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Understanding Percentage Rent in a Commercial Lease

Writer's picture: Amanda McMullanAmanda McMullan

In the world of commercial leasing, one of the less common but highly beneficial arrangements for both landlords and tenants is the concept of percentage rent. This is a type of lease structure where, in addition to paying a base rent, the tenant agrees to pay the landlord a percentage of their gross sales once a certain sales threshold, known as the breakpoint, is met.


How Does Percentage Rent Work?


Typically, the tenant pays a lower base rent than they would under a standard lease. In exchange, they agree to share a portion of their business’s success with the landlord. Once the tenant’s sales exceed the breakpoint, the percentage rent kicks in, allowing the landlord to receive a percentage of the excess sales.


For example, a lease might stipulate a base rent of $50,000 per year, with an additional 5% of gross sales above $1 million. If the tenant generates $1.2 million in sales, the tenant would pay 5% of the $200,000 excess, or $10,000, in percentage rent.


Benefits for Both Landlords and Tenants


For landlords, percentage rent can lead to higher returns if the tenant’s business thrives. It also aligns the landlord’s interests with the tenant’s success, incentivizing both parties to maintain a property that attracts customers.


For tenants, this arrangement provides flexibility. During slower periods, they are only obligated to cover the base rent, easing the financial burden. However, once business picks up, the additional rent is proportional to their increased revenue, making it easier to manage costs relative to their earnings.


Percentage rent structures can create a win-win scenario, particularly for retail spaces or businesses that experience seasonal fluctuations in revenue. By sharing in the success of the tenant’s business, both landlords and tenants can forge a more collaborative and sustainable leasing relationship.

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