Real Deal REInvestor Network

Breaking Down the New Deal:

• Tenant’s rent was $30,000 a month
• Additional 10% of every dollar sold above $300,000
• Breakpoint for tenant was $300,000 sales a month or $3,600,000 a year

The breakpoint is the point at which the tenant had to start paying percentage rent. If sales were $300,000, I received $30,000, which is 10% of $300,000 or the minimum rent. So, he paid me percentage rent with a minimum of $30,000, making the percentage rent, the total rent. The overage is how much more he has to pay.

In deals like the previous example, wording on the lease may include such verbiage as, “in addition to minimum rent and any other rent, additional rent would be the CAM paid by a tenant pursuant to any other lease provisions. Percentage rent without deduction (in this case, 10% of the tenant’s gross receipts for the month) exceeds the minimum rent. Percentage rent is due and payable by the ‘X’ day of each month”. For most deals in Florida, for example, the percentage rent due date ‘X’ is the 25th of the month, because that is the day tenants have to report their sales tax to the state.

So when you write a percentage lease, specify the minimum rent and then the following month by the 25th the tenant should give you a sales report along with the overage rent, if any, that is due.

You can download recommended copies of percentage and industrial leases, some office leases, and residential lease from the website at (www.hisrealdeal.com)? You can’t use these documents by themselves. You must take them to your lawyer and ask if they’re appropriate and legal. He’ll write you a letter indicating their merits and calculating breakpoints. Remember that the breakpoint for a business is the amount of sales you must have every month before you end in an overage rent situation.

To practice determining the breakpoint of a retail property percentage lease deal, see if you can follow the calculations for the train guy case-study below.

Percentage Lease - Going out of Business Guy

I asked him, “Well then, why do you need to move?” I presumed that my place wasn’t an additional location, because it really wasn’t well located. But, he didn’t care about the location, because after 17 years, people would come to him. He had a regular clientele who would come to his going-out-of-business business.

He answered: “Well, the reason I want to move over to your building is that over on Highway 192, I am going out of business for real.” The owner of his building was selling it, so it could be bulldozed to build a big new car dealership on the site.

So, he was finally, after 17 years, going out of business for real! Therefore, he wanted to reopen and start going out of business at my place, and after some thought and with some ideas on what I could get each month for that space I said it was okay with me.

Now that I had the story straight, I had to figure out how much rent to charge him, because 25,000 square feet was a pretty big chunk of my emptiness (a quarter of it). I knew I couldn’t charge him what I would like to charge, which was about $15 per square foot. Since he has a furniture company, he’d need lots of room, but furniture businesses usually can’t pay much rent.

They don’t have much traffic, with no real high markup, and normally require just one big room for the business. So, I proposed that he pay me $7.00 rent per square foot CAM, but he declined the offer.

He said that he wanted to pay zero dollars rent. Of course, my reaction was to ask, “Well, what’s in it for me? I don’t want to go out of business.” He said, “Well, I’ll you pay you percentage rent.” He wanted to pay me 3% of his sales, but since I knew something about the furniture business, I knew that he could pay 10%. Therefore, I suggested that we compromise with 12%, whereupon he agreed to pay 10%.

The first month he paid me $149, because his store was only open a few days with $1,400 in sales. The next month, I received a little under $3,000, which was more like it, but it’s a 25,000 square foot space, which made his payment about $1.50 a square foot. However, the next month, he paid me almost $10,000. Now, we are getting up there I thought. This is going to work out!

The next month he paid $29,000 for the space, but he wanted to change the deal. I didn’t accept his offer and told him that I wanted to stick to our original deal for a year. After that, the average rent was a little over $30,000 a month. At the end of the year, we changed the deal. He paid a regular rent of about $30,000 and an additional 10% on any months that were over $300,000 in sales.

Percentage Lease

Percentage or retail leases are almost always net leases. However, a percentage lease is a retail lease with an additional component. In addition to the rent and the CAM, a percentage lease also includes an amount that is called percentage rent or overage rent. This figure is based on how much, or how many, or to what extent the tenant had sales that month. In other words, if the tenant does better than projected when first entering the facility, the landlord gets a reward.

Going-Out-of-Business Guy

The following story is related by one of our real estate investment instructors:

One time, I was managing a shopping center over in Melbourne, Florida called The Oaks. It was a Specialty Shopping Center behind the Melbourne Square Mall. The developer who built it originally thought he would be able to sell fine clothes, apparel, shoes, and other high-end market products.

However, it wasn’t a very nice center and never did very well. When we took it over, the main tenant was a movie theater. There was also an ice-cream store and these two tenants together took about 20,000 feet of this 110,000 square foot building. So, although it wasn’t a huge building, it was a mall kind of building. When we took it over, it was largely empty, so I put a gal named Betty there to lease and run it. Betty called me a couple of weeks into the deal and said, “I’ve got a live one and I thought maybe you would want to be here for it.” When I asked her how big it was, she said, “25,000 square feet.”

I was amazed that she called me, so I left right away. When I arrived, she had this guy in tow who said that he was in the furniture business. However, when I asked him what business he was in, he said, “I am in the going-out-of- business.” He was selling furniture and was going out of business in the furniture business. He said that he had been successfully going out of business about a mile and half from my place for the last 17 years and that it was a very good business.