Navigating the different types of commercial leases can feel like a daunting experience. A percentage lease can be a great choice for tenants and landlords looking for a mutually beneficial arrangement as it gives both sides good reason to work well together.
In this article, we’ll go through the ins and outs of what a percentage lease is, how and why it works so you’ll have everything you need to decide whether a percentage lease is the right type of commercial lease for you.
What is a Percentage Lease?
Simply put, a percentage lease is a type of commercial lease where you pay a percentage of your gross revenue on top of your base rent to the property owner. While it sounds like you’re paying a lot, there are good reasons why this lease type is most often used in commercial real estate by restaurants and retailers.
How it Works
A percentage lease is divided into two parts. There’s the base rent or minimum rent you’ll be paying every month and a percentage rent that takes a specified percentage of your business’s gross revenue given to the landlord once you pass a certain ‘breakpoint’.
How to Calculate Breakpoint and How Much Do You Pay?
Your percentage lease will most often be calculated by what we call a ‘natural breakpoint’. Once you go over the breakpoint, you’ll begin to pay a percentage of your gross revenue to the landlord. This breakpoint is calculated by dividing your annual base rent by an agreed percentage negotiated between you and the property owner.
A Quick Example
For example, if your annual base rent for the real estate is $500,000 and you agree to pay a percentage rent of 7% over the natural breakpoint, then the breakpoint would be $500,00 divided by 7%, so $7,142,857. Anything over this amount would be charged percentage rent. If your business made $8,000,000 in sales that year, the landlord would get a percentage rent of 7% of $857,143. That’s $60,000 in percentage rent.
Why Choose a Percentage Lease Over Other Types of Commercial Leases?
Lower Base Rent Than Other Commercial Leases
Typically, the base rent in a percentage lease is lower than other commercial leases as this can help startups or businesses rely on a high sales volume when sales may be slower when you first set up your business.
Upsides for Both Tenant and Landlord
A percentage lease arrangement is often seen as mutually beneficial to both the tenant and the property owner. As the tenant, you enjoy a low monthly base rent and only need to pay extra when your business does well. If the landlord does a good job in providing foot traffic to your businesses, not only do you get to enjoy more profits but the landlord gets a percentage too. Since both sides are working towards the same goal, that is, making your business successful, much of the day-to-day maintenance of the commercial property is a lot smoother.
What Else Do You Need to Know?
Now that you have a good idea of what to expect when signing up for a percentage lease, you might want to know the lease terms or maybe look into other commercial leases to make the best-informed decision. Providing leasing advice since 1960, Schwarz Properties can give you all the information you need for all matters in real estate, leasing, commercial lease laws and commercial real estate.