The percentage lease refers to a form of lease which the tenant pays the base rent in addition to the amount of income earned from business in the premises. It is a term that is used to describe commercial real property. A percentage lease generally lowers the rate base for lessees and provides the lessor an additional upside opportunity.
Percentage Leases Explained
A percentage lease is comprised of two elements: the base rent (or minimum rent) and an amount of annual or monthly net sales generated on the premises. Lessees may appreciate this arrangement since it cuts down on this fixed cost that typically makes up a large portion of operating expenses. Additionally, the lessor can benefit from some potential upside over what the standard lease (i.e. it is not a percent of sales component) can yield. In addition the percentage lease is in line with the interests of the lessee as well as the lessee and.
In providing the desired location and maintenance services for the tenants, the landlord increases the visibility of the store to attract more pedestrians and thus an increase in sales. A portion of the will be paid to the lessee in the form of a percentage lease.
Negotiating a Percentage Lease Contract
A the landlord and tenant agree on the ” breakpoint,” the amount at which sales are made when the percentage lease payment kicks into effect, together to the basic rent. If the landlord agrees to lower base rent, it will prefer an even lower breakpoint. The lessee would like having a lower base rent as well as a an extremely high breakpoint. After a few rounds and settling down on these two numbers, the two parties have to decide on the exclusions to the sales figures (sales towards employees at the location, as an instance) and operating hours for the store, the right to alter the breakpoint and procedures for auditing the store’s sales, as well as other aspects.
Accounting for Percentage Leases
Let’s examine our financial statements for Tapestry, Inc., the owner of the Coach as well as Kate Spade brands, which declares their respective percentage of the total lease payments “contingent rentals.” The company records contingent rentals as part of the earnings statement in the event that “the achievement of target (i.e., sale levels) … is considered probable and estimable.” In the financial year the year of 2019, Tapestry paid around 30 percent of its total rent as the form of contingent rental (i.e. by way of the use of a percentage lease). Compare that to Signet Jewelers Limited, whose payments were lower than 2percent of total rent in that same period.