What is Percentage Rent?
The Short Answer
Percentage Rent explained simply
Percentage rent is a common structure in commercial leases, especially for retail businesses. It means the tenant pays a fixed base rent each month, plus an extra amount based on a percentage of their gross sales. For example, a lease might state a base rent of $2,000 per month plus 5% of all sales over $10,000. This setup lets landlords benefit when their tenants do well, and it can also make the base rent lower for tenants, especially when they are just starting out. It’s a way for both parties to share in the business’s success.
Real-World Example
The Boutique Clothing Store Example
Imagine a clothing boutique signs a lease with percentage rent terms. The agreement includes a base rent of $3,000 per month. Additionally, the lease specifies a 7% percentage rent on all gross sales exceeding $50,000 in a given month.
If the boutique sells $60,000 worth of clothing in a month:
- Base Rent: $3,000
- Sales above threshold: $60,000 - $50,000 = $10,000
- Percentage Rent: 7% of $10,000 = $700
- Total Rent for the month: $3,000 (base) + $700 (percentage) = $3,700
If the boutique only sells $45,000 in a month, their sales do not exceed the $50,000 threshold. In this case, they would only pay the base rent of $3,000, with no additional percentage rent.
Why this matters
Percentage rent matters because it ties a landlord's income to a tenant's sales performance. This can be good for both sides. Landlords get more money when the tenant's business thrives. Tenants might get a lower base rent, which helps them manage costs, especially during slower periods or when they are new.
When negotiating a percentage rent lease, pay close attention to the "breakpoint" – the sales threshold where the percentage kicks in. A higher breakpoint means you keep more of your early sales. Also, understand what counts as "gross sales" to avoid surprises.
When negotiating a percentage rent lease, pay close attention to the "breakpoint" – the sales threshold where the percentage kicks in. A higher breakpoint means you keep more of your early sales. Also, understand what counts as "gross sales" to avoid surprises.
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