Percentage rent is a supplemental rent payment made to landlords when commercial tenants reach a certain sales volume. Usually found in landlord-tenant agreements for retail leases, such as those used for renting commercial space in a mall, percentage rent agreements allow the landlord to earn more if the tenant operates a successful business. Tenants and landlords may go through a strict negotiation process regarding this type of rent, to determine how sales volume is calculated and what, if any, exclusions apply. Percentage rent is usually calculated on a monthly, annual, or break-point basis.
When used correctly, percentage rent can be a beneficial arrangement for both tenants and landlords. For tenants, their rental payments will be tied to market performance, and will be less likely to undergo annual rent hikes that might force them to close or relocate. Landlords also benefit, since they will not have to estimate the amount of a rent increase a tenant can afford. Tying at least a part of the rental payment to the performance of the business allows both sides to get a fair market value.
The negotiation for percentage rent is crucial in determining the success of the agreement. It must be carefully stipulated exactly what is counted toward the sales volume limit kicks in, and what is excluded. For instance, most agreements deduct taxes paid on transactions, since the tenant is merely collecting these funds for the government, rather than directly profiting from them. Similarly, if there is a fire at the premises and the tenant receives insurance money to repair the damage, this may be excluded since it is not actually profit from a sale.
Another important point of negotiation is whether sales made off-site, but filled on the premises, are included. For instance, if a merchant sells a clock through a website, the sale was not made on the premises. On the other hand, if the clock is stored on the premises and shipped to the buyer from the property, it may still be considered in the calculation of percentage rent. This negotiation may also be considered in reverse, regarding sales made on the premises but filled from an outside location.
How percentage rent is calculated depends on the stipulation of the rental agreement. The safest forms of this type of contract require a minimum guaranteed rent, plus a supplemental payment based on sales percentages. For instance, a tenant might be responsible for a minimum rent of $2000 US Dollars (USD) per month, plus 2% of gross sales over $5,000 USD per month. Rent may also be calculated based on a sales break-point, such as 5% of gross annual sales over $400,000 USD.
