The cost of retail space as a share of sales, once percentage rent is taken apart

The cost of retail space as a share of sales is the figure that decides whether a unit works. Rent is one line of it. Add recurring charges, percentage rent, and the cash spent before opening, then divide by realistic annual sales.

In most US markets, total occupancy cost falls between 8% and 12% of sales for apparel and general retail, 6% to 10% for restaurants, and 3% to 6% for supermarkets. Actual figures vary by street, by town, and by landlord. The structure of the charges does not.

Prime locations sit far above that range. Asking rents on Manhattan's Fifth Avenue are reported above $1,000 per square foot a year. Strip center space in a mid-size market typically asks $15 to $30. Urban strips such as Miami's Lincoln Road or Chicago's Michigan Avenue usually fall between $60 and $250.

What to take away

The recurring pieces

What you pay each month arrives as several items under one heading. Outside gateway cities these often total $18 to $45 per square foot a year. Prime urban space runs $60 to $150 or more.

The general rules for reading these charges, and where tenants tend to be surprised, are set out in commercial leasing.

Add the lines per square foot and multiply by your area. A 1,500 square foot inline unit at $28 rent, $6 CAM, $3 taxes, $1.50 insurance and $1 marketing carries about $59,000 a year before utilities.

Percentage rent, taken apart

Many retail leases add a variable component: a share of your sales above a threshold. Retailers fixate on the percentage. It is the least important of three terms. Typical rates run 5% to 8% for general retail, 6% to 10% for restaurants, 2% to 4% for supermarkets, and 8% to 12% for kiosks and pop-ups.

The breakpoint. The sales level above which the percentage applies. A natural breakpoint is the base rent divided by the percentage, so percentage rent starts exactly where the share of sales would exceed the fixed rent. Base rent of $60,000 at 6% gives a breakpoint of $1,000,000.

An artificial breakpoint is any other figure. Landlords in weaker centers often press for $400,000 or lower, which moves their share into your normal trading range. Ask which type applies and how it changes when base rent escalates.

The definition of gross sales. Everything turns on what counts. Items worth negotiating out fall into two groups. Government and customer money: sales taxes you collect, refunds and exchanges, gift cards until redeemed. Money you never receive: staff purchases, delivery and marketplace commissions, online sales fulfilled from elsewhere, charges collected for a third party.

Reporting and audit. How often you report, in what form, what records you must keep, what the landlord may inspect, and what happens if an audit finds a shortfall. A common penalty is 10% to 15% of the shortfall plus the landlord's accountant's fees. That clause can outweigh the rent itself.

Two clauses often ride along with percentage rent. A continuous operation covenant obliges you to keep trading at set hours, which converts a slow season into a breach. A radius restriction stops you opening nearby, typically within one to three miles for two to three years. It can bar the second store that would have saved the first.

Shared costs: what "your share" consists of

The operating expense clause is where a modest-looking quote grows. Read it for:

Ask for the last two years of reconciled statements. If CAM has risen 12% a year, budget for that, not for the quoted figure.

The costs before the first sale

These arrive together, at the moment you have least revenue.

Assemble this group the way you would build any opening budget. The SBA's guide to calculating startup costs is a reasonable template for the shape of it.

The last item is the one retailers forget. If the lease starts the clock on a fixed date and approvals slip by 60 days, you pay about $10,000 on a 1,500 square foot unit for space you cannot trade from.

Assemble it as a share of sales

Do this with your own numbers, on one page.

At $500,000 in sales the recurring cost alone is 11.9% of sales, and the amortized opening cost takes the total to 16.7%. At $700,000 the two figures are 8.5% and 11.9%. At $875,000 they are 6.8% and 9.5%.

Total occupancy cost reaches 10% of sales at roughly $830,000 on these numbers. An artificial breakpoint of $500,000 instead would add $22,500 of percentage rent in the high case and push it to 12.1% of sales.

Compare units on that percentage, not on the quoted rate, and be honest about which scenario the unit has to hit for the business to survive.

Where each item is defined

Common questions

Is a lease without percentage rent always better?

Not necessarily. A $60,000 base with a 6% natural breakpoint shares your risk in a bad year: below $1,000,000 in sales you pay the base only. A $90,000 base with an artificial $400,000 breakpoint charges 6% of everything above $400,000 and a higher fixed cost when trade is slow.

What is the most common surprise in the operating expenses?

The denominator. A share calculated on occupied rather than leasable area rises every time a neighbor leaves. In a center that is 15% vacant, a 1,500 square foot unit pays on 17,000 square feet instead of 20,000, about 18% more.

Should I count my online sales in gross sales?

Only if the lease makes you. Negotiate to exclude sales not fulfilled from the unit, and be precise about orders placed in store and delivered from elsewhere. A common compromise caps included online sales at 5% of the total.

How do I compare a unit with a rent-free period against one without?

Spread the concession over the term and put it in the recurring total. Three months free on a five-year lease at $60,000 a year is worth $15,000, or $3,000 a year. That trims the occupancy ratio by 0.3 points at $1,000,000 in sales. A rent-free period is a discount, and a discount is only comparable once it is annualized.