Particularly in the context of retail and commercial leases, percentage rent is a rental arrangement where the tenant pays a base rent plus a percentage of their gross income (or gross sales) to the landlord. This type of lease arrangement is especially common in shopping centers and malls where landlords want to benefit from the success of their tenants, ensuring they receive a share of the revenues generated on the premises.
Here’s a simple breakdown:
- Base Rent: A fixed monthly rent, often lower than the market rate, which the tenant pays regardless of their income or sales.
- Percentage Rent: On top of the base rent, the tenant pays a percentage (e.g., 5% or 7%) of their gross sales or income that exceeds a certain threshold. This threshold is known as the breakpoint.
The breakpoint can be determined in various ways but is commonly set based on the base rent. For example, if the base rent is $10,000 per month and the agreed-upon percentage is 5%, the breakpoint might be set at $200,000 in monthly sales ($10,000/0.05). If the tenant makes more than $200,000 in sales in a month, they would owe an additional 5% of the amount exceeding that breakpoint as a percentage rent.
The advantage of percentage rent for landlords is that it allows them to benefit from the success of their tenants. If a tenant does exceptionally well, the landlord earns more. On the other hand, for tenants, it offers a somewhat reduced risk because the base rent is often set below market rates, and the additional rent is only due when they’re performing well.