Why the Rent to Revenue/Sales Ratio is Important for Both Landlords and Tenants

The rent to revenue/sales ratio is vital for both landlord and tenants. Understanding the process of sales revenue can either make a business successful or bring them into bankruptcy.

The ratio can be used as an effective metric for forecasting and analysis for landlords and tenants to grasp the market better. The metric will show how to allocate funds during specific seasons to generate more sales and when funds can be used for other expenses such as marketing. There are different reasons as to why the ratios are vital for both the landlords and tenants. We will be discussing those below.

Importance of the Rent to Revenue/Sales Ratio for Landlords

The purpose of a business is to make money, whether through services or by selling goods. For landlords leasing their spaces to tenants is how they earn their income. Landlords depend on the rent to revenue/sales ratio to determine if a business they are considering leasing to is generating income, barely making ends meet, or just enough to pay dues. 

Their monthly rent per square foot may be based on the costs of constructing the building or payment on loans that are still being paid off to the bank. There may even be additional expenses for the last renovation or the costs of purchasing more cost-effective lighting installations. All these costs are added up and divided when landlords finalize the rent costs for specific units or floors. These may also include common area fees for maintaining and cleaning the lobbies, elevators, or parking spaces.   

If vacancies are high or tenants cannot pay rent, the landlord may need to reconstruct their leases to maintain the property's occupancy rate and value. The rent to revenue/sales ratio is vital for landlords because it allows landlords to stay in check and keep a steady pace, especially during difficult times such as a recession or pandemic.   

Importance of the Rent to Revenue/Sales Ratio for Tenants

For tenants, the rent to revenue/sales ratio is an essential benchmark for how much they can spend on leasing space for their business. Some businesses have a budget of 15-25% of their total sales for rent, especially if the commercial space they are leasing is in a newly opened mall or is in an area that targets their demographic. In this case, that percentage may be worth the investment. As your sales go up, that percentage will go down, which means you made a great choice in putting your business in that location. 

In situations where sales are not doing well, maintaining the space will cost more than the budget; for tenants, the revenue/sales ratio will indicate that you may need to find a less expensive place to rent. Keep in mind that not all businesses have to be in a big mall where rent prices are much higher. A separate building with ample parking space will work if you own a hardware or furniture store. 

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