Percentage Lease
A retail structure where rent includes a base amount plus a percentage of sales above a threshold.
01
What It Is
In a percentage lease the tenant pays base rent plus a percentage of gross sales above an agreed breakpoint. The structure ties part of the landlord's return to the tenant's performance and is most often used in retail, particularly in multi-tenant centers.
The breakpoint may be calculated naturally — base rent divided by the percentage rate — or set as a negotiated figure.
02
Why It Matters
For a tenant, a lower base rent reduces fixed cost and downside risk in early or seasonal periods, which can make a location workable that straight rent would not.
For an owner, participation in sales growth can produce a stronger return than flat rent, while also aligning both parties around traffic and merchandising.
The definition of gross sales controls the outcome. Online orders, returns, delivery, sales tax, employee purchases, and wholesale activity should each be addressed rather than assumed.
03
Common Misconceptions
- "Percentage rent applies to all my sales." It typically applies only to sales above the breakpoint.
- "Gross sales is self-explanatory." It is a defined term, and the definition is negotiable.
- "Only national retailers use this." Independent retailers use percentage structures regularly in smaller markets.
04
Questions to Ask
- What is the percentage rate, and how is the breakpoint calculated?
- How is gross sales defined, and what categories are excluded?
- How are online and delivery sales originating at this location treated?
- What reporting and recordkeeping will be required, and how often?
- Are there audit rights, and what happens if a discrepancy is found?
05
Related Reading & Resources
The most successful real estate decisions often involve collaboration between several professionals working toward the same goal. Understanding each person's role helps you ask better questions and make more confident decisions.
06
Other Lease Terms
- Gross LeaseA lease where the landlord pays most or all operating expenses and the tenant pays a single, predictable rent.
- Modified Gross LeaseA middle-ground structure where landlord and tenant split operating expenses in a negotiated way.
- Triple Net (NNN) LeaseA structure where the tenant pays base rent plus property taxes, insurance, and maintenance.
- CAM ChargesThe shared costs of operating and maintaining areas all tenants use, billed as a pro-rata share.
- Letter of Intent (LOI)A preliminary document outlining the main business terms before a formal lease is drafted.
- Tenant Improvements (TI)Modifications made to a space so it fits the tenant's use, and the negotiated question of who pays.
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