Rent Expense

What Is Rent Expense?

Rent expense is the cost incurred by a business to use a property or location for an office, retail space, factory, or storage space. Rent expense is a type of fixed operating cost or an absorption cost for a business, instead of a variable expense. Rental expenses are much of the time subject to a couple of year contract between the lessor and lessee, with options to restore.

Understanding Rent Expense

Contingent upon the type of business, rent expense can be a material portion of operating expenses or an immaterial one. For retail businesses that don't claim their own property, rent expense is one of the really operating expenses alongside employee wages and marketing and advertising costs.

Manufacturing companies regularly spend low amounts in rent expense as a percentage of total expenses. Rent expenses for manufacturing operations are remembered for factory overhead, while rent not tied to production — i.e., administrative office space rent — is charged to operating expenses. In real estate, location is normally the main factor in the price of rent.

A retailer that needs to set up in a prime area with heavy foot traffic should pay higher rent expenses than for a secondary location. A manufacturer that needs to lease factory or warehouse space close to ports or transportation lines in major metropolitan areas would face higher than average leasing costs. Rent expense consideration is balanced against the benefit of being in a prime area, for the retailer, and of being close to parcel points, for the manufacturer.

Special Considerations

The increase in the prevalence of web based business has driven many companies to rethink the amount of money they spend on renting commercial real estate. A few companies are lessening the number of brick-and-mortar stores they operate to shift a greater amount of their operations to online shopping. "Click and mortar" depicts the business model where retailers join online and offline operations as a website and physical stores to fulfill consumer need.

The demand for office space is likewise changing due to innovative progressions as companies realize they can utilize workers from a distance from home. A conspicuous benefit for the company is a reduction in property rent expenses, while numerous employees say they favor the convenience of working from home.

Real World Example for Property Rent Expense

The property rent expenses for retailers can vary contingent upon various factors, like the state of the economy. For instance, Signet Jewelers Limited (SIG) operates a chain of shops cross country under Kay Jewelers, Zales, and Jared brand names. In 2017, the company disclosed in a note to its financial statements in the 10-K filing that a portion of its operating leases incorporate predetermined rent increases. The increases are charged to the income statement on a straight line basis over the lease term, including any construction period or other rental occasions.

Contingent rentals, taxes, and common area maintenance are charged to the income statement as incurred. Contingent rentals — amounts in view of a percentage of sales in excess of a predetermined level — are isolated from least rent until the company can determine when it is probable that the expense has been incurred and the amount is actually respectable. In the fiscal year 2017, Signet incurred [minimum rent expense](/least lease-payments) of $524 million and contingent rent expense of $10 million, or around 28% of total operating expenses.

In June 2020, notwithstanding, Signet announced it would start to essentially reduce its property rental expenses due to the financial impact of the crisis that required the company to briefly close its brick-and-mortar stores worldwide. By May 2021, the company reported same-store North American sales had increased 117.2% over the previous year and sales in the International segment fell by 12.2%. One more splendid spot for the company was that over the same period web based business sales increased by 113.4%.

The company announced its plans to permanently shade in excess of 100 stores, many in shopping centers, as part of its reorganization strategy in fiscal year 2022, yet will open up 100 kiosks. The company will speed up its efforts in digital jewelry shopping, continuing to draw in customers at home through video technology to conduct virtual by-arrangement shopping conferences.

Features

• Rent expense is the cost a business pays to possess a property for an office, retail space, storage space, or factory.
• As additional individuals shop online, many retail companies have shifted the money they previously spent on rental expenses to support internet business all things considered.
• For a retail business, rent expense can be one of its greatest operating expenses alongside employee wages and marketing costs.
• A factor that can impact rent expenses incorporates the requirement for a location close to a major metropolitan area, ports, or transportation lines.
• For manufacturing companies, rental expenses tied to production are part of factory overhead, while administrative office rent is part of operating expenses.