RTM Lease Structure

How lunch vendors subsidize purveyors

Sellers of fresh produce, fish and meats at the Reading Terminal Market approached market management in 2003 with a plea that rent levels threatened their economic viability. They went so far as to submit a petition seeking relief to market management.

At that time, rental payments by market vendors was divided into two forms: Common Area Management (CAM) fees and Base Rent. CAM, as its name implies, was designed to cover the market’s general operating expenses. Under this system, the fresh food purveyors paid only CAM, while other vendors paid CAM plus Base Rent. The Base Rent was individually negotiated with vendors, but the idea was to provide “rough justice” based on location and volume, according to Paul Steinke, the market’s general manager.

With two-thirds of the leases coming up for renewal in the fall of 2005 the RTM’s board decided to embark on a program to restructure leases to strengthen the market’s heritage as a venue for consumers of fresh foods, while maintaining the economic viability of the market as a whole. That approach is supported by the market’s Mission Statement and Operating Policy Guidelines which make clear that rental rates and rental differentials are a critical tool for supporting the sale of fresh foods in the market. Without such a policy, given the varying margins and business models of the different types of market merchants, the historic venue would soon become a feed station for office workers and tourists rather than a vibrant, diversified public market with something for everyone.

In order to effectively use the tool of differentiated rental rates the market first had to understand the total revenue of all the market’s vendors. Only with this information could rental rates be fairly differentiated among the different classes of vendors to produce the revenue needed to meet the market’s operating expenses. To that end it hired a consultant who made on-site observations of business and traffic to estimate annual sales. The consultant, Larry Ross, an Atlanta professor of retailing, came up with a figure of $30 million in revenue for all merchants.

That $30 million became the baseline on which the board and its leasing committee restructured the lease agreements. With this information the board could devise lease formulas to accomplish the goals of helping the fresh food purveyors while insuring rents from non-purveyors were at or below those charged at other “multi-tenant” (mall and food court) venues. To provide a more precise baseline in the future, the new leases also would require each merchant to report sales revenue.

(Many merchants continue to bristle at the sales reporting requirement, even though their own Reading Terminal Merchants Association agreed to the provision in the new format of the leases, as described in the next paragraph. Market management believes it is a necessary tool to distribute the rental burden equitably in accordance with the market’s goals. The large sums of public monies invested to acquire the market from its former owner and rehabilitate its physical plant – at a time when market merchants had neither the capacity nor the willingness to mortgage their businesses to make the necessary improvements – demand as much precision as possible in assigning shares of operating costs, according to the market management. Still, this requirement is much less restrictive than at some other public markets which have opened in recent years: in many instances, all cash registers are tied into a central information system operated by the market.)

With direction from the board, Steinke began offering leases based on the new structure in the fall of 2005. Although a few merchants signed the new lease, others and the Reading Terminl Market Merchants Association complained that the board failed to formally seek their input on non-economic issues. (Non-economic issues include everything in the lease other than the amount of the payments.) The following spring the RTM board agreed to negotiate the lease form, a process which continued until the fall of 2006 when the board and the merchants association agreed to changes.

A month later the market began the merchant-by-merchant process of lease renewals, which now centered on the payments and issues particular to individual merchants rather than the broad requirements – including sales revenue reporting – that the merchants association had agreed to. All vendors whose leases had expired were extended on a month-to-month basis until individual leases could be completed. Those who had signed lease renewals in 2005 and earlier in 2006 had their leases updated to reflect the changes agreed to by the merchants association.

The new leases are designed so that all merchants continue to pay CAM. Different Base Rent charges are applied according to which of four basic categories a vendor’s business falls into. That’s why the market requires sales reporting in the new lease structure. In addition to the CAM and Base Rent, lunch vendors also pay Special Operating Costs, covering the extra costs of trash removal, exhaust systems, grease traps, etc. In each case, the market sought Base Rent payments which, when coupled with CAM and any Special Operating Costs, would mean total payments based on average sales for each category of merchant. The purveyors would continue to pay only the CAM charges.

In applying the rental differentials, the market classifies merchants into four distinct categories:

Purveyors. These are the sellers of fresh produce, fish, and meats. The market has about a dozen purveyors.

Food Basket. Sellers of other grocery items, including dairy products, coffee, spices, baked goods, etc. The market has more than two dozen food basket vendors.`

Mercantile. Craft, gift, floral, books and all other non-food sellers. The market has about eight mercantile vendors.

Food Court. Any vendor who sells ready-to-eat food or serves meals. The market has nearly three dozen Food Court stalls.

To the extent a merchant straddles multiple categories the rental differentials are blended.

Food Court merchants are further categorized and charged different rates depending on the location and characteristics of their individual businesses. Rates are highest, for example, to the Food Court stalls at Center Court and along “Avenue A”, as the 12th Street aisle is known. High volume Food Court sellers (cheese steak, Chinese food, etc.) would pay higher rates than lower volume outlets (South Asian, Middle Eastern, etc.). Food Court stores that maintain their own seating get a discount because those are seats the market would otherwise have to supply and maintain.

Through the differentiated rates, the Reading Terminal Market aims to collect total rental payments from Purveyors which reflect 3-5 percent of sales, while Food Basket vendors pay 7-8 percent, and Mercantile vendors and Food Court operators 10 percent. These percentages reflect the total of all lease components: CAM, Base Rent, and Special Operating Costs.

As a result of the restructuring the purveyors won a measure of rent relief, and Mercantile and Food Basket stall operators have seen their rents stabilize.

Food Court and other ready-to-eat vendors, however, have faced increases, some significant. The Ross study indicated they previously paid no more than five percent of revenue for their rent, compared to the 10 percent level under the new leases. No wonder the Food Court operators complained loudest. After all, who wants to pay a rent increase, especially one that as much as doubles their lease costs? Still, when compared to what these vendors would pay at similar high-traffic locations – 12 to 18 percent of revenue for their competitors at The Gallery and the Food Court at the Bellevue – they’ve got a relative bargain.