The former Waxahachie Police Department station will now be home to a steakhouse and music venue in the downtown business district.
Under his tenant agreement with the city, John Bailey has agreed to a 60-month lease. For the firstyear, Bailey will pay a base rent of $1,500. The remaining 48 months he will pay the base rent plus 6-percent of actual gross sales that exceed $25,000 exclusive of sales tax.
After the original 60-month lease, Bailey has the option to renew for an additional 60 months with a base rent of $2,500 plus 7-percent of actual gross sales that exceed $25,000, exclusive of sales tax.
Jeffrey Yarbrough, CEO of Big Ink Real Estate and Auction Services, said this type of percentage lease with retail and hospitality properties is commonplace in the market.
“A lot of times, landlords will roll the dice on a tenant to give them a chance to pay rent as they grow,” he said.“Instead of just escalating their rent every month, every quarter and every year, they say let’s share in a percentage of your sales that sit with the business.
“A 6-percent rent model is kind of a standard number that a restaurant needs to be in for a restaurant to operate efficiently,” he said.“So, if a restaurant is doing a million dollars a year, you want your rent to be less than $60,000 a year. So, 6-percent is really the right number.”
Yarbrough explained that once a restaurant’s percent gets up to 8-, 9- and 10-percent, the owners have to be cautious on the rest of their overhead like labor, food costs and liquor costs. He noted the lease will help Bailey build up the business.
According to the Century 21 website, a percentage lease is a type of rental agreement that is most commonly executed between a landlord and tenant for the rental of retail property. The most common practice of negotiating this type of leases obliges the retail tenant to pay a percentage of the gross sale income generated on a property. This total exceeds a predetermined minimum amount of sales in addition to the agreed-upon flat rate minimum monthly base rent.
“So, the minimum rent that the landlord is going to get is going to be a very small amount,” Yarbrough said.“That is a super fair deal that they cut him on year one. In fact, it is cheap. But [Bailey] is putting a lot of money into this deal. The city is getting something but really it is negligible. So, year one, the risk is very much on John even though he is paying almost nothing for rent.”
Yarbrough said the category of percentage rent is very common in today’s commercial leasing. He noted that the last 10 leases he did this month have a percentage rent clause in them.