Final answer:
A tenant may sign a percentage lease to lower their base rent and manage initial costs, while leveraging the potential for high sales volumes to benefit both themselves and the landlord. This type of lease arrangement incentivizes landlords to support the tenant's business success as it directly impacts their own revenue.
Step-by-step explanation:
A tenant may be willing to sign a lease that includes a clause in which they give a percentage of their sales proceeds to their landlords, often known as a percentage lease. This type of lease is common in retail and is particularly beneficial for businesses that are just starting out, or for locations with high foot traffic where sales are expected to be high. The reason for a tenant to agree to this may be multifold.
Firstly, a percentage lease can lower the base rent, which can be helpful for a new business that is trying to manage initial costs. The lower fixed costs allow the business to have lower operating expenses during times when their sales might be lower. Moreover, landlords might offer more favorable lease terms or additional benefits such as prime location spots or improved facilities.
It is important to remember the first rule of economics, which states that you do not get something for nothing—everything has an opportunity cost. So, while tenants might get cheaper base rent with a percentage lease, they have the opportunity to make up for it through higher sales volumes, which ultimately benefits both the tenant and the landlord. The landlord is incentivized to help the tenant succeed, as their earnings are directly tied to the tenant's sales performance.