Has COVID Changed Percentage Leasing for Good?
The catastrophic economic impacts of recurring COVID-19 lockdowns left retail stores in the lurch, which in turn put their landlords in a tight bind. While office landlords offered rent concessions and delayed lease commencement dates for their tenants, retail landlords tried to find ways to adapt their leasing structure to reflect market conditions as well. One popular solution was to adjust a tenant’s lease term from a fixed-rent to a turnover rent, at least until markets clawed their way back from COVID slumps.
A turnover rent, also known as a percentage lease, is about as straightforward as it sounds. The tenant agrees to pay a base rent, running expenses, and a monthly variable cost based on the monthly revenue generated from the tenant’s business. The practice is more widely accepted in Europe, but in the U.S., accepting too many of these leases could’ve spelled bad news for commercial landlords. But now that so many businesses negotiated a percentage lease in order to survive the lack of sales from pandemic lockdowns, percentage leases may be the post-pandemic norm.
The rent of the world as we know it
Percentage leases are unique to each business, but they typically follow the same structure. A retailer rents storage space. The store signs a lease for the space with a base rent of a few dollars per square foot, plus a 1 percent rent that’s based on a breakpoint in sales. That breakpoint is calculated by the annual rent (the square footage multiplied by the dollar amount