Question 1

What is a percentage lease?

Accepted Answer

A percentage lease is a commercial lease in which the tenant pays a base rent plus a percentage of the tenant’s gross sales revenue. Percentage leases are most common in: shopping centers and retail malls, restaurants and food service, and entertainment and hospitality venues. The structure aligns the landlord’s and tenant’s interests: when the tenant does well (higher sales), the landlord benefits from higher rent. The percentage rent is calculated as: a specified percentage of gross sales that exceed a breakpoint (the level of sales at which percentage rent begins).

Question 2

How is the breakpoint calculated in a percentage lease?

Accepted Answer

Breakpoint calculation: natural breakpoint: base rent divided by the percentage rate. Example: base rent: $5,000/month ($60,000/year), percentage rate: 6%, and natural breakpoint: $60,000 / 6% = $1,000,000. The tenant pays percentage rent only on sales above $1,000,000. Artificial breakpoint: the parties agree on a breakpoint that differs from the natural breakpoint (it can be higher or lower). The breakpoint determines when percentage rent "kicks in": below the breakpoint, the tenant pays only base rent; above the breakpoint, the tenant pays base rent plus the percentage on the excess sales.

Question 3

What sales are included in gross sales for percentage rent?

Accepted Answer

Gross sales definition: typically includes: all revenue from sales of merchandise and services at the premises, online sales fulfilled from the premises, gift card and gift certificate redemptions. Typically excludes: sales tax collected, returns and refunds, employee discounts, insurance proceeds, sales between affiliated entities, and vending machine revenue. The lease should clearly define "gross sales" to avoid disputes. The tenant should negotiate exclusions for: sales to employees, sales of fixtures or equipment, and revenue from activities not directly related to the tenant’s core business.

Percentage Lease

Percentage Leases in Florida

Structure

Breakpoint

Gross Sales

Related Terms

Barnes Walker Commercial Real Estate

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