Dealing with Reverse Premiumsby Udit Jain on June 13, 2007
Depending on the real estate market for retail locations, retailers can occasionally attract reverse premiums for vacant retail stores. In other words, when a retailer is considering a move, real estate companies might pay them a sum of money to encourage the retailer to leave their current site and move into another that is listed by an agent. Any premium given is normally dependant on the length and size of the new lease.
Many retailers have been encouraged to lease secondary or unattractive locations in order to get reverse premiums. In some cases, these retailers have subsequently fi led bankruptcy based on an unfortunate site selection. The danger is that the premium disguises the true profitability of the store and later comes home to roost in the store’s second year of trading.
A retailer paying a premium price to get a prime location is one thing, receiving reverse premiums from a realtor or mall developer is something to treat with a great deal of caution.