The least common of all commercial lease types is a percentage lease. A percentage lease is a lease wherein the tenant pays a standard fixed monthly lease payment in addition to a percentage of the gross income of the business. This lease type may apply in high demand areas where there are very few buildings available for rent.
In a percentage lease, a tenant pays a basic rental payment plus a profits derived from the property including a percentage of gross income and others. A property manager will typically provide tenants with a lower base rent under this form of lease.
With a percentage lease, the more successful a tenant’s business is, the more income a property manager earns. This allows a property manager to maximize his or her earnings.
Critics of percentage leases claim that it is unfair for a tenant to pay a property manager for his or her success. However, supporters claim that the lower base rent helps tenants who would otherwise not have the ability to rent a space start a business.
Most percentage leases have a recapture clause. A recapture clause states that in the event that a tenant does not meet a minimum gross income amount, a property manager has the right to evict the tenant from the property.
How to Derive at the Correct Percentage Lease
The terms of the percentage lease depend on the profitability of the business and the location of the property. The more in demand a specific location may be, the higher the base rent a landlord can charge. Conversely, a business with high profitability projections can suggest a low monthly payment to compensate the landlord from the high profits. Certain percentage leases cap the amount a landlord can make or how minimal the tenan is responsible to pay.
Most tenants will not accept a percentage lease due to the fact business profits are never predetermined and it is impossible to determine how much money they will owe a landlord every month. Percentage leases most often benefit landlords, however in certain situations such as when a location offers prime opportunities, the extra expense may be offset.
