For example, there is only a certain amount of stock that can be held in a retail shop. The growth of its revenue is limited by the physical size of the premises it leases. Its revenue growth is realistically more likely to reflect the inflation rate once it has reached its maximum revenue capacity.
Leases often have fixed annual increases of 4% or more in the base rent, well above the inflation rate. Over a 5 year period, this can increase the base rent by some 17%. At the same time, assuming an inflation rate of 2%, the revenue growth is likely to be limited to only about 8%. The tenant businesses profit is reduced. The value of the tenant’s business decreases, often to the point it becomes unsaleable. When outgoings and other lease expenses are considered, the outcome is often worse. The Landlord’s leasing business, on the other hand, is likely to have increased in value and saleability.
Small business owners would do well to calculate out the total rent over each period of the lease before entering into it. It will impact their business value and saleability.
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