Percentage rents make debut with booming retail market
Here’s good news for those of you into commercial real estate.
From Texas A&M Real Estate Center…
Percentage rent is returning to Austin after all but disappearing more than a decade ago, according to Sherry Naquin Sanchez, the retail team leader at NAI Commercial Industrial Properties Co. Deep-pocket brands entering the market have brought percentage rent with them. And now, some Austin landlords are beginning to demand percentage rent from all their tenants. The prospect of signing over a portion of future profits can come as a shock.
The key to making percentage rent more palatable is to negotiate a fair arrangement that enables the landlord to participate in a retailer’s success without becoming a financial burden when the tenant’s struggling.
- Typically, landlords charge percentage rent in addition to a minimum lease rate, plus fees for taxes, common areas and other shared expenses.
- If a tenant leases 2,500 square feet, and the rent is $20 per square foot, the retailer’s annual minimum rent is $50,000. Adding percentage rent of 6 percent to the equation, the landlord is entitled to 6 percent of the tenant’s profits over a predetermined amount, or breakpoint.
- The natural breakpoint is determined by dividing the minimum rent by the percentage rent. In the preceding example, the $50,000 minimum rent divided by 6 percent provides a natural breakpoint of $833,333. That means the landlord would collect 6 percent of profits beyond that amount.
The most obvious strategy for reducing a tenant’s exposure to percentage rent is to negotiate a lower percentage rate, which would simultaneously increase the natural breakpoint and lower the amount of profits shared with the landlord. If the tenant can convince the landlord that other businesses leasing space in the same property will benefit from the tenant’s customer traffic, the landlord may be willing to drop the percentage. In most cases, tenants will be more successful in attempting a compromise, according to Sanchez.
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October 23rd, 2006 at 11:06 am
A Tenant’s Guide to Renting
The first challenge every tenant faces is finding an apartment for rent that suits their individual needs. For today’s tenant, the most effective apartment search can be done using an online apartment finder. Tenants should decide what they require in an apartment or house rental before beginning their search. For example: the number of bedrooms, location or distance from public transportation and how much the tenant can afford to pay in rent, furnished or unfurnished apartment, etc. By making these important decisions first, tenants can avoid renting an apartment or house only to regret it later. Many tenants today are taking advantage of the convenience of the internet to locate apartments for rent as opposed to the traditional print publications.
Once a possible apartment or home has been found, it is the tenant’s duty to thoroughly inspect the premises making a commitment in the form of a security deposit. A tenant should not rely on the landlord or the landlord’s agent to tell the tenant if anything is wrong with the property. The tenant must inspect the property carefully and ask questions about it.
Inspecting the condition and functionality of the following areas/features of the apartment before committing yourself as a tenant is highly recommended.
1. Kitchen appliances in working order.
2. Water pressure strong, plumbing without leaks.
3. Electrical outlets and wiring working.
4. Walls and ceiling painted or papered without cracks
5. Ventilation or air conditioning accessible.
6. Floors, railings and bathrooms in good repair.
7. Fire escape easy to use.
8. Stairs safe and well-lighted.
9. No rodents or insects.
10. Heating system in working order.
11. If furnished, check and write down condition of all furniture.
12. Windows and doors operable and weather-tight; screens provided.
The tenant should also check the security of the building to find out if there is a dead-bolt lock, security chain, or through-the-door viewer.
BEWARE OF EXISTING DAMAGES: In order to avoid being blamed for damages that already exist in the rental unit, the cautious tenant should take every step for self-protection. Before moving in (or as soon as possible thereafter), the tenant should make a list of all existing damages and repairs that need to be made. A copy of the list should he presented to the landlord and attached to the lease This way the landlord cannot blame the tenant for damages caused by others and the tenant will know what the landlord intends to repair. If the tenant keeps good records the landlord will not be able to keep the tenant’s security deposit for damages that were actually caused by others. Taking pictures before moving in is also strongly recommended.
ABOUT THE AUTHOR: Paul Rossano, associated with http://www.AllSpaces.com who “Conveniently Connects All People with All Spaces in All Places” has been dedicated to the Real Estate rental market for over 8 years. He has assisted over 25,000 tenants with their renting needs. Any questions about renting apartments, houses or other rentals, feel free to visit http://www.AllSpaces.com or email him at Paul@AllSpaces.com.
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