In commercial real estate, a percentage lease requires a retail tenant to pay a percentage of their revenues in addition to a base rent, which is usually calculated per square foot (PSF). Typically, a percentage lease agreement is structured around a "breakpoint," a specific amount of revenue above which the landlord begins collecting their percentage. For example, a percentage lease agreement could set a fixed breakpoint of $20,000/month, with a 20% percentage. In that case, if the store made $18,000 in revenue that month, they would pay nothing. However, if they made $30,000, they would pay $2,000 to the landlord ($30,000- $20,000 = $10,000 * 20% = $2,000). In reality, the average percentage usually hovers around 7%. In addition, some percentage leases have a tiered system, in which the percentage rent changes as sales increases, though this is somewhat less common.

The advantages of a percentage lease are that it can have a strong upside for tenants, who want to reduce their fixed costs, as well as for landlords, who want to increase their property's potential monthly revenues. In most cases, a tenant can negotiate down their potential base rent if they're willing to set a lower breakpoint, give a higher percentage of their revenues, or both. A tenant may also be willing to set a lower breakpoint or increase the percentage of their revenues for other concessions, such as a lease renewal option.

The disadvantages of a percentage lease are that a landlord may require an annual or semi-annual audit of a tenants sales. They may also ask that the tenant avoid opening up any other locations within a specified area, as not to dilute their sales revenues. A percentage lease agreement also needs to specify what exactly is and is not included in a tenant's gross revenues. Despite the benefits of percentage leases, they're not for everyone. If a tenant or landlord doesn't feel comfortable with a percentage lease agreement, they may both want to go with a higher base rate and avoid a percentage lease altogether.

The common terms of a percentage lease typically include a fixed breakpoint of revenue, a percentage rate, and a tiered system. The average percentage rate usually hovers around 7%, and the tiered system is less common.

For example, a percentage lease agreement could set a fixed breakpoint of $20,000/month, with a 20% percentage. In that case, if the store made $18,000 in revenue that month, they would pay nothing. However, if they made $30,000, they would pay $2,000 to the landlord ($30,000- $20,000 = $10,000 \* 20% = $2,000).

Source: www.commercialrealestate.loans/commercial-real-estate-glossary/percentage-lease

A percentage lease can have a positive effect on a tenant's cash flow, as it allows them to reduce their fixed costs. In most cases, a tenant can negotiate down their potential base rent if they're willing to set a lower breakpoint, give a higher percentage of their revenues, or both. This can help tenants save money in the long run, as they will only pay a percentage of their revenues to the landlord, rather than a fixed amount.

For example, a percentage lease agreement could set a fixed breakpoint of $20,000/month, with a 20% percentage. In that case, if the store made $18,000 in revenue that month, they would pay nothing. However, if they made $30,000, they would pay $2,000 to the landlord ($30,000- $20,000 = $10,000 \* 20% = $2,000).

In reality, the average percentage usually hovers around 7%. In addition, some percentage leases have a tiered system, in which the percentage rent changes as sales increases, though this is somewhat less common.

The tax implications of a percentage lease depend on the specific terms of the lease agreement. Generally, the tenant is responsible for paying taxes on the percentage of their gross revenues that they pay to the landlord. The landlord is then responsible for paying taxes on the income they receive from the tenant. It's important to consult with a tax professional to ensure that all taxes are paid correctly and on time.

The legal considerations of a percentage lease include the landlord requiring an annual or semi-annual audit of a tenant's sales, as well as asking that the tenant avoid opening up any other locations within a specified area, as not to dilute their sales revenues. A percentage lease agreement also needs to specify what exactly is and is not included in a tenant's gross revenues.

In addition, the tenant and landlord may want to go with a higher base rate and avoid a percentage lease altogether if they don't feel comfortable with the agreement.