What are the three types of percentage leases?

The classification of percentage leases into three main types holds significance in commercial real estate. The types of percentage leases typically consist of straight, variable scale, and maximum percentage leases.

A straight percentage lease involves the tenant paying a base rent plus a percentage of sales above a certain threshold, which provides a straightforward arrangement for landlords to share in the tenant's success without complexities. The variable scale describes a lease where the percentage rate may change based on sales volume; thus, as tenants’ sales grow, they may pay different percentages depending on specific sales thresholds, creating a flexible and incentive-based structure for both parties. Lastly, a maximum percentage lease includes a cap on the total rent paid as a percentage of sales, ensuring that tenants avoid paying excessively high rents, regardless of their sales performance, thereby encouraging business growth without overburdening them financially.

Understanding these types can help property managers structure leases that can meet their financial goals while also being fair and attractive to tenants. It highlights the importance of adaptability in leasing structures to accommodate both landlord objectives and tenant capacities.