Don't Let Electronics/Appliances Tenant Exclude Warranties, Services from Gross Sales

If you're negotiating a lease with a tenant that primarily sells consumer electronics and appliances, don't agree to exclude sales of extended warranties, subscriptions, repairs, delivery, and other services from the definition of “gross sales,” advises national financial management consultant Kenneth S. Lamy. Those sales can represent anywhere from 10 percent to 20 percent of the electronics and appliances tenant's overall sales (depending on the size of the store and the mix of merchandise offered to customers), he points out. So you would be letting the tenant substantially reduce the amount on which percentage rent is calculated.

Lamy has seen many electronics and appliances tenants ask to revise the owner's lease to let them exclude all sales from the definition of “gross sales,” except sales of products. And many owners agree to make that revision because they assume—incorrectly—that the electronics and appliances tenant will generate almost all of its money from sales of products, he notes. As a result, the owners end up losing out on a lot of percentage rent.

CLLI Source

Kenneth S. Lamy: President, The Lamy Group, Ltd., New Orleans, LA 70130