The Resurgence of The Percentage Lease

In this up and down commercial real estate market, we are seeing the resurgence of the Percentage Lease. Most often it is in the retail and hospitality sector. In this type of lease, the rent is based upon a percentage of sales volume that the business makes at that location. Often times there is a minimum (and sometimes a maximum) rent base as well. For example, a restaurant has calculated that they can afford paying five percent of their gross sales as rent. If the sales volume for the month is $50,000 they would pay the landlord $2500 for that month as base rent. Now usually this is on a projected annual basis and then adjusted after the first year to compensate for seasonal swings. In this case, there may be a minimum of $1800 er month and a maximum of $3200. We have seen more than the usual number of these types of leases coming through the commercial pipeline than in normal market conditions.
What has been your experience with Percentage Leases? Do they work out for both parties involved? Have you experienced any quirks of some sort?
Let us know your thoughts on this since they seem to be more prevalent.