Percentage rents aren’t likely to replace fixed base rents in modern leases, but they’ve become a useful tool for landlords and tenants. They can help cut creative and flexible deals to fill unusual space or help incubate new concepts, experts said on a recent ICSC Connect Virtual Series called Evaluating the Percentage Rent Model.

Percentage rent agreements usually call for the tenant to pay 6 to 10 percent of total sales, said Bedrock Detroit executive vice president and COO Ivy Greaner. In most cases, the tenant pays a fixed base rent until sales reach an agreed-upon volume, at which time the percentage rent kicks in.

During the pandemic, many landlords helped tenants stay afloat by charging them a percentage of sales only if sales exceeded the store’s triple-net expenses, she said. But that was a response to a unique situation and likely will become less frequent once business returns to pre-pandemic levels.

Landlords will continue to use percentage rent to help lease temporary space and incubate the local tenants that ratchet up the properties’ experiential vibe, said Madison Marquette retail services president Gavin Farnam. “We’re definitely doing more of the percent-in-lieu or lower rents with more upside on the percentage side so we can partner more and incubate tenants to help build that cool factor.”

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Percentage rent clauses provide good levers for negotiation, said Greenstead Consulting Group founder Peter Morris. “You can only negotiate down on base rent and recoverable costs so much before you hit the bottom line. However, percentage rent has no offsetting costs, so you can use it in a negotiation either on the landlord or tenant side in a quid pro quo. … But you can’t do that if you don’t introduce it at the very beginning of the negotiation.”

Still, fixed base rents likely will remain the standard. Percentage rents will remain a negotiating tool, but they can’t demonstrate a property’s projected income to potential buyers, investors and lenders, Farnam said. Even with national credit tenants, percentage rent clauses don’t move the needle on the cap rate, especially on open-air and lifestyle center deals, he added.

Lenders focus on base rents when underwriting deals, and percentage rents are considered too risky, Greaner said. “We still have bricks-and-mortar, and we still have lenders. At the end of the day, you need a return on investment. There’s no magic. You have to have some certainties with rents, and percentage rent is gravy. It’s not a mainstay for an entire portfolio.”

Another major hurdle to the success of percentage rent is the industrywide disagreement over how to calculate online sales and curbside pickups and returns into total sales, Morris said. “What do you do with online sales and returns? It’s a disruptor in the percentage rent industry.”

RELATED: Percentage rent leases: How could click-and-collect sales factor in?

Kenneth Lamy — founder, president and CEO of The Lamy Group and of DataPoint International — said lease documents must be revisited and refreshed to reflect the new realities of percentage rents. Make sure you’re addressing online transactions or returns with specificity, he added.” If you don’t address it, you end up with a big fight after the fact.”

Watch the full ICSC Connect Virtual Series on Evaluating the Percentage Rent Model here. Scroll down and click on Presentations.