In a percentage lease the tenant pays a percentage of their sales revenue to the Landlord above a base amount.
As an example: Tenant comes to Landlord with a new retail concept. However tenant is unsure how long it will take before income is sufficient to cover operating costs including rent. Landlord believes that the concept will eventually be very successful. So he accepts tenants offer of a percentage lease.
Under the percentage lease Tenant pays below market rents until concept catches on. After revenues exceed a base amount tenant shares a portion of either the gross or net revenues with Landlord.
Thus a percentage leases allow small and large Tenants to mitigate some of the risk associated with new concepts, unproven locations, incomplete redevelopments in return for sharing some of the anticipated profits.
Aug 12, 2014