Real Estate Forecasting: Additional Income and Percentage Rent.

Additional investment income can be a huge plus in a real estate investment and many times can drive the returns on investment. Examples of additional investment income are in multi-family homes, pet rent, lease breakage, storage, parking, use of common areas for parties, et cetera. Typically, in multi-family residences, this is forecast by units or as a percentage of gross potential rent. In office and industrial buildings, we see additional income for storage and parking. And again, this is forecast by GPR. And in retail also things like parking and a concept called percentage rent, which we will discuss in a moment. There are various methods for calculating this income. A big component of income for owners or landlords of retail spaces is percentage rent. This is primarily a component of the retail sector and was a huge driver of mall and shopping center growth. The principle is that the mall itself, with its collection of stores, easy access via connected passageways, food courts, and large anchor stores bring traffic to the stores and the mall operator therefore is entitled to a percentage of the revenues from that location. The percentage is negotiated based on a natural breakpoint, which is the annual base rent divided by a breakpoint percentage assumption, which is typically in line with the market or industry averages. Tenant sales minus the breakpoint times the breakpoint percentage gives us the percentage rent payable to the landlord. This payment only works one way, however. If negative, the landlord does not owe the retailer anything.