Percentage rent is an additional payment made to landlords by commercial tenants when a certain sales volume is reached. It can benefit both parties by tying rent payments to market performance and fair market value. Negotiation is crucial to determine what counts towards sales volume and what is excluded. Calculation depends on the rental agreement, with a guaranteed minimum rent plus a supplemental payment based on percentages of sales being the safest form.
Percentage rent is a supplemental rental payment made to landlords when commercial tenants reach a certain sales volume. Typically found in landlord-tenant agreements for retail leases, such as those used to rent commercial space in a mall, percentage rent agreements allow the owner to earn more if the tenant operates a successful business. Tenants and owners can go through a strict negotiation process regarding this type of rental, to determine how sales volume is calculated and what, if any, exclusions apply. The rental percentage is generally calculated on a monthly, annual, or breakpoint basis.
When used correctly, the rent percentage can be a win-win deal for both tenants and landlords. For tenants, their rent payments will be tied to market performance, and they will be less likely to experience annual rent increases that could force them to close or relocate. Landlords also benefit, since they won’t have to estimate the amount of a rent increase a tenant can afford. By tying at least a portion of the rental payment to business performance, both parties can obtain fair market value.
Rent percentage negotiation is crucial to determining the success of the deal. It must be carefully stipulated what exactly counts towards the sales volume limit and what is excluded. For example, most agreements deduct taxes paid on transactions, since the tenant simply collects these funds for the government, rather than directly benefiting from them. Similarly, if there is a fire on the premises and the tenant receives insurance money to repair the damage, this can be excluded as they do not actually benefit from a sale.
Another important point of negotiation is whether to include sales made off-site, but filled on-premises. For example, if a merchant sells a watch through a website, the sale did not take place on the premises. On the other hand, if the watch is stored on the premises and shipped to the buyer from the property, it can still be considered in the rental percentage calculation. This negotiation can also be considered in reverse, in relation to sales made on the premises but made from an external location.
The way the rental percentage is calculated depends on the stipulation of the rental agreement. The safest forms of this type of contract require a guaranteed minimum rent, plus a supplemental payment based on percentages of sales. For example, a tenant might be responsible for a minimum rent of $2,000 United States Dollars (USD) per month, plus 2% of gross sales over $5,000 per month. Rent can also be calculated based on a sales break point, such as 5% of annual gross sales over $400,000 USD.
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