What Does Base Rent Mean?
If you're renting your home, you probably don't have to worry about base rent provisions in your lease. This term relates mainly to businesses, and it's most commonly associated with leases for retail stores in malls. Most of these commercial leases are formulated around some level of base rent.
What Does "Base Rent" Mean?
The term base rent refers to the minimum amount of rent that's due under the terms of a lease. This type of lease will also require the tenant to pay additional rent based on one or more factors. This add-on is typically a percentage-of-sales or participation requirement.
For example, Karen's Kat Corner, a pet shop, might pay a base rent each month of $1,500. Her lease also has a percentage rent requirement that she must pay on top of her base rent. This is usually a small percentage of the sales she makes each month—usually somewhere in the neighborhood of 2 percent—over a certain threshold.
Base rent is typically calculated according to the amount of square footage you're renting, and in some cases, it's negotiable. It can depend on how high-risk your landlord feels your business is. Are your customers likely to cause damage to community use areas? You may have some negotiating tools at your disposal as well. If you're a dentist, how likely is it that your clients will be purchasing sweets at the ice cream stand just outside your door immediately after exiting your office?
Additional rent add-ons can include a contribution toward taxes, insurance, and maintenance on the mall property. If this sounds unfair, consider what you're getting in exchange: ample parking for your customers, a food court outside your door, and a security guard at the mall's entrance. Consider how much these things would cost if you had to foot the bill yourself, Under a base-rent agreement, you're sharing these costs with other tenants who are also renting retail space in the mall.
Calculating Your Rent Obligation
Incorporating base rent into your business budget can be a tricky calculation. It helps to understand that your rent will never be less than the base rent amount, and you must make provisions in your budget for an extra rent percentage. If you're just opening your business, this means forecasting your most likely sales scenario. It can be tempting to estimate low, but be careful so that you're not hit with a big rent payment if you do much better than anticipated.
The Bottom Line
Weigh your options carefully before entering into such an agreement. Leasing a stand-alone building with more advantageous rent for your business might give you the security of knowing you're liable for a set amount of rent each month, but you'll lose the advantage of mall traffic.
Consult with a professional who can accurately weigh the pros and cons of your business type before you decide. If you're selling earrings and baubles that require a lot of foot traffic, mall traffic might be worth it. If you're a dentist, probably not.