Percentage Lease
A percentage lease is a type of lease agreement commonly used in retail properties, where the tenant agrees to pay a base rent plus an additional percentage of their business’s gross sales. This lease structure aligns the interests of both the landlord and the tenant, as the landlord benefits from the tenant’s success, and the tenant has a lower initial rental commitment during periods of lower sales.
Key Features:
- Base Rent: A fixed component of the lease, paid regularly regardless of business performance.
- Percentage Rent: An additional rent amount calculated as a percentage of the tenant’s gross sales over a certain threshold.
- Sales Threshold: The sales level above which the percentage rent kicks in, also referred to as the “Breakpoint.”
Examples
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Retail Store Scenario: A clothing retailer leases a shop in a mall. The agreement stipulates a base rent of $20,000 annually and an additional 5% of all gross sales exceeding $500,000. If the retailer’s annual sales were $700,000, they would pay base rent plus 5% of $200,000 ($10,000), totaling $30,000.
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Café Lease: A café enters into a percentage lease with a base rent of $1,500 per month and an agreement to pay 4% of monthly sales above $10,000. In a month where the café’s sales reach $20,000, they would owe the base rent plus 4% of $10,000 ($400), totaling $1,900 for that month.
Frequently Asked Questions
Q: What are the advantages and disadvantages of a percentage lease for tenants?
A:
Advantages: Provides lower fixed costs during periods of low sales, aligns landlord and tenant interests, and can be more manageable for new businesses.
Disadvantages: Potentially higher total rent during high-sales periods, mandatory sales reporting, and the need for accurate record-keeping.
Q: How does the landlord benefit from a percentage lease? A: Landlords benefit from a percentage lease because it allows them to capitalize on the tenant’s successful business performance through the additional percentage rent. It also attracts dynamic retailers who expect their sales to significantly contribute to their rent payments over time.
Q: What is a common ratio for percentage rents? A: The ratio for percentage rents can vary widely but generally ranges from 3% to 7% of gross sales above the threshold amount.
Q: What items are included in “gross sales” for calculating percentage rent? A: “Gross sales” typically include total revenue from sales before deductions for returns, discounts, or sales taxes. Specific inclusions and exclusions should be clearly defined in the lease agreement.
Q: Can percentage leases be found outside the retail industry? A: While predominantly used in the retail sector, percentage leases can also be used in other industries where tenant revenue is a function of consumer transactions, such as in entertainment venues or some service-oriented businesses.
Related Terms
- Base Rent: The fixed, minimum rent a tenant must pay under a percentage lease regardless of their revenue.
- Breakpoint: The level of sales at which percentage rent payments begin. Breakpoints can be natural (calculated so that base rent is met) or artificial (specifically set in the lease).
- Overage Rent: The portion of rent that exceeds the base rent, calculated based on a percentage of sales.
- Gross Sales: The total revenue generated from sales before any deductions.
- Natural Breakpoint: Calculated by dividing the base rent by the percentage agreed upon (e.g., $20,000 base rent / 5% = $400,000 breakpoint).
Online Resources
- Investopedia Article on Commercial Leases: Investopedia
- Nolo’s Guide to Commercial Leases: Nolo
- LegalZoom’s Commercial Lease Guide: LegalZoom
References
Suggested Books for Further Studies
- “Negotiating Commercial Real Estate Leases” by Martin I. Zankel
- “The Complete Guide to Leasing a Business Property” by Ira Meislik and Dennis Horn
- “Lease Drafting in Plain English” by Ronald L. Brown
- “The Commercial Lease Formbook: Expert Tools for Drafting and Negotiation” edited by ICSC (International Council of Shopping Centers)
