Simplicity Esports Uses Percentage Rent Leases for Expansion Strategy

Simplicity Esports and Gaming Company has acquired the assets of a gaming center previously owned by a PLAYlive Nation franchisee in Vancouver, Wash. In the process, it signed a percentage rent lease.

Simplicity Esports also owns and operates 13 Esports gaming centers and is the franchisor for more than 20. It owns eight on the West Coast. The Vancouver location initially opened in 2013 and has a database of over 17,000 unique customers. It is expected to reopen in mid-April.

Expect Simplicity Esports to remain an active acquirer of gaming centers.

“The Vancouver location is our fourteenth corporate owned gaming center and eighth on the West Coast,” Roman Franklin, CEO of Simplicity Esports, said in a prepared statement. “We plan to continue with strategic gaming center acquisitions as well as construction of new locations throughout 2021.”

Franklin says the COVID-19 lockdowns have created an opportunity to partner with landlords. “I expect Vancouver and our other corporate gaming centers with percentage rent leases to be profitable within the first 30 days of operating at full capacity,” he said in the prepared statement.

Simplicity Esports is among a growing number of companies shifting to the percentage rent model. Omar Eltorai, market analyst at Reonomy, told GlobeSt.com in an earlier interview that the pandemic has produced a greater interest in more flexible lease terms. Now, he expects the percentage lease concept to grow more popular. “While not new, the percentage lease concept will likely become more widespread—particularly in retail,” he says.

Percentage have generally only existed for large retailers, according to Eltorai. “The way that the leases work is that they have one fixed rent component and one variable rent component,” he says. “The fixed component is the base rent, which is generally below market rate, and then the variable component is a percentage of the sales generated by that retailer at that property.”

The lease protects the tenant but gives the landlord the upside potential of collecting more than the market rent. And when sales are worse than expected, the tenant pays below the market rent. “The tenant likes this agreement because they have locked in a lower fixed rental cost, and the owner likes it because they have filled the space and have upside potential if the retailer does well,” Eltorai says.

But landlords need to take care as these leases are now filtering down to smaller retailers. As they enter into negotiations, they need to have a fundamental understanding about the tenant’s balance sheet, cash position, debt load and maturity schedule before they can start offering such concessions, Brad Tisdahl, principal and CEO of Tenant Risk Assessment, told GlobeSt.com.

“If they have debt, has the tenant had any conversations with the lenders about potentially extending the period when they need to service it or move interest payments back on the calendar,” Tisdahl says.