Boosting Base Rent to Improve Bottom Line

Most shopping center and strip mall owners are always looking for ways to bring in more income. If you’re negotiating leases with some prospective tenants to fill vacant space and they’ll be paying percentage rent and base rent, there are often-overlooked ways to boost your rent revenues that you should try to put in the lease.

One way to increase your income is to increase a retail tenant’s minimum rent with last year’s percentage rent figures. Have the lease say that if the tenant pays percentage rent in a given lease year, in the following year it must pay a new annual minimum rent that includes that percentage rent. Then, the tenant must continue to pay the annual minimum rent as increased by a prior year’s percentage rent, even if it doesn’t owe percentage rent the next year.

Here’s how a percentage rent strategy can affect a tenant’s annual minimum rent payments in a way that’s profitable for you:

Example: Suppose in the first four lease years, the tenant’s annual minimum rent is $60,000. In the first lease year, the tenant pays $5,000 in percentage rent. In the second year, the tenant pays an annual minimum rent of $65,000 ($60,000 minimum rent + $5,000 prior year’s percentage rent). The tenant doesn’t owe any percentage rent in the second lease year, but its annual minimum rent in the third year of the lease is still $65,000. In the third lease year, the tenant pays $2,000 in percentage rent. In the fourth lease year, the tenant’s annual minimum rent is $67,000 ($65,000 + $2,000).

This percentage rent strategy doesn’t affect any annual minimum rent increases you’re entitled to based on a method such as a step-up or the Consumer Price Index. If the lease sets out such increases, you continue to take them as well as the percentage rent increases.

To set up the percentage rent strategy, state in your lease that if the tenant pays percentage rent in any full or partial lease year, the amount of percentage rent paid will be added to the tenant’s annual minimum rent due the following year. To be fair to the tenant, also say that the percentage rent breakpoint will be adjusted upward commensurate with any annual minimum rent increases. Also, clarify that once the annual minimum rent is increased by the previous year’s percentage rent payment, it can’t later be decreased. That is, even if the tenant no longer pays any percentage rent, the annual minimum rent won’t decrease, so you won’t lose money.

For language to add to your lease where it discusses percentage rent, see “Collecting Higher Base Rent Using Previous Percentage Rent Figures,” available to subscribers here.