Percentage lease

A lease arrangement used by many larger shopping centers is the percentage lease. This arrangement ties the rental payments to the success of the tenant's business, and is often used with properties in which the property itself (and its location) promises to bring customers to the tenant. A portion of the tenant's rental payment is based on the tenant's gross income.

With shopping malls and centers, for example, where the success of the tenants relies heavily on the marketing draw of the shopping mall, this gives both the landlord and tenant equal impetus to successfully market the entire mall.

The percentage lease is normally structured as either a gross or net lease, and occasionally with a variable lease feature. However, the entire rent payment is not based on a percentage of the tenant's gross income. A useful example would be a triple-net arrangement, with a base rent of $5 per square foot plus 1.75% of the tenant's gross income.

Obviously, the lease agreement will require the tenant to open the business' books and accounts to the landlord's scrutiny. Certified copies of the tenant's business tax returns, audited financial reports and, sometimes, personal tax returns are normal disclosure requirements. Property owners who use the percentage lease are usually astute enough to know what market averages are for the local area and the tenant's industry.

To protect the landlord's bottom line, percentages leases typically give the landlord a recapture clause, which allows the property owner to reclaim the rental property if minimum sales projections—as pre-stated in the lease agreement—are not satisfied.

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