Retailers are exploiting a loophole to pay cheaper rents -- and it's choking shopping malls

Getty/Kena BetancurCustomers return items in store.
  • Some retailers are underreporting their sales numbers by deducting the returns of items bought online by customers.
  • This can be a way to get cheaper rents from landlords.
  • David Simon, CEO of Simon Property Group Inc., the largest US mall owner, said the company is “getting dinged” by this.

Mall-based stores have found a way to benefit from the pressure of e-commerce by shifting the heat to mall owners.

According to David Simon, CEO of Simon Property Group Inc., the largest US mall owner, tenants are underreporting their sales numbers by deducting the returns of items bought online. As some rental agreements are based on the landlord taking a cut of sales, this is a way for those tenants to score cheaper rents, Bloomberg reported Tuesday.

In a call with investors on Friday, Simon explained that this also impacts their sales per square foot numbers – a metric investors use to track the success of a mall.

“We’ve just found that we’re getting dinged by the internet return,” Simon said, adding that it is a breach of tenant leases.

“It’s surely part of our lease negotiation, but we just want to tell the market, we are giving you our reported sales and they are less than what’s going on in that market because of the internet sales returns,” he said.

Simon didn’t quantify how much of an impact this has had on sales but said that the impact is “material.”

Snowy deserted empty mallSeph LawlessDerelict malls fall victim to the retail apocalypse.

American malls are being severely impacted by the shuttering of anchor stores, which are often large department stores such as Macy’s, JCPenney, or Sears.

More than 6,400 storesclosed in 2017, and another3,600are expected to shutter in 2018. According to a reportdone by Credit Suisse, this will result in 20-25% of malls closing in the next five years.

Some mall companies have invested money into refurbishing these complexes to improve the shopping experience. In other cases, they have been transformed into completely new buildings with new uses.

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