Overage rent is a term used to describe the additional amount of rent that a tenant needs to pay once sales reach a pre-determined target.
Overage rent agreements are usually practised by retail properties, such as shopping malls. However there have also been instances of hospitality and healthcare properties practising overage rental arrangements with master lessees.
A typical overage rent arrangement usually involves a base rent component, and a cut from total sales once these reach a pre-determined amount for that particular month or year.
Overage rent agreements are often seen as a win-win arrangement for both tenants and landlord as it allows rents to be kept at relatively modest levels until business for the tenant picks up to an optimal level.
When there is a form of overage rent agreement in place, tenants will also usually receive some form of promotional support activities from the landlord in increasing the amount of human traffic into the property. The support could be in the form of festive decorations, contests and other promotional activities that can increase footfall into the property.
However the execution of a proper overage rent arrangement would require a comprehensive sales reporting arrangement between tenant and landlord.
Overage rent is an example of a favourable term that prospective retail REIT investors should look out for in the property's lease agreements with tenants, on top of other favourable terms such as triple net leases.