Reading a Restaurant Lease Like an Accountant: NNN, Percentage Rent, CAM Reconciliations, and the Tax Angles

A restaurant lease is a 10-to-15-year financial instrument that most operators negotiate once, under time pressure, focused on the one number (base rent) that's least likely to surprise them later. The surprises live in the pass-throughs, the percentage-rent formula, the annual CAM reconciliation, and — pleasantly, for Florida operators — in a tax that no longer exists.

Key takeaways

• In a triple-net (NNN) lease, base rent is the beginning of occupancy cost, not the end. Taxes, insurance, and CAM commonly add 20–40% on top — underwrite the all-in number per square foot.
• Percentage rent turns the landlord into a silent partner above a sales "breakpoint." Negotiate a natural breakpoint, define "gross sales" narrowly, and know what your POS will be asked to prove.
• The annual CAM reconciliation is an invoice you're allowed to challenge. Caps on controllable CAM and audit rights belong in the lease, not in your hopes.
• Tenant improvement allowances are taxable income to the tenant unless structured under the IRC §110 safe harbor for retail space — a drafting detail worth real money.
• Florida repealed its sales tax on commercial rent effective October 1, 2025. Rent, CAM, and other charges taxed as rent are no longer subject to it — check that your landlord's invoices caught up.

What NNN really costs

Triple-net means the tenant pays its proportionate share of the property's real estate taxes, insurance, and common area maintenance on top of base rent. In South Florida the "T" and the "I" are the volatile ones — property values have repriced tax assessments upward, and windstorm insurance premiums have moved dramatically — and NNN passes every increase straight through to you. Underwriting a space at "$45/SF NNN" without modeling $12–$18/SF of pass-throughs, escalating annually, is how a deal that penciled stops penciling in year three. Ask for the last two years of actual pass-through billings for the center before signing; a landlord who won't share them is telling you something.

Also in the fine print: annual base-rent escalators (fixed 3% vs. CPI-linked — in inflationary stretches that choice is worth points of margin), who pays structural and HVAC replacement (a $40,000 rooftop unit "maintenance" clause is a classic tenant trap — cap your exposure or make replacement the landlord's), exclusivity (no second pizza concept in the center), assignment rights (you cannot sell a restaurant whose lease can't be assigned — this clause is part of your exit value), and personal guaranty scope (push for a "good guy" burn-off after a few years of clean payment).

Percentage rent: the landlord's equity kicker

Common in retail centers and prime locations: base rent plus, say, 6% of gross sales above a breakpoint. The natural breakpoint is base rent divided by the percentage — $180,000 base at 6% gives a $3,000,000 natural breakpoint, meaning percentage rent only kicks in once sales are large enough that base rent equals 6% of them. An artificial (lower) breakpoint is simply extra rent wearing a formula; negotiate toward natural.

Then define gross sales like the accountant you brought: exclude sales tax collected, staff tips, employee meals and comps, third-party delivery commissions (or delivery sales entirely — you shouldn't pay percentage rent on DoorDash's cut), gift card sales (count redemptions instead), refunds, and catering executed off-premises. The lease will give the landlord sales-reporting and audit rights against your POS — which is one more reason the POS-to-books tie-out in your monthly close needs to be clean, because you'll be certifying these numbers.

The CAM reconciliation: audit it

You pay estimated CAM monthly; once a year the landlord reconciles actuals and bills the difference. Treat that reconciliation as an auditable invoice. What belongs in CAM: cleaning, landscaping, parking-lot maintenance, common utilities, security. What creeps in: capital projects dressed as maintenance (a parking-lot replacement is capital and should be amortized across tenants at most, not expensed in one year), management fees above the lease's stated cap, costs for spaces that don't benefit you, and a shrinking denominator (if the center is 30% vacant, your "proportionate share" shouldn't be computed as though occupied tenants cover the whole property — look for a gross-up clause that works both ways).

Negotiate two protections up front: a cap on controllable CAM increases (commonly 3–5% annually, cumulative and compounding language matters) and an explicit audit right with a fee-shifting clause if errors exceed a threshold. Then actually exercise it every few years; industry experience is that a meaningful share of reconciliations contain billing errors, essentially always in one direction.

The tax angles

Rent is deductible when paid for a cash-basis restaurant — including pass-throughs and percentage rent. Prepaid rent generally isn't deductible ahead of the period it covers. Leases with large scheduled rent escalations or free-rent periods can, above thresholds, trigger IRC §467 leveling rules — usually a non-issue for a single restaurant lease but worth a look on big deals.

Tenant improvement allowances are the trap. Cash a landlord pays you toward build-out is taxable income to you (with you then depreciating the improvements) unless it fits the IRC §110 safe harbor: retail space, lease term of 15 years or less, allowance used for qualified real property improvements that revert to the landlord, with the required mutual disclosure statements. Inside the safe harbor, the allowance is excluded from your income and the landlord owns and depreciates those improvements. Whether §110 treatment or taking the income and the depreciation yourself is better depends on your loss position and the QIP bonus-depreciation math (see our restaurant startup costs guide) — but the choice should be made deliberately in the lease drafting, not discovered by your preparer in February. Improvements you fund yourself on leased space are generally qualified improvement property — 15-year, bonus-eligible.

Florida's rent tax is gone. For decades Florida was the only state taxing commercial rent; the rate fell to 2% in mid-2024 and the tax was repealed effective October 1, 2025. Rent, CAM, and other payments taxed as rent for periods from that date forward carry no state sales tax (prior periods remain taxable and collectible). Practical to-dos: confirm your landlord's invoices dropped the line, and if you sublease space (a coffee kiosk, a ghost-kitchen tenant), you likewise stop collecting it on rent for post-repeal periods.

Official sources

• Florida DOR — Sales tax on commercial rent, repeal effective Oct. 1, 2025 (TIP 25A01-04): https://floridarevenue.com/taxes/tips/Documents/TIP_25A01-04.pdf
• IRC §110 — qualified lessee construction allowances: https://www.law.cornell.edu/uscode/text/26/110
• IRS Publication 946 — depreciating leasehold/qualified improvement property: https://www.irs.gov/publications/p946
• IRS Publication 334 — rent expense: https://www.irs.gov/publications/p334

Practitioner note: Before signing, build a ten-year occupancy model: base rent with escalators, realistic pass-through growth, percentage rent at three sales scenarios, and your build-out amortized over the initial term only — options you might not exercise don't get to subsidize the math. If all-in occupancy exceeds 10% of realistic sales in year three, the location has to be extraordinary to justify itself.

Fairlight models lease economics, reviews CAM reconciliations, and coordinates §110/TI structuring with your attorney for restaurant deals across South Florida. Contact us or see pricing.