Boost Retail Tenant’s Minimum Rent with Last Year’s Percentage Rent
If you're like most owners, you're searching for new leasing strategies to increase your rent revenues. Here's one to consider if you're negotiating a percentage rent lease with a retail tenant that doesn't have a lot of negotiating power, suggests Florida attorney Oscar R. Rivera: 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, says Rivera. Rivera has gotten many smaller tenants to agree to this requirement.
We'll give you details on how Rivera's percentage rent strategy works and how to require it in your lease. And we'll give you Model Lease Language that you can adapt and use to set up his strategy.
How Percentage Rent Strategy Works
Here's an example of how Rivera's percentage rent strategy would affect a tenant's annual minimum rent payments:
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, notes Rivera.
Add Language to Percentage Rent Clause
To set up the Rivera's 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, says Rivera. 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.
Add the following language to your lease where it discusses percentage rent, says Rivera:
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.
Insider Source
Oscar R. Rivera, Esq.: Partner, Siegfried, Rivera, Lerner, De La Torre & Sobel, P.A., 201 Alhambra Cir., Ste. 1102, Coral Gables, FL 33134; (305) 442-3334 ext. 316; orivera@siegfriedlaw.com.