Overage rent

[CANative]

In this property the overage rent has been declining for several years:

2008 - $66,837
2009 - $59,724
2010 - $48,031
2011 - $42,426
2012 - $26,241

Would the declining trend in the overage rent merit a higher cap rate on reconciliation? The overage rent is about .012% of total rental income.

Or is "more information" needed?

 

[CANative]

Actually, it might be better to just eliminate the overage rent from the total revenues reported since it's an intangible asset.

 

[hastalavista]

In this property the overage rent has been declining for several years:

2008 - $66,837
2009 - $59,724
2010 - $48,031
2011 - $42,426
2012 - $26,241

Would the declining trend in the overage rent merit a higher cap rate on reconciliation? The overage rent is about .012% of total rental income.

Or is "more information" needed?

I would think it would go the other way?
Base rent is set; that is presumed to be collectable and wouldn't vary.
Overage is "iffy"; if the business succeeds, the rent is more; if not, the rent is lower (but no lower than the base).
Overage rent would create a higher cap rate IMO. Base rent would be the lower cap rate.

 

[hastalavista]

The overage rent is about .012% of total rental income.

So for every $1,000 of contract rent there is $12 of overage rent? On $500k of income that equals $6k. That doesn't sound like enough to affect anything?

(is your math right? Or is my math wrong?)

 

[CANative]

Contract rent is about $3M give or take. The overage started out in 2005 at over $90k and has dwindled to about $30k.

 

[CANative]

Yeah, since this is for property tax appeal the overage rent is not used.

But to the other question, since overage rent represents a "partnership" between tenant and landlord and the declining overage is trending downward doesn't that say something about the "health" of the market experienced by those tenants?

 

[Michael S]

Yeah, since this is for property tax appeal the overage rent is not used.

But to the other question, since overage rent represents a "partnership" between tenant and landlord and the declining overage is trending downward doesn't that say something about the "health" of the market experienced by those tenants?

How many tenants are producing overage rent? If it's one tenant and they have a business model like Blockbuster, it's not necessarily indicative of the health of the other tenant's businesses.

Do you have gross sales for any of the tenants? That seems like it would be more indicative. It could be that as leases rolled over and renewed their percentage rent formulas changed to make it less likely they would pay any overage rent.

 

[Howard Klahr]

As you noted, since this is for a property tax appeal the overage rent is not relevant. You are evaluating fee simple, not leased fee for property tax purposes. Therefore, current market rent would be applied in your analysis. Most retail properties with an overage rent provision also incorporate a natural break and therefore the market rent would generally represent the amount of the natural break.

 

[hastalavista]

Yeah, since this is for property tax appeal the overage rent is not used.

But to the other question, since overage rent represents a "partnership" between tenant and landlord and the declining overage is trending downward doesn't that say something about the "health" of the market experienced by those tenants?

It would seem so; unless the decline is due to some other function (like, an adjustment upward in the base and downward in the overage; this could be the case if the initial base rent was low to ensure tenant viability in the beginning of the tenancy).
Is overall gross rents stable, occupancy/occupants more or less the same, and overage rents are declining? I think that would be a pretty good indication of weak tenant performance.

 

[CANative]

Michael S...

No, I only have income and expenses statements for the last 6 years as well as the rent rolls.