Understanding Percentage Retail Rent

Percentage rent is often perceived to be of benefit to landlords to reward them for having a successful shopping center that draws a large customer base benefiting the tenants in the center. In reality, percentage rent is of benefit to both tenants and landlords. The relationship of a retail tenant and a landlord is very different than that of an office tenant and landlord. The success of the office tenant’s business does not rely upon the success of the building and the masterful creation of a synergistic tenant mix as does that of the retail tenant. The landlord and tenant are really in business together to create a successful business environment that benefits both parties, and, as such, percentage rent plays a very important role. 

Landlords may offer a startup tenant, a tenant reluctant to come to the shopping center or urban area, or a struggling tenant a percentage rent only deal. A percentage rent only deal is typically provided to a standard retail tenant for a short period of time (1-3 years) and generally converts to a full rent triple net deal after certain amount of years, or in better crafted deals, when a tenant hits a certain number of gross sales that justify a conversion to a standard deal. In these cases, this is a win-win for both the tenant and the landlord.