CRE glossary
Percentage rent
Percentage rent is additional rent that a tenant pays a landlord based on a percentage of the tenant's gross sales above a contractual breakpoint (sometimes called the natural breakpoint). It is most common in retail leases, especially for anchor tenants and shopping center storefronts. Typical structures range from 4–8% of sales over the breakpoint, with the breakpoint often calculated as base rent divided by the percentage rate.
Percentage rent aligns landlord and tenant economics in retail. The landlord shares in the tenant's success when business is strong, in exchange for a lower base rent during slower periods. The classic formula: percentage rent owed = (gross sales − breakpoint) × percentage rate. If a tenant's base rent is $120,000/year and the percentage rate is 6%, the natural breakpoint is $2,000,000/year of sales (base rent ÷ percentage).
Two breakpoint structures dominate. A natural breakpoint scales with base rent so tenants only pay percentage rent once they're earning enough that base rent equals the percentage of sales. An artificial breakpoint sets a fixed dollar threshold (often lower than the natural breakpoint), favoring the landlord by triggering percentage rent earlier in the sales curve.
Tenants negotiating percentage rent should focus on three points: confirm whether the breakpoint is natural or artificial; carve out specific exclusions from gross sales (returns, employee discounts, internet sales, gift card sales); and negotiate audit rights so the landlord can verify reported sales.
Percentage rent
Percentage rent = (Annual gross sales − Breakpoint) × Percentage rate
Example
- Base rent
- $120,000 / year
- Percentage rate
- 6%
- Natural breakpoint
- $2,000,000
- Sales above breakpoint (yr 3)
- $500,000
- Percentage rent owed
- $30,000
Broker perspective
Percentage rent is where retail brokers earn their fees. The natural-vs-artificial breakpoint distinction can cost a tenant tens of thousands per year on a strong sales year. Always model percentage rent across three sales scenarios (low, mid, hit-plan) before signing.
Frequently asked
People also ask
Why do landlords ask for percentage rent?
It aligns the landlord's upside with tenant success in revenue-driving locations. Landlords accept lower base rent in exchange for upside if the tenant performs well.
Natural vs artificial breakpoints?
Natural = base rent ÷ percentage rate. Artificial = a fixed dollar threshold, usually lower, which favors the landlord by triggering earlier.
Do all retail leases have percentage rent?
No. Anchor tenants and stronger national retailers often negotiate it out. Smaller and inline tenants in mall environments almost always have it.
What's typically excluded from gross sales?
Returns, employee discounts, gift card sales (until redeemed), internet sales fulfilled elsewhere, and sales tax.
Related terms
Base rent
The headline rent before pass-through expenses, usually quoted in $/SF/year and the starting point for every comp.
Co-tenancy clause
Retail tenant's right to reduced rent (or termination) if anchor tenants leave or shopping center occupancy drops below a threshold.
Exclusive use clause
Tenant's right to be the only operator in a defined business category within the shopping center.
See percentage rent extracted from a real lease.
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