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a percentage lease is an agreement in
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commercial real estate where the tenant
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pays rent plus a percentage of their
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earned business Revenue knowing the
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different types of leases and how they
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work is essential for the real estate
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exam and luckily if you're studying for
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the real estate exam you're in the right
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place hello everybody it's Zach here
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from real estatewizer.com today we're
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talking about percentage leases let's
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get started so what is a percentage
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lease weight percentage lease is an
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agreement where the tenant pays rent
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plus a portion of their business profits
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in this type of lease the landlord
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benefits from the tenant's success
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percentage leases are standard in
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commercial real estate particularly in
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retail if a tenant is running out of
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space for their business in a
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multi-tenant property the owner may have
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them sign this type of lease examples of
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properties where a retail tenant may
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agree to a percentage lease would be
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shopping malls shopping centers Outlets
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or really any multi-tenant rental space
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now what terms are covered these
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percentage leases well really three
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things one base rent two break-even
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point and then three percentage rate so
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I'm gonna break these each down because
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they're important to really understand
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so what is base run well base run is the
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price tenants pay to occupy a rental
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space the square footage of the property
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typically determines the rent amount no
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matter how much the tenant earns in
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Revenue the rent price is guaranteed and
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unchanging even if the tenant makes no
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money from their business the landlord
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will collect this base rent cost because
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again that's the bare minimum next is
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that break even point now the break even
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point also known as breakpoint is the
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income a tenant earns before paying a
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percentage of their sales to the
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landlord landlords typically identify
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the break-even point as the point where
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the percentage rent is equivalent to the
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base rent and then obviously there's the
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percentage rent the percentage rent is
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the amount of tenant must pay from their
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gross sales to the landlord now the
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percentage of rent varies from lease to
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lease but it's typically a flat
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percentage above the break-even point
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both the landlord and tenant must choose
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a percent that makes sense and works for
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both of them for example the landlord
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and tenant may agree that the percentage
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rate will apply to 8 percent of gross
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sales above the break point this means
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that after the tenant's business earns
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the amount defined in break point they
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pay eight percent of all their other
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profits so what terms are included in a
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percentage lease well it looks pretty
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much like a standard lease I'll put them
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on the screen but essentially again
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you're going to have the names of the
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tenants the property description the
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length of the term any you know
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potential deposits fees legal rights you
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know disclosures and restrictions things
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like that so what's an example of a
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percentage lease well say that kamau
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owns a clothing store and wants to rent
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a space for her business a mall camel
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signs a percentage leads to the landlord
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agreeing to pay four thousand dollars
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rent for a space at the mall per the
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agreement she must also give seven
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percent of her profits after earning a
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break point of eight thousand dollars
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this is a typical example of how a
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percentage lease might work in the
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retail market so let's discuss some of
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the pros and cons so for tenants a
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percentage lease can be deemed
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attractive because it requires paying
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lower base rent landlords have a vested
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interest in the tenant's business so
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they will likely provide maintenance and
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other services it is also more likely
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that the tenant's business will be in a
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good location like a mall or shopping
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center the downside for tenants is that
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they may have to negotiate to get the
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best terms landlords naturally try to
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set terms that favor themselves so
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tenants must know how to haggle another
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downside of the percentage lease is that
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tenants cannot keep all their profits
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they are required to give that
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percentage of their earnings at the end
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of that month or quarter or or whatever
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it might be to the landlord now for
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landlords a significant advantage of
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percentage lease is that they get a
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portion of the tenant's earnings as long
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as the business is doing well the
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landlord will make passive income
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without having to do anything
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necessarily extra now one disadvantage
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of a percentage lease for landlords is
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that they have to charge a lower base
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rent if a tenant's business is not doing
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well landlords will not make as much
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money from this lease it also takes
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landlords more time to make money with
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percentage leases as the tenant must
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reach that break point before they can
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make any earnings of course landlords
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also have to worry about potentially a
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tenant not accurately reporting their
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income and things like that whereas with
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a standard lease you don't have to worry
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about all those extra things so how do
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we calculate a percentage lease well
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it's pretty easy there's really three
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things a percentage rent gross sales and
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then square footage of the rental
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property put the equation on the screen
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for you that's essentially what it looks
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like again percentage rent times gross
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sales and then you're going to divide by
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12 obviously for the month and then
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that's going to find us the price per
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square foot so what specifically do you
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need to know for the real estate exam
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well obviously you need to be familiar
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with the term percentage lease a
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percentage lease is an agreement where
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the tenant pays base rent plus a
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percentage of sales to the property
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owner remember it's one of those
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essential lease types that you just need
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to understand because again they like to
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give you an example and you have to pick
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which lease type makes the most sense in
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this situation if you can understand
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that and distinguish which is which
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which is a percentage lease which is a
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gross lease all these things that we've
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been talking about you'll be one step
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closer to passing the real estate exam
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for more videos on leases and Lease
5:40
types click here and click here to
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subscribe thank you guys so much for
5:43
watching until next time see ya bye
