Mall owners, already squeezed by e-commerce and spending billions on property makeovers to draw shoppers, have a new headache: retailers deducting returns for items bought online from their sales figures.

David Simon, CEO of Simon Property Group, said a “significant number” of tenants are underreporting sales and that the company — the largest U.S. mall owner whose holdings include Southdale Center in Edina — is negotiating with them to find a solution.

For America’s beleaguered retail landlords, sales per square foot is a critical metric, used by investors to gauge their financial health. In addition to the dollars lost themselves, a low number can damage a mall’s reputation on Wall Street.

It’s common that a tenant pays a base amount and then gives the landlord a cut of sales that exceed a set threshold. Occasionally a retailer has no base rent and is obligated to pay only a percentage of sales rung up at the property.

“We are getting dinged by internet returns,” Simon said on a conference call with analysts recently. “Every retailer is different, and there is not a standard response yet. It needs to be addressed in future leases.” He declined to quantify the problem but said it showed up in audits and was “material.”

The tension adds to a growing list of troubles for retail property owners as the rise of internet shopping erodes brick-and-mortar revenue.

Many malls are adding small, local merchants and relatively unknown retailers to the mix as large chains cut back on space, exacerbating the issue of online returns, according to Burt Flickinger, managing director of Strategic Resource Group LLC. Big, well-known companies, especially publicly traded ones, are likelier to hew to established guidelines when they report sales figures.

“As the big chain tenants close, they’re replaced more often with newer, more entrepreneurial independent owner-operators, who can be more casual in terms of responsibly reporting,” Flickinger said.

Managing returns is a critical issue for both landlords and retailers, and e-commerce has only made it more complicated. The rate of returns for online purchases is estimated to be as much as four times the rate for physical-store sales, according to David Sobie, CEO of Happy Returns Inc., which operates in malls and other shopping venues and handles online returns from consumers for retailers that don’t have a lot of physical stores.


Mulholland writes for Bloomberg News.