Mall owner offers shares-for-rent plan

Source : Straits Times – 15 Jul 2009

A LEADING landlord has come up with a novel way to help eligible tenants defer rent for up to three years.

New tenants of Far East Organization may be able to sell shares of their companies, worth their base rental amounts, to their landlord each month.

They will have to buy back the shares not more than three years later, at an interest rate of 4 per cent per annum.

Alternatively, if both parties agree, Far East will become a co-owner of the companies. Sales are capped at 49 per cent of their paid-up capital or $500,000, whichever is lower.

Tenants have to register online at www.fareastretail.com.sg and go through an evaluation process before being selected. Current tenants who want to expand can also apply.

Far East is the first mall owner to offer such a scheme. Other operators, like Orchard Turn Developments and Asia Malls, which run ION Orchard and Tampines 1, offered rental rebates and waivers to help tenants open in time with the opening of the malls.

Far East said the scheme is aimed at budding designers who need a head start, international retailers with new concepts and existing retailers who want to expand.

Only 5 per cent of rental space in six of its malls – namely Central, Far East Square, Orchard Central, Pacific Plaza, Square 2 and West Coast Plaza – will be allocated to it.

This comes up to 45,000 sq ft. Depending on the size of each unit, the scheme would cater to about 90 tenants.

‘It is a support programme,’ said Far East’s executive director of investment properties Eddie Yong.

‘Running a business is like a marathon. We are just providing a helping hand to get them off the starting block or encourage them to start the race, by easing cash flow constraints.’

He stressed: ‘It is not our intention to own or run our tenant’s business.’

In fact, business owners like 28-year-old Sam Su see the scheme as a possible way to snag a good location at deferred rents.

‘It is pretty attractive because rental is the largest cost when it comes to opening a business here,’ said Mr Su, who owns T.S. Rarity, a men’s apparel store at 45 Haji Lane. ‘Take away rental, and cash flow will be eased a great deal. I will take it if the location is good.’

The owner of Don’s Pie, a popular pie shop located in the business district, is also mulling over the option. Mr Don Lim, 50, was forced to close down two outlets after ‘rental killed (my) business’. He now has one outlet near Far East Square.

‘With this scheme, I can wait till business is good before I pay rent,’ he said.

Analysts say that the scheme could be a way for the property developer to keep rents high.

‘The motivation of this scheme is to maintain rents and fill up the shopping centre,’ said Mr Colin Tan, director of research and consultancy at real estate consultancy Chesterton Suntec International. ‘Landlords will not have to reduce rents because tenants unable to afford market rent can now do so with such a scheme.

‘Many landlords are reluctant to lower rent because if word spreads, it will be hard for them to demand high rents from those who can afford it.’

The Singapore Retailers Association’s executive director Lau Chuen Wei said it would help companies with cash flow.

HOW THE SCHEME WORKS

FAR East’s executive director (property services) G.L. Yap explains:

The scenario

~ An eligible tenant signs a two- or three-year lease for a 1,000 sq ft unit at $15,000 per month ($15 psf).

The process

~ The tenant will be instructed to set up a new company.

~ Each month, he will issue company shares – named Redeemable, Convertible, Cumulative Preference Shares (RCCPS) – in lieu of rent. The value of each share depends on the structure of the company. Share issues will be capped at 49 per cent of the paid-up capital, or $500,000, whichever is lower.

~ The tenant can opt to buy back the shares after a set period or after the lease expires at the original selling price plus interest of 4 per cent per annum. Alternatively, he can convert the RCCPS into ordinary shares at the current market value of the company.

~ He will now start paying the rent in cash.

~ If the business fails at any time, the losses will be shared among shareholders – including Far East Organization – in proportions based on the structure of the company.