Don't Let Drugstore Tenants Exclude Third-Party-Paid Drugs from Gross Sales

If you're negotiating a lease with a drugstore tenant, don't agree to exclude sales of prescription drugs paid for by third parties (such as HMOs) from the definition of “gross sales,” advises international financial management consultant Kenneth S. Lamy. This exclusion could cost you a lot of percentage rent. Sales of third-party-paid prescription drugs typically represent a significant portion of a drugstore tenant's overall sales, he points out. So you would be letting the tenant substantially reduce the amount on which percentage rent is calculated.

When asking for the exclusion, a savvy drugstore tenant may argue that third-party-paid prescription drugs aren't as profitable as prescription drugs paid for entirely by a consumer. So, the tenant might say, it's necessary to exclude their full value, or at least the portion paid by the third party (if the consumer makes a copayment), from gross sales, says Lamy. He has seen some gullible owners fall for this argument—and then later discover that the drugstore tenant is making a significant profit from prescription drugs. Each third-party-paid sale may not bring in the same gross profit for the tenant as consumer-paid sales do. But the high volume of third-party-paid sales often contributes a lot to the tenant's overall financial performance.

CLLI Sources

Kenneth S. Lamy: President, The Lamy Group, Ltd., 650 Poydras St., Ste. 2245, New Orleans, LA 70130; (504) 525-9914; kslamy@thelamy group.com.