Understanding Percentage Rent Leases
In commercial real estate, understanding your lease type is essential to making informed financial decisions-especially for retail tenants operating in malls, shopping centers, or mixed-use developments. One such lease structure is the percentage lease, a model that combines a base rent with a share of the tenant’s gross sales.
This guide breaks down what a percentage lease is, how it works, its benefits and challenges, and negotiation strategies to help tenants structure favorable terms. Whether you’re a small business owner or a larger retail tenant, grasping the mechanics of this rent model will help you optimize your real estate lease strategy and support long-term business success.
What is a Percentage Lease?
A percentage lease is a type of commercial lease agreement in which tenants pay both a minimum monthly rent-also referred to as fixed base rent-and a percentage of their gross sales revenue to the landlord. This leasing structure is particularly common in multi-tenant retail spaces like shopping centers, outlet malls, and airports, where a tenant’s income can vary month to month.
Unlike gross leases or fixed leases, where rent is predetermined and does not fluctuate, percentage leases tie rent payments directly to the performance of the tenant’s business. This model allows landlords to benefit from increased sales while providing tenants with a lower break-even point and more flexibility during slower months.
How Does a Percentage Lease Work?
Typically, the tenant pays a fixed monthly rent (a lower base amount than in other lease types) plus a flat percentage of gross sales over a certain sales threshold-often called a breakpoint. The lease agreement specifies the percentage rate, the gross sales calculation method, and whether there’s an artificial breakpoint or a natural breakpoint based on the base rent.
In commercial real estate, understanding your lease type is essential to making informed financial decisions-especially for retail tenants operating in malls, shopping centers, or mixed-use developments. One such lease structure is the percentage lease, a model that combines a base rent with a share of the tenant’s gross sales.
This guide breaks down what a percentage lease is, how it works, its benefits and challenges, and negotiation strategies to help tenants structure favorable terms. Whether you’re a small business owner or a larger retail tenant, grasping the mechanics of this rent model will help you optimize your real estate lease strategy and support long-term business success.
What is a Percentage Lease?
A percentage lease is a type of commercial lease agreement in which tenants pay both a minimum monthly rent-also referred to as fixed base rent-and a percentage of their gross sales revenue to the landlord. This leasing structure is particularly common in multi-tenant retail spaces like shopping centers, outlet malls, and airports, where a tenant’s income can vary month to month.
Unlike gross leases or fixed leases, where rent is predetermined and does not fluctuate, percentage leases tie rent payments directly to the performance of the tenant’s business. This model allows landlords to benefit from increased sales while providing tenants with a lower break-even point and more flexibility during slower months.
How Does a Percentage Lease Work?
Typically, the tenant pays a fixed monthly rent (a lower base amount than in other lease types) plus a flat percentage of gross sales over a certain sales threshold-often called a breakpoint. The lease agreement specifies the percentage rate, the gross sales calculation method, and whether there’s an artificial breakpoint or a natural breakpoint based on the base rent.