Percentage Rent
Percentage rent is a lease structure where the tenant pays base rent plus a percentage (typically 5-8% for restaurants) of gross sales exceeding a defined annual breakpoint. For example, with a $10,000/month base rent and a 6% percentage rent above $2 million in annual sales, a restaurant doing $2.5 million would pay an additional $30,000/year in percentage rent.
Why It Matters for Operators
Percentage rent aligns landlord and tenant interests—the landlord benefits when your business thrives. However, it also means your rent increases as revenue grows, potentially capping your profitability at higher volumes. Carefully model the impact on your P&L at different revenue scenarios before agreeing to percentage rent terms.
FWDRE Insight
If you must accept percentage rent, negotiate a natural breakpoint (base rent ÷ percentage rate) rather than an artificial one. Also exclude non-recurring revenue like catering, gift card sales, and delivery platform commissions from the gross sales calculation. These items have different margin profiles and shouldn't trigger additional rent.
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