A percentage lease is a commercial real estate agreement where the tenant pays a base rent amount and a percentage of the receipts or sales generated during the month. The lease can include caps or minimums and benefits both the tenant and owner.
A percentage lease is a commercial real estate agreement in which the tenant remits a base rent amount each month, along with a percentage of the receipts or sales the business generates during that month. In exchange for this agreement, the tenant can often negotiate a lower base amount for the monthly rent, with the landlord assuming a greater share of risk, since the tenant’s income stream can vary from month to month. Such a lease may use gross receipts or sales as the basis for the percentage, or some other part of the income stream as defined in the percentage lease provisions.
In some cases, a lease percentage uses a very simple approach to calculate the amount of rent due each month. Along with the agreed-upon base amount, the tenant will also submit a fixed percentage of gross receipts or gross sales. Oftentimes, companies tend to lean more toward calculating the figure based on receipts rather than sales, since the return on those sales may or may not occur during that same calendar month. Doing so still allows the owner to anticipate shipping at least the base amount, even if the business is closed for renovations or other factors that prevent revenue generation during a given month.
Depending on the nature of the tenant’s business, a lease percentage may include provisions that limit the total amount of income that is remitted as part of that percentage. An example is the imposition of a cap or limit on the quantity. For example, the terms may state that the tenant will pay the base amount each month, plus five percent of the gross income, with the amount of those receipts not to exceed the same number named as the base amount. This would mean that if the base monthly rent is $2,000 US Dollars (USD), the total remitted for the month cannot exceed $4,000 USD.
At the same time, a lease percentage can also specify a minimum that must be returned from the percentage of the income stream enjoyed by the business. Here, the lease may require that in addition to paying the base amount, the tenant must submit an additional payment of a fixed percentage of gross receipts or a fixed dollar amount, whichever is greater. This means that if the lease percentage required a monthly base rent of $2,000 and the agreed upon gross income percentage was less than the minimum stated in the lease, the tenant would remit the $2,000 plus the minimum, rather than remit the percentage and the base amount.
Ideally, a percentage lease is worked out with terms that are beneficial to both the tenant and the owner. The tenant should benefit from a total monthly rental commitment that is flexible enough to minimize the potential for cash flow issues. At the same time, the owner can depend on receiving at least a minimal amount through the base payment, and could earn a significant additional amount, assuming the tenant enjoys an increase in income or sales during a given month.
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