Revenue sharing is the use of profits to enable separate actors develop efficiencies or innovate in mutually beneficial ways. There are many ways the revenue sharing concept is structured with the objective being sharing of revenue profits and losses between various parties. Revenue sharing is practiced widely in sports, manufacturing industries, advertising industries, private companies and malls/retail shopping centers. The International markets are embracing the concept of revenue sharing or turnover rent.
In commercial leasing and more specifically in malls and retail shopping centers, revenue sharing takes the form of either (a) the landlord and tenant share revenue(s) based on agreed percentages or; (b) the tenant pays a combination of a fixed rental amount and a percentage of their revenues or; (c)the tenant pays a below-market rent payment or a percentage of revenue, whichever is higher among other forms. These and other forms can however be modified and agreed to by parties.
The concept of revenue sharing has been in use in Kenya but there has been a spike in the market in the recent past. Some of the reasons for this upsurge are;
- The mushrooming of malls/retail shopping centers within close proximity. More malls and commercial centers are coming up every day and within close proximity to one another. This oversupply has led to jitters among tenants who for fear of a condensed customer base prefer negotiating their rent to be based on their earnings rather than on a fixed rental basis and further compelling the Landlord to promote the growth of the mall.
- Financial Muscle of tenants. Some tenants, either for their financial muscle or due to them leveraging a high market share, are able to better negotiate the commercial terms of their leases.
- Kenyan market dynamics. Peculiarly, the Kenyan retail consumer market is highly skewed in favour of convenient stores and eating establishments. Convenient stores and eating establishments often tend to be the anchor tenants attracting the footfall to a mall. The presence or lack of anchor tenants often determines the attractiveness of the mall both to other tenants and customers. For this reason, anchor tenants leverage a high commercial negotiating power and can call for revenue sharing.
Proponents of revenue sharing advocate for it because of the good marketing incentive it creates. A good marketing strategy has a domino effect that benefits both the landlord and tenant. The more effectively the landlord is able to market/promote the mall or retail shopping center and offer incentives and discounts, through the tenants to the consumer, the more footfall there is in the mall, which translates to profitability of the shops in the mall and in effect a high rent payable to the landlord in a revenue share arrangement. On the downside, the landlord in addition to making the capital investment, is actively involved in the day to day promotion and development of the mall and thus has to commit more time, human resources, expertise, money and improvement of marketing/promotional activities.
It is however not all doom for the Landlord. A benefit that arises from an effective marketing and promotional campaign necessitated by revenue sharing is that it creates a demand among tenants to access space at the mall/retail shopping center. With a proven track record of footfall to the mall/retail shopping center, the negotiating power of the landlord increases and thus they can negotiate for better returns on payment of rent. If, however a marketing, advertising and promotional campaign is weak or if the tenants for one reason or other (such as a poor economic climate or if there is internal mismanagement) both the landlord and the tenant may suffer great loss.
The revenue sharing concept requires parties to be honest and act in good faith and more so the tenant. For revenue sharing to be effective, the tenant supplies the landlord with a record of their revenues. The tenant thus must endeavor to give to the Landlord true and correct records. For purposes of transparence the tenant should allow the landlord access to and to peruse and audit the tenant’s books of accounts.
A short coming of the revenue sharing model is the effort spent in parties trying to agree on a rent sharing formula that is mutually beneficial. There are very many variables to the revenue sharing concept and parties may find themselves locked behind doors for days on end trying to agree on a formula. The lack of sufficient data on the same, especially in the Kenyan market, only escalates the problem.
To these negotiation parties may need to consider a base rent (minimum rent payable), a rent hurdle (point at which revenue sharing starts) rent share percentage (percentage of the tenant’s revenue that will be paid to the landlord as rent) rental escalation rate among others.
Revenue sharing as a mode of paying rent is however not for all retail shops and will not work for some businesses. It works best where there is a sale of goods that can generate adequate and profitable revenue to the tenant.
Revenue sharing is a concept where both the landlord and the tenant can financially benefit. However, it requires a lot of input from the landlord in terms of marketing and does not necessarily come with a money back guarantee.
Disclaimer: This article has been prepared for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing on this article is intended to guaranty, warranty, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.