Managers of Shopping Centers – Determination of Gross Income for their Billing Rents
When it comes to leasing and managing a retail tenant in your managed property, you will sometimes come across a type of rotating rent from which you will need to determine the rent to be paid.
Rotating leases are very helpful if the tenant is still establishing their commercial level or if the mall is new and not fully commercial. A rotating rent is fair to both landlord and tenant, assuming a fair percentage of the tenant’s turnover figure is set as the calculation point.
So what is a rotation rent? The most common variations are:
- It is usually a rental where the tenant pays a base (fixed) rent to the landlord and then pays additional rent as a percentage of the actual monthly or annual billing.
- It could also be a rent that is a direct percentage of the tenant’s billing with no basis to pay. This would normally be monthly.
Either way, you as the property manager or owner should have a mechanism in the lease to get accurate billing figures from the tenant in a timely manner. Audited billing figures are essential.
To determine a rotation rent to pay, it is about setting the percentage to be paid on the gross income of the tenant. The great variable to define and get right is the ‘gross income’. In general, ‘gross receipts’ should take into account variances and rebates normally applicable to the tenant doing business with customers. The terms of the lease between the landlord and the tenant must clearly define how the ‘gross income’ is established and how it will be used as the basis of the revolving rent.
Here are some ideas to consider and define when establishing ‘gross income’ for the purposes of your lease. The owner and the tenant must decide what applies in the case of the business and the property.
- Sales taxes, taxes on goods and services, would normally be removed from the calculation of gross income.
- Customer rebates, discounts and bonuses would be removed from gross receipts.
- The impact of exchanges of goods for customers would be eliminated.
- The impact of exchanging goods between multiple tenant or store locations would be eliminated.
- Damaged goods and stock must be removed from gross receipts
- Returns to manufacturers should be removed from gross receipts
The reality of gross income is that you want to define the true income the tenant generates given their type of business and the goods or services they sell.
Since this rotational rental process is used in both small and large premises, it is advisable to adopt a clear and transparent calculation process with guidelines established in the lease. It is not uncommon to have this type of rental with very large businesses such as hotels or supermarkets. As you can imagine, in that case the monthly billing calculations are significant and an audit will be required.
