Percentage Rent…What Is It?

 

Sometimes in a Letter of Intent (LOI) you will see a part/heading that contains the words: PERCENTAGE RENT. I think it is important that everyone know what things really mean and how it can impact getting the best deal.

PERCENTAGE RENT is defined as a percentage of the tenant’s total annual sales paid in addition to fixed rent. This additional rent is normally paid after a predetermined sales level has been achieved. The percentage factor is then applied to all sales over the present level (breakpoint).

Usually the landlord’s representative will put percentage rent in an initial proposal, but some retailers do put it in the initial LOI for various reasons. Percentage Rent is usually applicable to restaurants and food operators more than dry goods and service oriented retailers.

In general, I would say to negotiate percentage rent out of your proposal unless it is really going to help you on your fixed/based rent. As always, evaluate your business and consult your broker before responding to a deal with percentage rent.

The Almighty Letter of Intent (LOI) Part 1

The Letter of Intent (LOI) is a very important document in the retail property industry and commercial property as a whole. I have only negotiated one deal without using a letter of intent and that was a very unique situation. Before expanding on the components of an LOI, it is really important to get a clear understanding of what an LOI is all about and why you need to use one.

An LOI is a document outline the basic terms of the deal being contemplated between the Tenant and Landlord. In many cases, after you identify a space and speak with the landlord, you will submit ann LOI to the landlord for review.  The LOI is often negotiated with several rounds of comments before the deal goes “to lease”. The reason you want to negotiate an LOI is so that the attorneys involved have a clear picture of the deal their clients are contemplating. In addition, this allows the attorney to draft the lease with many of the major points addressed (It also saves a ton of time and money, so you do not have to pay your lawyer a third of your start up money…Sorry Lawyers!).

It is really important to document everything you do agree upon when negotiating the LOI. Verbal agreements have little to no validity and get lost in translation, especially if there are brokers involved. Equally important is the paper trail you create if you ever end up in court over a real estate transaction. There is not much you can do with a “He said – She said” situation.

LOIs are non-binding and it is usually written out at the top of the document, so there is little risk financially if things do not work out. However, your reputation could be at risk if you submit an LOI that is just outrageous (more about that in other parts of the series). In other words, be real about what you put in your LOI and be prepared to explain your requests outlined in the document.