Collecting Higher Base Rent Using Previous Percentage Rent Figures

Q: As the owner of a strip mall, I’m always looking for ways to bring in more income. I’m negotiating leases with some prospective tenants to fill vacant space. They’ll be paying percentage rent and base rent. Are there any often-overlooked ways to boost my rent revenues that I might not have thought about but that I should try to put in the lease?

A: Yes, one way to increase your income is to increase a retail tenant’s minimum rent with last year’s percentage rent figures. This works for tenants who pay percentage rent, but don’t have a lot of negotiating power. 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. Many smaller tenants agree to this requirement.

How Strategy Works

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.

Add Language to Percentage Rent Clause

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.

Ask your attorney about adding the following language to your lease where it discusses percentage rent:

Model Lease Language

a.         If in any Lease Year (or Partial Lease Year) Tenant shall be required to pay Percentage Rent, then the amount of such payment shall be added to the Annual Minimum Rent due for the next Lease Year, and the total sum shall become the new Annual Minimum Rent for such ensuing Lease Year. The Percentage Rent Breakpoint shall also be adjusted upward so as to reflect the new increased Annual Minimum Rent.

b.         Notwithstanding that Tenant may not achieve Percentage Rent in subsequent years, once increased, the Annual Minimum Rent shall not be reduced to any prior Lease Year’s amount.