Expert: Stephen A. Cross, CCIM - 1/29/2010

Question
Hi,

Are there some retail leases that give the landlord a portion of sales made by the business/tenant?  What kind of lease is this and does the business/tenant have to give the landlord reconciled bank statements each month?

Thanks!
Michael

Answer
Michael:

In many mid- to large retail centers, it is common for landlords to request a percentage of a tenant's gross sales in addition to the base rent and NNN expenses.

This is called a 'percentage clause', and the amount due is generally based on natural 'breakpoint'. The breakpoint is calculated by dividing the annual base rental amount by the percentage figure #for example: if the space was 2,000 SF with an annual base rental amount of $24,000.00 and a percentage figure of 5%, the natural breakpoint is determined by dividing $24,000 by .05, which yields $480.000.  In this example, the tenant would begin paying 5 cents of every dollar earned above $480,000.00. Amounts due can also be calculated on a monthly basis as well (i.e., $40,000.00 per month#.

Note that the percentage is generally negotiable, as is the clause itself.  In this economy, many landlords will forego percentage clauses, or establish artificial breakpoints, so that the number is never reached.

Many landlords use monthly sales figures that appear on the city sales tax forms in determining the gross sales figures.

TIP: I suggest requesting that any online sales be excluded from the gross sales figure.

Best of luck, and thank you for your question.

Stephen A. Cross, CCIM
CROSS Commercial Realty Advisors
www.crossrealty.com