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Helping your first-time commercial client understand percentage rent

On Behalf of | Jan 31, 2022 | Commercial Real Estate |

Supporting a client through their first commercial lease can be exciting and frustrating at the same time. It can be fun to help them get started on the next chapter of their business. Still, sometimes you need to try several approaches to help them understand some of the key terms for their new lease.

Percentage rent can seem like a simple term when you are familiar with commercial leases. However, there can be some ambiguities when your client is new to commercial leases.

Here are answers to two of the most common questions about percentage rent.

What does percentage rent mean?

There is more to percentage rent than paying a percentage of profits for rent. When you are talking to your client about percentage rent, you will need to cover the following essential elements:

  • Base rent. The amount they will pay regardless of their profits.
  • Breakeven point. The point where they will start calculating rent from profits over a negotiated amount.
  • Rent percentage. The percentage of their earnings that goes to the landlord for rent.

When you help your client understand the basic terms for their commercial lease, they can make a more thoughtful decision about what type of commercial space they can afford with their projected profits from their business.

What there’s a bad month?

One of the benefits of a percentage rent agreement is that when your client has a month with low profits, their rent burden is lower. However, your client will still have rent obligations to the landlord, even if they have a month with no profits.

Ideally, when you help your client negotiate their percentage rent, they will want a low base rent and a high breakeven point. Realistically, however, it is more likely that they will end up with a deal where they meet the landlord halfway and have either a higher base or a lower breakeven.

When your client clearly understands their obligations in their commercial lease, you can help them find the right fit for their business.