In the retail leasing world, it’s common for landlords to require percentage rent to be paid in addition to base rent. When this negotiation point arises, we are often asked by our clients to explain how percentage rent is calculated. Percentage rent provisions use either a natural or artificial breakpoint. A “natural breakpoint” is simply defined as the fixed annual rent amount divided by the percentage given.
Let’s go through a hypothetical example to better illustrate the calculations.
If a tenant’s annual rent is $60,000 and annual sales are projected to be $1,200500, which option below is economically better for the tenant?
Artificial Breakpoint: Tenant shall pay to Landlord a percentage rent equal to five percent (5%) of the Tenant’s annual gross receipts above a base threshold of $ 1,000,000.
Natural Breakpoint: Tenant shall pay five percent (5%) rent over a natural breakpoint.
Let’s do the math formula of natural breakpoint minus annual sales equals sales in excess of breakpoint multiplied % given.
In option one, the retailer pays an additional $10,025 (5% multiplied by $200,500) in annual rent.
In option two, we divide the annual rent of $60,000 by 5% to get a natural breakpoint of $1,200,000 in annual sales. In this case, the retailer only pays an additional $25.00 in annual rent($500 excess sales X 5%).
In the above example the natural breakpoint is a far better deal for the tenant than accepting the artificial breakpoint.
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