Profit Sharing Clause

Definition

A profit sharing clause is a lease provision requiring a tenant to share with the landlord any excess profits generated from assigning or subleasing the leased premises at a higher rent than the tenant is obligated to pay under its original lease.

Purpose

• Prevents tenants from fully capturing market rent arbitrage.
• Allows landlords to participate in upside value.
• Balances tenant flexibility with landlord control.

How It Works

1. Tenant subleases or assigns space at a higher rent.
2. Calculate net profit (after deducting allowable costs).
3. Tenant shares agreed percentage (e.g., 50%) with landlord.

Typical Calculation

Sublease Rent − Original Lease Rent − Reasonable Transaction Costs = Net Profit

Example

• Original Lease Rent: $20/SF
• Sublease Rent: $30/SF
• Allowable Costs: $2/SF

Net Profit = $30 − $20 − $2 = $8/SF If 50% sharing applies → Landlord receives $4/SF

Allowable Deductions

• Brokerage commissions.
• Legal fees.
• Tenant improvement costs.
• Marketing expenses.

Profit Sharing vs. Recapture Clause

• Profit Sharing: Tenant may proceed, but landlord shares upside.
• Recapture Clause: Landlord may terminate lease instead of approving transfer.

Landlord Perspective

• Captures value in rising markets.
• Discourages speculative leasing.
• Maintains leverage during assignment negotiations.

Tenant Perspective

• Retains partial upside opportunity.
• Maintains flexibility to restructure business.
• Must carefully review profit definition language.

Underwriting Considerations

• Review lease abstracts for profit-sharing provisions.
• Assess potential recapture alternatives.
• Model effect of below-market lease positions.

Common Pitfalls

• Ambiguous definition of “profit.”
• Disputes over allowable deductions.
• Ignoring partial assignment scenarios.
• Failure to align with recapture rights.

Related Terms

• Recapture Clause
• Assignment Clause
• Assignment of Lease
• Sublease
• Lease
• Rent Escalation