rent at risk | €718 575 |
| Total rent exposed | €1 985 894 |
€1 985 894 of rent exposed, from a tenant paying €561 600. That is 3.5 times the rent the anchor pays, and only 28 per cent of it is the anchor’s own rent. The rest is the clauses, and the residual arithmetic of a retail rent working in reverse: lower sales, the same service charge, lower capacity, more units past the occupancy cost their trade can carry.
The total is a floor, not a point estimate. A 40 per cent abatement does not make a unit affordable; it makes it less unaffordable. A protected value operator would pay €87/m² after abatement against a post-anchor sustainable rent of about €21/m² — still catastrophically over. The conservative construction understates the protected half.
The same asymmetry shows up from the other side. The anchor generates 38.9 per cent of the centre’s reported sales from 25.7 per cent of the area, and pays €78/m² against a specialty average of €269/m².
| The anchor | Value |
|---|---|
| Area | 7 200 m² |
| Share of lettable area | 25.7 per cent |
| Share of reported sales | 38.9 per cent |
| Share of the rent roll | 10.0 per cent |
| Occupancy cost, against a grocery ceiling of 3.5 per cent | 3.4 per cent |
| Rent paid | €561 600 |
| At the specialty rate it would pay | €1 935 686 |
| Implied subsidy | €1 374 086 |
Capitalise both sides. At the exit yield — a net perpetuity at 11.5 times, which allows nothing for when the loss happens and is therefore an upper bound rather than the answer, against 10.2 times when the same loss is charged from each lease’s own date — €1 985 894 of rent is €22.9 million of value. The implied subsidy of €1 374 086 a year is €15.8 million. The centre can afford to pay the anchor to stay, and by a wide margin.
At renewal, then, the anchor is negotiating against a landlord for whom its departure costs €1.99 million and its rent is worth €561 600. The anchor knows the first number. And the 11.0 years of term on the anchor lease is security against the anchor leaving early, not against it shrinking: a grocery operator that reduces its store size at renewal, sublets part of the floor plate or hands surplus space back pays proportionately less rent, and the footfall does not improve.
Not as a scenario buried in an appendix. As a line: the exposed rent, the probability attached to the trigger over the hold, and the product. At a one-in-five chance over ten years the expected cost is €397 179 a year of rent, or €4.6 million of value — 6.9 per cent of the €66.0 million asking price, and larger than most of the items an acquisition team spends its diligence budget on.
Four things set the size of it, and none of them is in the rent roll:
Co-tenancy is a North American device above all: standard in United States and Canadian mall leases, occasional and usually narrower in continental Europe, rarer still in the United Kingdom. The 35 per cent penetration used here is an assumption about one lease pack, not a market statistic, and the first thing a buyer does is replace it with a count from the actual leases. The point of the arithmetic is not the answer. It is that the answer is large enough to be worth counting.
A clause under which a specialty tenant gets a rent reduction, a right to convert to turnover-only rent, or a right to walk, if the anchor closes or occupancy falls below a stated level. On this centre, 35 per cent of the specialty rent roll is assumed protected and the trigger produces a 40 per cent abatement: €705 719 a year.
Carry three figures on one line: the exposed rent, the probability of the trigger over the hold, and the product. Here €1 985 894 of rent is exposed; at a one-in-five chance over ten years the expected cost is €397 179 a year, or €4.6 million of value — 6.9 per cent of the asking price.
The anchor here pays €78/m² against a specialty average of €269/m². At the specialty rate it would pay €1 935 686 rather than €561 600, so the implied subsidy is €1 374 086 a year — €15.8 million capitalised at 11.5 times.
This article is one calculation from Retail Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1706 articles →
If this book helped — or didn’t — a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.