What characterizes a percentage lease in commercial real estate?

A percentage lease is characterized by a rent structure where the rent owed by the tenant is based on a percentage of their gross sales. This type of lease is commonly used in retail environments, where landlords seek to align their income with the success of their tenants. As the tenant’s sales increase, so does the rent, creating a mutual benefit— landlords gain more revenue when their tenants thrive, and tenants may benefit from lower base rent during slower sales periods.

In this arrangement, the lease typically includes a base rent, which is then supplemented by the additional rent derived from the percentage of sales. This model can encourage both parties to invest in the success of the business since the landlord has a vested interest in the tenant’s performance.

The other options do not accurately describe a percentage lease. A fixed lease relies solely on a predetermined rent amount without consideration for sales performance. Agreements strictly covering utilities and maintenance costs do not represent a lease's fundamental rental structure. A lease strictly based on square footage entails a flat amount per area leased, independent of sales results. Thus, the characteristics of a percentage lease distinctly set it apart from these alternatives.