What Is Rent Expense?
Rent expense it the cost incurred by a business to utilize property or location for an office, factory, or storage space. Rent expense is a type of fixed operating cost, or an absorption cost, for business—as opposed to a variable expense—that is subject to a one- or two-year contract between the lessor and lessee, with options to renew.
Property Rent Expense Explained
Depending on the type of business, rent expense can be a material portion of operating expenses or a negligible one. For retail businesses that do not own their own property, rent expense is one of the main operating expenses along with employee wages and marketing and advertising costs.
Manufacturing companies typically spend low amounts in rent expense as a percentage of total expenses. (Rent for manufacturing operations are included in factory overhead, while rent not tied to production—i.e., administrative office space rent—is charged to operating expenses.) In real estate, location is usually the most important factor in the price of rent.
A retailer that wants to set up in a prime area with heavy foot traffic will have to pay higher rent expense than for a secondary location. A manufacturer that wants 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 transshipment points — for the manufacturer.
Real-World Example for Property Rent Expense
Signet Jewelers Limited operates a chain of shops nationwide under Kay Jewelers, Zales, and Jared brand names. The company discloses in a note to its financial statements in the 10-K filing that some of its operating leases include 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 holidays.
Contingent rentals, taxes, and common area maintenance are charged to the income statement as incurred. Contingent rentals—amounts based on a percentage of sales in excess of a predetermined level—are separated from minimum rent until the company can determine when it is probable that the expense has been incurred and the amount is reasonably estimable. In the fiscal year 2017, Signet incurred minimum rent expense of US$524 million and contingent rent expense of $10 million, or approximately 28% of total operating expenses.