Count Installment Payments in Gross Sales as Early as Possible to Maximize Percentage Rent

You’re negotiating a lease with a retail tenant that sells some goods on an installment basis in which customers make a series of payments over a period of time. How do you calculate these sales for purposes of calculating percentage rent? The tenant wants installment sales to count as “gross sales” only after the customer makes the final payment. Should you agree?

Big Dollars on the Line

While this might seem like mostly an accounting issue, experts warn that not counting installment sales until the tenant receives the last payment could cost you a bundle in percentage rent. That’s because installment sales typically take months to complete. During this time, you’ll be forgoing a percentage of the partial payments that could be earning you valuable interest and helping your cash flow. Even worse, you may never see a dime of percentage rent on the sale if the customer doesn’t make the final payment or the tenant receives the final payment only after the lease expires.

When it comes to percentage rent treatment of installment sales, you want to get as much as you can as fast as you can. Here’s a negotiating strategy to follow.

Plan A: Count the Entire Purchase Price Right Away

Ideally, you want to be able to count the entire installment price toward gross sales in the month the tenant consummates the sale with the customer. In other words, you want to shift the entire cash flow burden and risk of customer’s default on payment away from you and to the tenant.

Example: In January, the tenant sells computer equipment for $1,500, to be made in three equal monthly installments starting with $500 upfront. You want to be able to count the entire $1,500 in gross sales from January, even though the tenant has collected only $500.   

Ask your attorney about using the following language to execute this strategy:

Model Lease Language

Tenant acknowledges and agrees that for any sales made on layaway or installment terms, the full selling price shall be reported as a sale for purposes of calculating Gross Sales in the month during which the sale is initially made, regardless of whether or when the Tenant receives payment, in part or in full, therefor.  

Of course, the question of whether the tenant agrees will come down to leverage. But one argument you can make to justify your position is that it was the tenant’s decision to accept payments in installments and that your business model, as a landlord collecting percentage rent, doesn’t work that way.

Plan B: Count the Money as Tenant Receives It

If you lack the leverage to compel immediate recognition, you can compromise by agreeing to recognize installment sales as gross sales as the tenant receives payments. Thus, for example, following the previous scenario involving the installment sale of computer equipment for $1,500 over three installments, you’d count $500 in January, $500 in February, and $500 in March.

Ask your attorney about using the following language to execute this strategy:

Model Lease Language

Tenant acknowledges and agrees that for any sales made on layaway or installment terms, any payments received by Tenant shall be included in the calculation of Gross Sales as and when received in the month in which Tenant receives the payments.  

Plan C: Count It All When Last Payment Is Made

The last choice—which you should accept only if you lack leverage and/or are willing to trade for a more valuable concession—is to allow the tenant to count the entire purchase price as gross sales when it receives the last installment payment.

Concession Request to Anticipate

Recognize that in many states, if a customer doesn’t finish making installment payments and never takes possession of the merchandise, the retailer must turn over the “unredeemed” installment payments to the state. Tenants that do business in these states are apt to demand the right to deduct from gross sales any installment payments they must fork over to the state that you previously counted as gross sales in a previous month. This is a reasonable concession, attorneys say.