If you're leasing a commercial space, you might come across a lease structure that includes percent rent. This model allows you to pay a base rent plus a percentage of your gross sales, which can be a great option for businesses looking to manage costs during slower sales periods. But how does percent rent work from a tenant’s perspective, and what should you keep in mind when it's time to pay?
Related Blog: The Complexities of Managing Percentage Rent for Multi-Location Tenants
How Percent Rent Works
The core of a percent rent lease is a "breakpoint," which is a sales threshold you need to reach before paying any additional rent. Once your sales exceed the breakpoint, you’ll pay a percentage of the excess as part of your rent. For example, if your annual sales are $1 million and the lease sets a breakpoint of $900,000, you would pay a percentage (say, 5%) on the additional $100,000.
How to Stay Prepared for Percent Rent
- Track Your Sales: Accurate and consistent sales reporting is key. Be sure to keep detailed records of your monthly or quarterly sales to stay on top of your numbers.
- Understand Your Breakpoint: Check your lease for the breakpoint. It could be a fixed amount or vary depending on your sales, so it’s crucial to know what triggers the percent rent.
- Do the Math: Once your sales exceed the breakpoint, calculate the percentage of sales that’s due and add it to your base rent. Staying on top of this helps avoid surprises when your payment is due.
- Communicate Early: If your sales are fluctuating or growing faster than expected, keep open lines of communication with your landlord to manage expectations.
Benefits of Percent Rent for Tenants
- Flexibility: When sales are lower, you only pay the base rent, which helps manage cash flow during slower seasons.
- Shared Risk: Percent rent structures create a mutual interest between you and your landlord in the success of your business.
- Growth Opportunities: If your business grows steadily, your rent will reflect that success, but only after you’ve passed the sales threshold.
Need Help Navigating Your Lease and Understanding Percent Rent?
Check out Property Works’ Comprehensive Guide to Percent Rent Processing to get a full breakdown of how it works and tips on managing your lease like a pro!