What does percentage rent mean for my commercial lease?

Getting started with a commercial lease can be an overwhelming process, especially if it is your first one. Many terms can seem clear until it is time to follow them.

One of the most critical terms in your negotiation will be your rent. There are many ways to calculate rent in a commercial lease, but percentage rent is one of the most common.

Here’s what you should know about percentage rent and what it means for your commercial lease.

Calculating percentage rent

The term “percentage rent” can feel a little misleading. The name suggests you will only pay a percentage of your profits.

However, percentage rent is typically a base rent amount plus a portion of your profits. The benefit of this type of lease means that you and the landlord have more profits when you have a good month. It also means that your rent burden is not as high when your earnings are low.

In a commercial lease based on percentage rent, you and the landlord will agree on a break-even point. You will calculate the profit percentage portion of your rent after you meet the break-even point.

Finding the right match

Whether you are looking to expand your current business, change your location or create a physical presence for a new venture, a commercial lease can support your needs as you develop your business. As you start looking at spaces, it is essential to consider both what the space can offer your business and whether your business can support it.

A commercial lease based on percentage rent can be a good fit for a company with a minimum reliable profit so that you can sustain the base rent. Then, as your business grows, both you and the landlord can reap the benefits of your developing business in its new location.  

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