Use case: minimum guaranteed rent
In this use case, a retail property is leased to a clothing store. The lease agreement includes both a minimum guaranteed rent and a turnover rent based on the store's sales. This structure provides the lessor with stable income while allowing the lessee flexibility.
Case details:
• Minimum guaranteed rent: $40,000 per year
• Turnover rent: 8% of annual sales over $500,000
The following scenarios illustrate how the rent is calculated based on the store's sales:
Scenario 1: Lower sales
In the first year, the store generates $400,000 in annual sales. Since this amount is below the $500,000 threshold, the lessee only pays the minimum guaranteed rent.
◦ Sales: $400,000
◦ Minimum rent: $40,000
◦ Turnover rent: $0 (sales are below the threshold)
◦ Total rent payable: $40,000
Scenario 2: Higher sales
In the second year, the store generates $700,000 in annual sales. As this exceeds the $500,000 threshold, the turnover rent applies.
◦ Sales: $700,000
◦ Sales exceeding the threshold: $700,000 - $500,000 = $200,000
◦ Turnover rent: 8% of $200,000 = $16,000
◦ Minimum rent: $40,000
◦ Total rent payable: $40,000 + $16,000 = $56,000
How does this work?
• For the lessor: The lessor receives a guaranteed minimum rent of $40,000 per year, regardless of the lessee’s sales.
• For the lessee: The lessee pays only the minimum rent in years with lower sales, with additional rent applied in more profitable years based on sales performance.
This lease structure provides a balance between predictability for the lessor and flexibility for the lessee.