When renting commercial real estate spaces, it’s important to understand the different types of leases to ensure the most practical and beneficial contract between the landlord and the tenant. Of these different lease types, net leases and gross leases are the most commonly known. However, percentage leases are also widely used in commercial real estate because of the beneficial properties they offer both the tenant and the landlord. Find out what you need to know about percentage leases.
What are the features of a percentage lease?
A percentage lease is a contract between a landlord and tenant where the tenant agrees to pay a predetermined rental rate in addition to a percentage of the sales earned while conducting business on the rental property. Because of these provisions, this type of lease is used exclusively in commercial real estate–particularly in retail mall outlets and companies with high sale volumes.
How is a percentage lease calculated?
Percentage leases have a predetermined base rental rate. The percentage of sales the landlord receives is determined once a base amount of gross sales is met. This base amount is called the breakpoint. Two different types of breakpoints exist to accommodate different calculations of a percentage lease.
An artificial breakpoint is a set dollar amount of sales both the landlord and the tenant agree on. This means a percentage of sales that exceed the set dollar breakpoint amount is paid to the landlord in percentage rent. In contrast, a natural breakpoint is when the base rent is divided by the established percentage to determine the breakpoint amount. This calculation ensures that a tenant only pays a percentage expense on the sales that exceed the amount required to pay the predetermined rental rate.
What are the benefits of a percentage lease?
Some tenants may be attracted to the terms of a percentage lease because these contracts typically have a lower fixed rental cost each month. In addition, the percentage lease is commonly used in multi-tenant buildings, which means these shopping centers or retail malls are a natural draw to other businesses in the building and can benefit tenants with both large and smaller sales.
Percentage leases can also benefit the property owner because they have the ability to choose the type of businesses and companies that are placed within the retail space. Accordingly, strategic leasing can attract more customers to the space, which gives the landlord the opportunity to negotiate a percentage of sales.
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