Equitably written, gross sales and percentage (overage) rent clauses play an important part in the administration of a retail lease. Negotiating clear rent clauses assists both the landlord and retailer achieve a working knowledge of retail financial goals and future obligations. Paramount in protecting each party, these clauses outline what items of revenue are to be reported and what percentage (overage) rent may be due in addition to fixed minimum rent requirements.
Defining the gross sales clause
There are two distinct areas of the gross sales clause: The beginning portion is dedicated to certain elements of revenue routinely included in the reporting of sales. The remaining portion of the clause typically lists certain standard items of “allowable” deductions to gross sales.
Depending on the type of retail business, this section may include the following:
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The total amount of the actual sales price, whether for cash, credit, of all sales of merchandise, goods and services. Including all credit-extensions of time payment sales, bank credit card sales (regardless of charge card fees) and carrying/finance charges, and despite whether or not collection is affected. Each transaction on an installment basis shall be treated as a sale for the full price in the month the sale was made. All sales to employees. All mail, telephone, fax, wire, e-mail or internet service orders, placed and/or received at or from the premises, whether or not such orders are filled elsewhere. All charges for services, alterations, or repairs. All deposits not refunded to customers (cancelled orders, lay-a-ways). Sales through any vending/mechanical machines or coin/bill operated device, except only the commission income received by retailer shall be reported. All sales by any sub-lessee, concessionaire, licensee, and any other persons permitted to use the premises.
Referred to as “allowable” deductions, exclusions to the clause may include:
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Returns by customers, shippers or manufacturers for un-used or damaged inventories. Retail sales or excise taxes imposed by a governmental authority. Exchanges of merchandise between stores, where such exchanges is made solely for the convenient operation of the retailer and not for the purpose of transacting a sale. The amount of any cash or credit refund made upon any sale where the merchandise has been sold or portion thereof returned. Sale of any trade fixtures, furniture, equipment. The gross revenues from vending/mechanical machines or coin/bill operated devices, except to the extent retailer receives a portion of the revenues, or fee, for such devices.
As the retailer and landlord negotiate the lease, it is important this clause is tailor-made to the type of retail being transacted. Modifications to this clause need to be clearly understood by both parties. Lease language establishing the platform determining what sales will or will not be reported directly effects the percentage (overage) rent calculations.
Calculations
At the end of a specific lease period, either a partial or full lease year, retailers are required to report gross sales in accordance to the gross sales clause. Should the retailer enjoy strong sales that exceeded an agreed upon breakpoint, the landlord's entitlement to minimum rent will generally include a percent of reportable gross sales. This clause outlines the requirements to paying percentage (overage) rents specifically, but not limited to:
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The period of time certified gross sales statements are to be reported to landlord.
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Percentage (Overage) Rent Rate
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Sales Volume Breakpoint
The breakpoint (when sales exceed a certain level) can be determined by two methods: stated breakpoint or natural breakpoint. The stated breakpoint is an amount specifically stated in the percentage rent clause. In most cases, minimum rents paid generally have no mathematical connection to stated breakpoint levels.
The natural breakpoint is calculated dividing the minimum rent by the percentage (overage) rent rate. Either the same or a different percentage rent rate is applied to gross sales over the breakpoint to arrive at percentage (overage) rent due.
Nick Milburn, founder and president of National Auditing Advisors Inc., specializes in audits of gross sales, CAM, and shopping center/mall operational audits as well as construction management reviews.