The test for a rent concession to an anchor is not its own rent but everything its departure would take with it, weighed against the fall in the probability that it leaves.
A rent cut to keep an anchor pays for itself when the fall in the probability that it leaves, multiplied by all the rent its departure would expose, exceeds the cut paid in the cases where it stays. On an illustrative centre where a 600,000 anchor exposes 1,136,250 a year and has a 35 per cent chance of leaving, a 20 per cent cut breaks even if it lowers that chance by 7.68 points. Counted against the anchor's own rent alone, it would need 16.25 points, and most cuts would wrongly be refused.
Worked in full in Retail Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The centre is illustrative. The anchor's lease is coming to renewal, and the landlord's leasing team puts its chance of leaving at 35 per cent on the current rent. Half of the specialty rent roll sits in leases with a co-tenancy clause; the other half has no protection but depends on the anchor's footfall for its sales.
| Input | Value |
|---|---|
| Anchor rent a year | 600,000 |
| Probability of departure at the current rent | 35.0% |
| Proposed cut at renewal | 20.0% |
| Specialty rent roll / share with co-tenancy clauses | 2,400,000 / 50.0% |
| Co-tenancy abatement if the anchor goes dark | 40.0% |
| Unprotected specialty: sales / rent / service charge and rates | 15,000,000 / 1,200,000 / 450,000 |
| Occupancy cost ceiling for those trades | 12.5% |
| Specialty sales fall after the anchor leaves | 15.0% |
Anchor's own rent = 600,000
Co-tenancy abatements = 2,400,000 × 50.0% × 40.0% = 480,000
Rent capacity of unprotected tenants after the fall = 15,000,000 × (1 − 15.0%) × 12.5% − 450,000 = 12,750,000 × 12.5% − 450,000 = 1,143,750
Rent beyond capacity = 1,200,000 − 1,143,750 = 56,250
Rent exposed, E = 600,000 + 480,000 + 56,250 = 1,136,250
Before the fall, the unprotected tenants could carry 1,425,000 of rent, comfortably above the 1,200,000 they pay. The anchor's departure removes that headroom and more, which is the occupancy cost ratio doing its work. The exposure is 1.89 times the anchor's rent, and the anchor's own rent is only 52.8 per cent of it.
Without a cut, the expected annual loss is p0 × E. With a cut C, the landlord pays C in every outcome where the anchor stays, and loses E in the outcomes where it still leaves:
Indifference: p0 × E = p1 × E + (1 − p1) × C
Solved: p1 = (p0 × E − C) / (E − C)
Here: C = 600,000 × 20.0% = 120,000; p1 = (35.0% × 1,136,250 − 120,000) / (1,136,250 − 120,000) = 27.32%
Required fall = 35.0% − 27.32% = 7.68 points
The comparison is annual because the cut and the exposure run for the same renewal term: the concession is paid for as long as the anchor stays, and the exposure lasts for as long as it would have been gone. If the anchor's space could be re-let within the term, shorten the exposure accordingly.
The cut is worth making if the leasing team believes it lowers the chance of departure from 35.0 per cent to anything below 27.32 per cent. Suppose it brings it to 25.0 per cent. The landlord then expects to pay 90,000 a year of concession (the 120,000 cut in the 75 per cent of outcomes where the anchor stays) and avoids 113,625 a year of expected loss, a net gain of 23,625 a year. Without a cut the expected loss is 397,688 a year, which is also the most any concession could be worth: that is what a cut that made the anchor certain to stay would save, 66.3 per cent of its rent.
| Cut | Annual cost | E = anchor rent, 600,000 | E = 1,136,250 | E = 1,800,000 |
|---|---|---|---|---|
| 10% | 60,000 | 7.22 | 3.62 | 2.24 |
| 20% | 120,000 | 16.25 | 7.68 | 4.64 |
| 30% | 180,000 | 27.86 | 12.24 | 7.22 |
| 40% | 240,000 | 43.33 | 17.41 | 10.00 |
The left-hand column is how the decision is usually framed: the anchor's rent against the anchor's rent. On that framing a 30 per cent cut needs the probability of departure to fall by 27.86 points, which no negotiation can promise, so the cut is refused. Measured against the full exposure, it needs 12.24. On a centre where the anchor carries three times its rent, a 40 per cent cut needs only 10.00 points.
The probabilities are judgements, and a precise-looking 7.68 should not hide that. The value of the calculation is to turn a vague "can we afford it" into a question the leasing team can answer: do we believe this cut moves the anchor's decision by eight points?
Measure the exposure first, then solve for the fall in departure probability that makes the cut break even: p1 = (p0E − C) / (E − C). With 1,136,250 exposed and a 35 per cent chance of departure, a 20 per cent cut on a 600,000 rent needs to lower that chance by 7.68 points. The occupancy cost tape, with the anchor subsidy and co-tenancy cascade wired to it, is in the free workbook for this case.
Only if the cut lowers the chance of departure by enough. The break-even is (1 minus the new probability) times the annual cut, divided by the annual rent exposed. With 1,136,250 exposed, a 35 per cent chance of leaving and a 120,000 cut, departure has to fall to 27.32 per cent, by 7.68 points. If the tenant would stay anyway, the cut is pure cost.
More than its rent. On this illustrative centre an anchor paying 600,000 exposes 1,136,250 a year when it leaves, 1.89 times its rent: its own rent, 480,000 of co-tenancy abatements on protected specialty leases, and 56,250 of specialty rent pushed above what a 15 per cent sales fall leaves tenants able to pay.
The expected annual loss from its departure: the probability of leaving times the rent exposed. At 35 per cent and 1,136,250 that is 397,688 a year, or 66.3 per cent of the anchor's rent, and only if the concession makes it certain to stay. Any concession that leaves departure possible is worth less.
Paying the anchor to stay is the first of the three cases the companion files add to chapters 7 and 8 of 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.
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