How do Rental Structures work in Food Halls
Rental structures in food halls are pretty straightforward. They have all the same tools as normal rental structures with a few simple differences.
Percentage Rent is standard in food hall agreements and typically ranges from 12%-30%. A notable difference of percentage rent in food halls is that it is usually not subject to a breakpoint and begins with the first dollar. Food hall agreements typically have percentage rents for a number of reasons that benefit both parties. Some of these include: better located real estate, nearly turn-key builds, significant common areas, significant shared expenses (utilities, internet, parking) and dedicated staff that run, clean, and maintain most aspects of the food hall. Finally, because the performance of individual concepts can vary greatly depending on visibility or style of cuisine, this typically makes potential tenants more comfortable.
Common Area Maintenance or Passthrough charges exist in some food halls. They are less popular because CAM charges are greater, making per square foot estimates seem onerous to potential tenants. For that reason, most deals are structured as gross rent plus percentage rent. However, it isn’t uncommon to see CAM in some food hall agreements. Notably, because many food hall vendors are earlier in their retail careers we typically caution both parties around “CAM” true ups at the end of the year. It’s for this reason that most food halls alternatively capture common charges through a mixture of percentage rent and base rent.
Base Rent exists in most food hall agreements in the form of a fixed charge or an alternative minimum charge (i.e. greater of 15% or $8,000 per month). Occasionally we see agreements without such charges but they are typically in out of the way locations or provide much less amenities to customers and vendors. Base Rents are often discounted for the first six months to scale vendors into normal volumes except in the best locations. Of course, the base charges vary greatly by location, geography, and foot traffic. A notable difference is that base rent is rarely quoted on a PSF basis because of the large amount of common areas.
Term for most agreements is between 2 and 5 years and include a minimum sales clause that the purveyor must reach or else the agreement can be susceptible to termination at the owner’s option.
Guaranty of rent is found most often in agreements with a fixed base rent. Many food halls do not use guaranty provisions or limit them to early departures with a defined maximum. We typically suggest that owners and operators favor security deposits over guaranty.
Security Deposit exist in most food hall agreements and range substantially depending on the operator, geography, and location.
“Key money,” “buy-in,” or “setup fees” do often exist in food hall agreements to offset the time and energy of coordination for particulars. We have seen them where these fees are applicable to equipment (which may be standardized or specific to the vendor’s concept).
Brokerage Fees exist in some food hall agreements, but we recommend that everyone ask about this in the first meeting as it has been common in the industry to avoid such fees. When they are paid, they are typically a negotiated flat fee since the terms of the food hall agreements can be rather short compared to a typical lease.
Of course, it would be impractical to be exhaustive in popular terms, but anyone considering building or purveying in a food hall should be aware of these common deal points.
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Politan Group specializes in operating food halls, bars, and bars within food halls. We also provide remote accounting, HR, and administration for food halls. Finally, we sell software that organizes much of the routine processes. If you are thinking of building a food hall or need help with an aspect of a food hall you already own, reach out to us. Politan is the most-awarded food hall operator in the industry.