Some of our clients ask us to help explain percentage rent. A landlord of a retail property may require a tenant to pay a predetermined percentage of their retail sales above a defined breakpoint.
The additional rent is calculated based on the tenant’s sales over a certain dollar amount. A natural sales threshold or breakpoint is the annual base rent divided by the overage rate.
Follow the three steps below to determine the overage rent and total annual base rent for a natural breakpoint.
- Annual Rent / Overage Percent Rate = Breakpoint
- Total Sales – Breakpoint = Excess Sales
- Excess Sales X Overage Percent Rate = Overage Rent
- Base Rent + Overage Rent = Total Annual Rent
To calculate the overage you must be know the overage rate, annual rent, and total sales.
- Overage Rate = 8%
- Annual Base Rent = 120,000
- Total Sales = 1,600,000
The answers are as follows:
- $120,000 / .08% = $1,500,000 Breakpoint
- $1,600,000 – $1,500,000 = $100,000 Excess Sales
- $100,000 X .08% = $8,000 Overage rent
- $120,000 + 8,000 = $128,000 Total Annual rent
Percentage rent is usually calculated and paid on an annual basis.