Percentage rent is rent due in lieu of, or in addition to base rent that is paid to landlords based on tenant sales. A percentage rent clause is nearly exclusive to retail leases. The actual amount of percentage rent can be determined by a formula with or without a breakpoint. For example, without a breakpoint, a tenant may pay a flat 5.0% of gross sales. With a breakpoint, percentage rent only applies once sales reach a predefined amount. This amount may be determined by a breakpoint which is a percentage of sales above a set dollar amount.
As an example calculation, say a tenant occupies 5,000 square feet and base rent is $10/sf and percentage rent is 4.0% of gross sales above $1,000,000. If gross sales were $1,100,000 for the period, then the tenant would owe $54,000 for the period (base rent of $10/sf times 5,000sf equals $50,000 plus additional rent of $1,100,000 gross sales less $1,000,000 breakpoint equals $100,000 times 4.0% equals $4,000 for a total of $54,000). Alternatively, percentage rent may be based on a “natural breakpoint” which is calculated by dividing the base rent by a predefined percentage. Continuing with the above example, the natural breakpoint would be calculated by taking the base rent of $50,000 and dividing by 4.0% which equals $1,250,000. In this case, the tenant would not have exceeded the breakpoint and thus no percentage rent would be due. The theory of the natural breakpoint is that percentage rent should only apply to sales in excess of the amount needed to achieve base rent (in this case $1,250,000 times 4.0% equals $50,000 which is the base rent amount).
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
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