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One of the potential ways in which the company would be subject to moral hazard comes in the form of not fully complying with the duties of being a landlord. This comes in the form neglecting to properly maintain the mall for potential customers of the tenants.
A variable payment scheme aligns the interest of the landlord and tenant through the process of percentile gain. Basically, the more sales a tenant has, the greater the amount of money the landlord generates. As such, it is in the interest of the landlord to support the tenant since this would result in higher profits for the landlord in the long term.
In the case of the tenant supporting the landlord, it should be noted that the variable payment scheme ensures that the mall itself is serviced and maintained properly by the landlord since that is where a percentage of the payments would go towards. This ensures that the mall continues to be a viable investment for the landlord in the long term.
When looking at the case and the various factors associated with the sale of goods and services, it is advisable that a gross revenue scheme be chosen. The reason behind this is that the mall operator will have a vested interest in ensuring the tenant will make money whereas under the net revenue option there is the potential moral hazard that the landlord would just collect payments without implementing any form of support since whether or not the tenant makes money does not impact them in the least.
Attitude towards Risk
Variable payment should increase or decrease based on the landlord’s perception regarding the risk associated with the type of tenant renting. Anchor tenants in malls (i.e. McDonalds, Starbucks, etc.) can be deemed as being low risk and should have a low variable payment rate. While small independent stores that are relatively unknown are thus more risky (i.e. fewer people may buy) and, as such, should have a higher variable payment rate. This is also because another more famous tenant could have rented the same space.
Investment in Location
Not all locations are created equal within a mall with some areas generating lower levels of foot traffic as compared to others. As such, giving a lower rate for certain areas is advisable so as to ensure fairness when it comes to rental management practices. One of the ways in which this can be accomplished would be to retain the standard of 1% of the client’s gross revenue while reducing the fixed monthly rate of $35 – $38 to $25 – $28 for areas with lower foot traffic.
Length of Tenants Lease
The average length of a tenants lease should be two years at most. This is due to the fact that the landlord may need to change the contract agreements to better align with increased costs due to inflation (i.e. increase the fixed monthly payment). Also, a length of two years would be viable for tenants since it ensures that they are not locked into a lengthy contract wherein they lose more money than they gain due to a lack of product patronage.
Comparison of Tenants
When looking at the various malls, it can be speculated that the types of tenants for the IMM Building would be tenants that are looking for an area with a large square footage for their store along with sufficient warehouse space for their products. These are all factors that can be seen in the IMM building due to the 1,426,518 square feet available for retail. Some possible tenants would be big box stores such as Home Depot or various furniture retailers like Ikea.
Centrepoint Properties would attract smaller independent retailers due to the fixed monthly rental charges which would enable them to price their products competitively. The mall developed by Maple Tree investments would attract more mid to high end restaurant tenants given its proximity to the central business district of Singapore which would result in many office workers going there for lunch or dinner.