Video: Using Percentage Rent in a Commercial Real Estate Lease
ARGUS Training Manager – Americas, Jessica Leal, shares her insight about the basic concepts of percentage rent, and why it would be negotiated in a lease, and then she will walk through how this is modeled in ARGUS Enterprise. Watch the video and read the entire transcript below.
“Using Percentage Rent in a Commercial Real Estate Lease,” Transcript
Hello, my name is Jessica Leal and I’m the training manager for the Americas region, and today we’re going to talk a little bit about percentage rent. Now, this video is serving as a bit of a follow up to our insights article, Using Percentage Rent in a Commercial Real Estate Lease.
And this article is great because it talks about the concepts of percentage rent, why it would be negotiated in a lease. It gives some perfect examples. It discusses the different variables that play into percentage rent, such as our breakpoint, and it goes through examples of the breakpoint as well as calculations. So this is a great insights article to read when it comes to understanding percentage rent.
But now let’s get into ARGUS Enterprise (AE) and see how the model percentage rent within the program in some of the different variables that go into it. Now, I currently already have a property open within ARGUS Enterprise and before we start going through the rent roll and see where to model percentage rent, I would like to mention that in order to model percentage rent within a property, the property type has to have retail in it.
So it could be a retail property, it could be an office and retail property type, it could be a retail and multifamily. You have a few options, but the point is that the word retail has to be there. Now, you could see that currently, we’re in an office and retail property. So I’m going to go ahead and navigate to the tenants parent tab rent subtheme. We have office tenants. And we have retail tenants. Now, for our retail tenants, we are taking percentage rent. So let’s see how to exactly model that.
And so if we navigate right on over to our percentage rent section, you can see that we have the ability to choose our sales basis. So I could choose right here. And then I can enter in our sales percentage. And what we’re going to say is that we’re taking 5% of their retail sales. Once we enter and 5% then we get to enter in the sales amount. And so we’re going to say that each year. They’re making $350 per square foot in sales. And so once we enter in $350. You could see that our sales amount unit is set to $1 per square foot. We could also just enter into total annual amount.
We don’t have to enter it in as a per square foot basis. Then we can choose our inflation rate. We’re going to say that the sales amount is growing by the general inflation rate. And that we’re going to enter in a natural breakpoint, meaning that Argus is going to calculate the breakpoint for us, which is just simply going to be our retail tenants’ rent divided by the sales percentage. So what that breakpoint means is that we’re going to take 5% of any of their sales over this particular breakpoint. When it comes to entering into a breakpoint, we don’t have to use a natural if there wasn’t a breakpoint, we could choose a 0 breakpoint or we could manually enter into breakpoint as an annual amount or $1 per square foot. For now, we will choose a natural breakpoint. Now, let’s take a look at where a percentage rent is going to show up on our reports. So let’s first run a tenant cash flow. And we can do that by clicking the tenant cash flow button on our grid Navigator. Once we do this, we’ll be able to see the tenant space rent each year.
We could see what is coming in, and then we’ll also be able to see the percentage rent coming in each year. On top of that, we also have a retail revenue and sales report that will show us the total sales volume brought in by the tenant, the growth each year, and then the total income brought in by the tenant from their base rent, as well as their retail sales or percentage rent. Now, also on our property reports, parent tab, cash flow, sub-tab, we will be able to see our potential base rent up here at the top. And then an other tenant revenue. We could see our percentage rent coming in each year as well. So that is actually it for our percentage rent video. We do hope that you enjoyed it. And remember, if you have any questions, you can always reach out to us. Thank you.