In one sentence
A tenant's total occupancy cost as a percentage of its sales, a health check for retail tenants.
The longer version
For retail, occupancy cost as a share of tenant sales signals whether a tenant can sustain its rent. High ratios flag tenants at risk of failing or demanding relief, which matters to the income underwriting a loan relies on.
Lenders diligence major retail tenants partly through this lens, tying tenant health to the durability of the property's cash flow.
Common questions
- How is occupancy cost ratio calculated?
- Divide the tenant's total occupancy cost, including rent and its share of operating expenses and taxes, by its sales at the location.
- Why do retail lenders look at occupancy cost ratio?
- Because a tenant paying a high share of its sales in occupancy costs is more likely to struggle or seek rent relief, which affects the property's income.
- Where does the lender get tenant sales?
- From sales reports required under the lease, typically for larger retail tenants, provided by the landlord during diligence.
Keep reading