Commercial leases typically include a “fixed rent” or “base rent” as well as a provision for “additional rent”. The base rent is a pre-determined amount paid each month, and additional rent includes other charges that tenants may be responsible for throughout the lease term, such as real estate taxes, utility charges, and insurance premiums. However, leading into and especially during the Covid-19 pandemic, a growing number of retail tenants have been paying “percentage rents” based on gross sales, which is in lieu of part, or all of their base rent.
What is included in gross sales can vary from lease to lease, and the way a tenant reports its gross sales affects its rent. When representing tenants, we generally negotiate for certain exclusions to gross sales which reflect the tenant’s business practices and produce a more accurate expression of its revenue. These exclusions may include sales taxes, refunds, promotional items, employee discounts, gratuities, gift certificates until they are redeemed, and credit card service fees among other items.
We have found that many tenants, however, are not taking advantage of these exclusions. The most commonly neglected exclusion we see is credit card service fees. Credit card service fees may range from 1-3% of a transaction, depending on the credit card company, and can therefore account for a significant portion of a business’s gross sales revenue if not properly deducted.
Common retail apps like Shopify which help retailers collect data and track their financials do not always account for specific exclusions, so that “gross sales reports” and similar data reports may not be consistent with the particular terms of a tenant’s lease. Shopify, for example, only excludes discounts, returns, taxes, and shipping from its gross sales reports but does not exclude the credit card service fees. Tenants should therefore not rely on these calculations without reviewing the terms of their lease.
As a best practice, we recommend tenants ensure they are taking advantage of their gross sales exclusions in existing leases and seek appropriate exclusions to gross sales to match their current business structure for all future leases.
If you would like to discuss your specific circumstances or how they might be impacted by the foregoing, please feel free to contact us by replying to this email or calling us at (212) 625-8505.