Percentage Rent

Does anyone know how they model out percentage rent in operating/revenue proformas?

Not the mechanics, but how to you arrive at the sales number with which to take a percent of? Do we ask the lessee for a 5-10 year operating proforma? Do we use market comps?

 

Yeah agree here, it's really difficult. Typically what I've done in the past is do a run where I just assume we get 0 PR for the duration of the analysis assuming the tenant sucks wind, and then another more aggressive case where I just take the average of the sales of the last 3 years as my starting amount and grow it by 3%. I've been seeing less and less of these in my markets and I strongly feel it's just because it's too much volatility to try to work in to a pro-forma.

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Often they have a floor of an amount of rent psf that always is paid, and the percentage rent is is added to that for all sales over the break even.

Say you had a base rent of $20 for 1,000 sf with 10% of sales over the breakeven. The break even is the point where 10% of sales is equal to the base rent. So for this example it would be $20,000/10%=$200,000.

So you would pay your base rent only until sales were greater than $200K and then 10% of sales above that.

 
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These can be tricky because you don’t want to be so aggressive that it immediately jumps out but if youre bullish on the asset it would run counter intuitive to not forecast any growth there.

Generally look at historicals over however many years to find overall growth, typically 5 sometimes more. Then you can dial that back a bit to be conservative.

To the extent info is avail or can be acquired, understand any spikes or major dips. Assuming this would be for retail so you can have local economy trends carrying the tenant or other times retailer specific events driving sales

Hopefully this helps, without knowing more it’s hard to step thru. When multiple spaces usually the %rent becomes smaller component overall so slapping conservative rate given historical growth smells right but if it’s a single tenant scenario that could move the needle more.

If you don’t have any history comps might be more helpful there but if you do I wouldn’t use comps and then mark up your % rent based on those alone but first figure out what local economy or operator factor is at play.

Apologies ifthis comes across in any wrong way whatsoever. Hope you can take away at least one piece that’s helpful

 

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