Question

Describe the concept of “percentage rent” in retail leases including the breakpoint. Your paper should include examples of specific types of locations where a percentage rent clause is normally expected and the types of businesses which could reasonably be expected to pay percentage rent. What are some typical percentage rents by type of business? You should answer the question “Why is it necessary to know a business’ approximate “gross profit” or “gross margin” before signing a lease with a percentage rent clause?”

Answer 1

Hi, I will answer this multi-part question:

1. Percentage Rent is a form of rent paid in addition to Base or Minimum Rent. It is almost exclusively reserved for retail tenants and is based upon a percentage of the tenant's gross sales, with or without a breakpoint.

2. Most often used in retail tenants, it is useful for businesses where the expected sales is high but not proven, in this way, the tenant can get a lower base rent and the rest can be based on percentage of profits, thus lowering the risk factor. It is vital to know the approximate gross profit and margin involved as often one can overpay through this method and make a decision on whether to pay only fixed rent or percentage rent.

3. One can also utlize the concept of breakpoint, to help put a cap on the maximum rent payed, in order to limit the rent payable by the person. Breakpoint can be both natural or stipulated based on formulation of lease

4. Restaurant: 5-8%,