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A percentage lease is a commercial real estate agreement in which the tenant remits a base rental amount each month, along with a percentage of the receipts or sales that the business generates during that month. In exchange for this arrangement, the tenant can often negotiate a lower base amount for the monthly rent, with the landlord assuming a larger portion of risk, since the revenue stream of the tenant may vary from month to month. A lease of this type may utilize gross receipts or sales as the basis for the percentage, or some other portion of the revenue stream as defined in the provisions of the percentage lease.
In some cases, a percentage lease uses a very straightforward approach to calculating the amount of rent due each month. Along with the agreed-upon base amount, the tenant will also forward a fixed percentage of either the gross receipts or the gross sales. Often, businesses tend to lean more toward calculating the figure based on receipts rather than sales, since the return on those sales may or may not be realized during that same calendar month. Doing so still allows the landlord to anticipate remittance of at least the base amount, even if the business is closed for renovations or other factors that prevent the generation of revenue during a given month.
Depending on the nature of the tenant’s business, a percentage lease may include provisions that limit the total amount of revenue that is remitted as part of that percentage. One example is the imposition of a ceiling or cap on the amount. For example, the terms may state that the tenant will pay the base amount each month, plus five percent of gross receipts, with the amount from those receipts not exceeding the same figure named as the base amount. This would mean that if the base monthly rent is $2,000 US Dollars (USD), then the total remitted for the month cannot exceed $4,000 USD.
At the same time, a percentage lease may also specify a minimum that must be returned from the percentage of the revenue stream enjoyed by the business. Here, the contract may require that in addition to paying the base amount, the tenant must tender an additional payment of either a fixed percentage of the gross receipts, or a set dollar amount, whichever is higher. This means that if the percentage lease called for a monthly base rental of $2,000 USD and the agreed upon percentage gross receipts amounted to less than the minimum named in the contract, the tenant would remit the $2,000 USD plus the minimum, rather than remitting the percentage and the base amount.
Ideally, a percentage lease is crafted with terms that are beneficial to both the tenant and the landlord. The tenant should benefit from enjoying a total monthly rental commitment that is flexible enough to minimize the potential for cash flow problems. At the same time, the landlord can depend on receiving at least a minimum amount by way of the base payment, and could stand to earn a significant additional amount, assuming that the tenant enjoys an increase in receipts or sales during any given month.