Commercial Loan Percentage Rent

Commercial loan percentage rent is the lease term that adds rent when a tenant’s sales pass a line the lease names. The base rent is still due. The extra rent is a share of sales above that line, or a share of all sales, depending on the sentence in the lease. A business-purpose loan file reads that sentence because the rent the lender will count is the rent the lease can actually be made to pay.

This is a retail and some restaurant pattern. An office lease that is only base rent plus operating expenses is a different document. Do not paste a percentage clause into the story of a building that does not have one.

What commercial loan percentage rent is in the lease

Open the lease and find three things. The base rent. The percentage. The breakpoint, if the clause uses one. A natural breakpoint is often described as the sales level where the percentage of sales equals the base rent. A negotiated breakpoint is a different number the parties wrote down. The lease tells you which one you have. This page will not substitute a percentage or a sales figure. Those belong to the lease in the file.

Then read what sales count. Some clauses use gross sales. Some exclude tax, returns, employee sales, or online orders fulfilled from another site. The exclusions change the rent. A lender who is handed “sales” without the definition is being asked to underwrite a rumor.

Read the payment calendar. Percentage rent is often computed after a year, or after a quarter, and paid in arrears. Base rent is usually monthly. A trailing twelve-month sales report and a monthly base-rent check are not the same cash flow. The file should show both.

Loan covenants may require the borrower to deliver operating statements. Percentage rent is one line on those statements, and only when the tenant actually owed it. A covenant that asks for rent rolls is asking for the base rent, the extra rent billed, and the extra rent collected. Those three numbers diverge when a tenant disputes the sales figure.

The audit right

Percentage rent is only as good as the sales number. The lease usually gives the landlord a right to examine the tenant’s records. Read who may look, how often, how far back, and what happens if the audit finds a shortfall. Some clauses make the tenant pay the audit cost when the miss exceeds a threshold the lease prints. The threshold is in that lease. Do not import one from a different deal.

An audit right the landlord has never used is still a right. It is not evidence that past sales reports were accurate. If the loan is leaning on percentage rent, ask for the reports the tenant delivered and for any audit the landlord completed. A single year of sales, with no backup, is a thin story for a multi-year loan.

Online sales are the modern fight inside older clauses. If the lease is silent, do not announce that web orders “obviously count” or “obviously do not.” Ask counsel to read the definition, and ask the tenant what they have been reporting. The loan file should match the practice the parties can defend, or it should ignore percentage rent until that practice is written down.

How a business-purpose file treats it

Lenders like rent they can see in a lease and in deposits. Base rent with a term, a commencement date, and a payment history is that kind of rent. Percentage rent moves with the tenant’s sales. A lender may count a history of it, haircut it, or leave it out of the payment they divide rent by. The choice is the lender’s guideline for that file. A blog cannot promise that last year’s percentage rent will be treated as next year’s income.

Ask for the rent roll to split the lines. Base rent. Recoveries, if the lease has them. Percentage rent billed. Percentage rent collected. A blended “total rent” cell hides the volatile piece inside the stable piece. Underwriting wants the split.

A tenant who pays percentage rent and is also the only tenant is a concentrated story. The sales of one operator are the extra rent and, if they fail, the base rent is the remaining lease. Read the remaining term. Read any kick-out or co-tenancy clause that lets that tenant leave or pay less when sales or occupancy miss a mark. Those clauses can shrink the base rent the percentage clause sits on. They belong in the same memo as the breakpoint.

Who signs for the borrowing entity still matters. The landlord’s right to audit a tenant is not the same signature as the borrower’s right to pledge the rent. The loan is underwritten on the borrower. The percentage clause is underwritten on the lease. Both documents have to be in the file, and the person who certifies the rent roll should be someone the operating agreement allows to speak for the borrower.

Vacancy is not percentage rent. A dark space produces neither base rent nor a sales share. Do not forecast a percentage on a space that has no tenant and no executed lease. A pro forma that does that is a hope. Label it as a hope or take it out of the income the loan is asked to believe.

What the clause does not do

Percentage rent does not make a consumer home loan. The property in this file is business-purpose real estate. A borrower who lives in the space, or who is buying a house to occupy, is in a different product. Do not use a retail percentage clause as a story for a house.

Percentage rent is not a guaranty of sales. The tenant may miss the breakpoint every year. The landlord then collects base rent only, if the tenant pays base rent. The loan has to work on the rent the lender is willing to count after that possibility. If the deal only works when the percentage always hits, the deal is fragile. Say that before the application, not after a sales year comes in light.

A percentage clause also does not replace a personal guaranty, an environmental report, or a title policy. It is one income term. The covenants and the lease abstract still have to be read. Bring the lease, the sales reports, and the audit letters to the same review.

Have a retail or mixed-use property where part of the rent follows sales? Start with a confidential inquiry or call (907) 841-1600.

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Frequently Asked Questions

Is percentage rent the same as base rent?

No. Base rent is the stated rent. Percentage rent is additional rent tied to sales, on the formula the lease prints. A file should show them on separate lines.

Will a lender count all of last year’s percentage rent?

Sometimes a lender counts a history of it, sometimes a portion, and sometimes none of it. The guideline for that file decides. Collect the reports anyway so the number is real if they ask.

What if the lease has no breakpoint?

Then read the clause that is there. Some leases take a percentage of all sales and reduce it by base rent. Some take a percentage only above a negotiated line. The operation is the sentence in the lease, not a default from another property.

Do online sales count?

Only if the lease definition includes them, or if the parties have a written practice counsel will stand behind. Silence is not a yes and not a no. Get the definition read before you underwrite the extra rent.

Can I use percentage rent on a house I will live in?

No. This review is for business-purpose commercial property. A home you will occupy is not a retail percentage-rent file. Call (907) 841-1600 if the property is an investment and the lease actually has the clause.