Percentage Lease
What Is a Percentage Lease?
A percentage lease is a type of lease where the tenant pays a base rent plus a percentage of any revenue earned while carrying on with work on the rental premises. It is a term utilized in commercial real estate. A percentage lease agreement generally diminishes the base rate for lessees and offers the lessor extra upside potential.
Percentage Leases Explained
A percentage lease has two parts — base rent (or least rent) and a percentage of the month to month or annual gross sales made in the vicinity. The lessee could find this arrangement appealing, as it lowers this fixed cost, which regularly accounts for a large proportion of operating costs, and the lessor gets some upside potential past what a standard lease (i.e., no percentage of sales part) could yield. Furthermore, the percentage lease adjusts the interests of lessee and lessor.
By giving an ideal location and upkeep services to the tenant, the lessor improves the presence of the retailer to capture more foot traffic and consequently, the possibility of greater sales, part of which would go to the lessor under the percentage lease agreement.
Arranging a Percentage Lease Contract
The landlord and tenant arrange a "breakpoint," the level of sales where percentage lease payments kick in, related to the base rent. On the off chance that a landlord consents to a lower base rent, it would need a lower breakpoint too. The lessee is keen on a low base rent and high breakpoint. After this way and that and settling on those two figures, the two parties must determine avoidances to the sales figure (sales to employees of the store, for instance), operating hours of the store, rights to alter the breakpoint, and procedures for auditing store sales, among different subtleties.
Accounting for Percentage Leases
We should investigate the financial statements of Tapestry, Inc., owner of Coach and Kate Spade brands, which calls their percentage portion of its overall lease payments "contingent rentals." The company perceives contingent rentals on its income statement when "the accomplishment of target (i.e., sale levels) ... is viewed as probable and admirable." In its fiscal year 2019, Tapestry paid roughly 30% of its total rent as contingent rent (for example through a percentage lease). Balance that with Signet Jewelers Limited, whose percentage lease payments were under 2% of the total rent for that very year.
Highlights
- This percentage is added on top of a base rent, however the base will be set lower than it would be on a standard lease, making it appealing to tenants.
- A percentage lease requires commercial tenants to pay to the landlord a set percentage of gross revenue earned from business directed at the leased premises.
- Frequently, the percentage of revenue portion of the lease won't kick in until a negotiated sales breakpoint is first reached.
