Percentage rent is becoming a common form of tenant-landlord agreement on commercial property leases. In this case, the tenant pays an agreed basic rent in addition to an agreed percentage amount of their gross sales. This type of leasing arrangement is common in shopping malls and other retail spaces.
Here are a few facts you should know before leasing out your property on percentage rent terms.
1. Type of businesses
When you invest in commercial real estate, the type of businesses operated on your commercial property will greatly influence the amount you get on the percentage of gross profit. Create an advantage by offering your property to high-profit retail businesses.
You will need to put up a reasonable marketing and advertising budget. The more customers you attract to your property the better your bargain on the percentage of gross sales.
3. Basic rent
You will agree on a minimum payable rent amount that is not inclusive of the percentage sales. The fixed amount is payable at the agreed time whether the tenant’s business is making a profit or not. It is charged on a given dollar amount per square feet of space.
4. Breaking point
This is an agreed gross sale amount; if the tenant makes sales beyond that amount, a certain percentage goes to you in the form of additional rent. The amount can be paid annually or accumulated. When determining the breaking point, you will have to stipulate clearly any inclusions or exclusions in the gross sale.
5. Control on tenants’ businesses
For this arrangement to be effective, you may need to have access to the tenants’ sales reports and occasionally order for audits. You may also have to exert control on when the businesses operate. For instance, you may require that all tenants’ businesses remain open throughout the festive seasons to maximise on sales.
Investing in commercial real estate isn’t easy. As such, you should plan your leases for high returns.