Profit sharing, with landlords

<i>A greater number of retailers opt into 'percentage rent' agreements, paying more when the cash register is full </i>

Some Manhattan landlords are looking to get into the profit-sharing business. While the practice is not widespread in New York, so-called percentage rent is on the rise here, some brokers said.

Percentage renting “is definitely growing in New York City,” said Patrick Breslin, president of retail at Grubb & Ellis.

The pay structure — in which the landlord takes a base rent plus an additional amount if the retailer achieves a certain sales threshold, or “breakpoint” — has long been used in malls, brokers said.

About five years ago, percentage rents started appearing in Manhattan leases. Indeed, Apple inked a percentage rent deal at the GM Building when it signed on there in 2006. In an earnings conference call earlier this year, Boston Properties, which owns the building, said percentage rent there has been stronger than expected because of Apple’s high level of sales.

These days, brokers noted that they’re now seeing a slight uptick in these types of deals.

Driving the growth of this strategy in New York City is a gamble that landlords will ultimately make more money through percentage renting down the road, even if they offer lower base rents now to lure tenants, Breslin said. It also can be used to attract retailers to difficult-to-lease spaces.

“When it is used in New York City, it is a profit center for the landlord — additional money,” Breslin said. “Landlords think if they invested all this money in a property, and they know the tenant is going to fare extremely well in their business, then why shouldn’t the landlord share in that?”

Breslin said even while the practice has increased a bit, it is still relatively rare in New York City. However, he said, the landlords that use it here are the more sophisticated ones, such as Vornado, as well as Wall Street firms that own real estate.

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Jerry Longi, who is opening the Italian restaurant Tresanti in Soho this month, signed a deal for his 3,900-square-foot space, which is owned by Vornado, in November 2009 with a percentage rent clause.

Longi declined to disclose the details of the lease, including price per square foot, the percentage rent he’s paying, or the breakpoint number in his lease. He did note that retailers generally pay the first year of their percentage rent in a lump sum in the 13th month of their lease. Then, during the second year, they pay in monthly installments.

He said he’s extremely happy with the deal he hammered out with Vornado, but that he usually prefers to pay a straight base rent because “you know what your fixed expenses are every month,” he said.

He agreed to the deal because of the terms, including a base rent that’s below market value, and the fact that the restaurant space was already built out.

When it came to negotiating, he said Vornado was less flexible in determining the breakpoint (a number that increases slightly each year with inflation), but was more willing to negotiate when it came to the actual percentage he’d pay over the breakpoint.

Vornado, he said, came up with a very realistic breakpoint number, one that he might very well surpass.

“They looked at a realistic number. Maybe it has to do with the average sales of restaurants my size in similar locations,” he said.

“They feel they have a good location for you and gave you a below-market base rent; once you make a profit, they want a piece of it,” he added.

Vornado declined to comment.