Percentage Lease? Anyone?

Business By BrandisBaked Updated 28 Oct 2013 , 2:32pm by Stitches

BrandisBaked Posted 25 Oct 2013 , 10:50pm
post #1 of 10

AI am wondering if anyone here has rented a space with lease payments based no a percentage of gross sales?

If so, what percentage did you pay, and did you put cap on rent that was greater than the going rate for the space in a "normal" lease (and by what percent)?

I am thinking of doing this, but am wondering what the landlord really gets out of it - other than a tenant. Seems to me that this would be most beneficial to the tenant since all the financial risk is on the landlord. Although, it does get a tenant in the space which benefits the landlord in more ways than one, I know.

If you have had experience with this type of arrangement, please let me know.


9 replies
liz at sugar Posted 26 Oct 2013 , 3:44am
post #2 of 10

Our restaurant landlords wanted to do that, but we put a kabosh on it.  Didn't really think it was in our best interest to open our books up to them.


Would you end up getting pressure from them if you weren't selling $X each month?  You just don't know what will happen.


Most landlords who hope for that arrangement want a flat rate PLUS a percentage, not just a percentage.


To me, landlords who try to do this are greedy.  Just set a fair rental amount and be done with it.



jason_kraft Posted 26 Oct 2013 , 5:03am
post #3 of 10


Original message sent by liz at sugar

Most landlords who hope for that arrangement want a flat rate PLUS a percentage, not just a percentage.

This. A reputable landlord would not agree to a long-term lease with no minimum rent. Unless the landlord didn't know what they were doing, in which case you probably wouldn't want to be their tenant anyway.

BrandisBaked Posted 28 Oct 2013 , 2:48am
post #4 of 10

APercentage leases are quite common in the restaurant/food industry, and are not a sign of anything untoward by the building owner/agent. This type of arrangement is far more beneficial to me than to the owner - and quite a compliment that he thinks he will make more money by getting a percentage than a base rate for rent (he has faith I will be raking it in!)

My question was whether anyone has entered into such a contract and at what percentage.


liz at sugar Posted 28 Oct 2013 , 2:59am
post #5 of 10

I figured up our restaurant rent and it is roughly 3.6% of gross sales for an average month.  My bakery rent will be 5 to 6% of what I anticipate sales to be, but utilities are included.  How much is your landlord asking for?


Percentage leases are not common where I live, but may be the norm where you are.  Why do you want a "partner" in your business, with free rein to look at your books and make sure you aren't shortchanging him?



jason_kraft Posted 28 Oct 2013 , 3:12am
post #6 of 10

ASee the link below for more info on how a percentage lease works. There is always a minimum fixed amount the tenant pays for rent, the benefit for the landlord is that they get additional rent if the tenant's gross sales exceeds a certain amount.

BrandisBaked Posted 28 Oct 2013 , 4:04am
post #7 of 10

AThe benefit to me is that it's a percentage only lease... Which means no sales = no rent (not that that would be the case, but would be awesome during slow months). The risk is all his, but if I do well, so does he. There will be a lot of tenant improvements required(it used to be a bar) and time needed to get the space ready and inspeections, so no rent would be paid until I was making money.

The rent would be 10% of gross sales up to the market rate for the space, and the percentage would decrease in increments 6%, 2% and then be capped at a certain point.

If I thought I was going to get rich overnight, this would be a bad arrangement. But given the time needed to build up business in a new city and money I need to invest in more equipment and decor, I think this may be the way to go. I just wanted to make sure the percentages were "normal".

We'll see.

liz at sugar Posted 28 Oct 2013 , 12:37pm
post #8 of 10

What type of concept are you opening?  A storefront with custom cakes, or will you have a display case with lots of individual/take out items?  In our area, most food concepts first 3 months open are the busiest they will ever have, then it tapers off to your normal business.  But that would not apply to a custom cake concept.


I would call the utility companies and ask for a printout of what the previous tenants paid to see how much that will add up to.  In the summer, our utilities are almost twice our rent (between 6 and 7% of gross sales).


To me 10% sounds high, but I don't know the rents in your area.


Good luck!



BrandisBaked Posted 28 Oct 2013 , 1:19pm
post #9 of 10

AWell, the 10% rate is only until we hit the market rate for the space. After that, it drops down to 6% up to another $300 and 2% up to another $200. So potentially, the most he makes is $500 per month more than the market rate for the space. And that's only if I bring in that much money.

I would be doing a bakery/cafe serving pastries, breakfast and lunch with custom cakes on the side. I don't think I'd survive in this town on custom cakes alone.

Stitches Posted 28 Oct 2013 , 2:32pm
post #10 of 10

I was desperate enough to rent space from a coffee shop, giving them a percentage of my profits. It was a horrible experience! They always think your making more than you are....and that your hiding something from them. Most people don't understand the lower profit margins/higher labor costs of bakeries.....and good luck trying to get them to understand that. They watch everything going through your doors and dream your profits are bigger than they really are.


In time, if you are successful you'll feel trapped and angry that someone gets a part of your hard work for nothing. The landlord isn't going to take money out of his pocket to fix up your place. Your better to keep your money and invest improvement into your space yourself, you choose what improvements are needed the most.


I understand your reasoning and thoughts about this, it seems less risky and has less cash out put from you. BUT if you really think hard about this, this arrangement is best for you only if you fail. You shouldn't put all that effort into something where you can possibly fail. Don't give yourself an easy out situation, it allows you to fail and penalizes you to succeed.


Do you have experience being a short order cook running a breakfast and lunch spot? That's a completely different set of skills and equipment layout than baking. It will require more staff too.

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