Leases come in many different shapes and sizes and it is important to understand the intentions of the lease and what effect it may have on your business.
As a business owner you are tasked with multiple decisions and demand on your time. Just starting out or a long standing operation most business lease their space. Leases come in many different shapes and sizes and it is important to understand the intentions of the lease and what effect it may have on your business. For example:
The percentage lease, a lease that usually has some minimum basis that needs to be met every month. Then in addition to the minimum the landlord is entitled to a percentage of your sales.
Your business is a restaurant, the landlord offers you a 5 year lease starting off at $500 per month for the first two years then increasing by 20% the last 3 years or $600 per month. In addition to this minimum he requires 15% of your gross sales on anything exceeding $300,000 for the duration of the lease. This is simplistic but will demonstrate the uses of this type of agreement. If you are a restaurant that is kicking out $1 million a year in gross sales, what is your lease payment in the first year?
Base Rent $500 X 12 months=$6000
Percentage of gross over $300,000. $1million- $300,000=$700,000 X 15%=$105,000 + $6000=$111,000
So your lease agreement works out to be $9,250 per month.
This may seem to be a very one sided advantage to the landlord. It may be that the landlord agreed to remodel the entire store at his/her expense putting money into the property to meet your specific needs. The landlord is also taking the risk that you are going to be a good operator and have the potential to pay him more of the market price for the use of his/her space. There are cases when a percentage lease makes sense for both parties.
We will be discussing percentage leases as well as some other commonly used leases in the state of Wyoming in a webinar hosted by Bob Benardis, commercial realtor, on October 12th from 2-3:30 PM