Percentage rent is a leasing arrangement commonly used in commercial real estate. In this arrangement, a tenant pays a base right rent along with an additional percentage of their gross sales. Some tenants may also owe percentage rent when the lease has expired so it is important to look over the lease agreement to see if you may owe additional rent. The link below can give you some advice regarding this.
Can you owe additional rent after your lease expires?
Percentage rent tends to kick in when the tenant’s sales exceed a certain threshold, known as the breakpoint. What people may not know is that there are two different types of breakpoints. “A natural Break Point” and an “Artificial breakpoint”.
Natural Breakpoint
Natural Breakpoint is when the tenant only pays percentage rent on sales over and above the required minimum rent. When the tenant’s gross sales exceed the natural break point, they then become obligated to pay percentage and base rent. The Natural Breakpoints are directly tied to the tenant’s sales performance. This will show when the business reaches a level of success that triggers the payment of additional rent to the landlord. This agreement aligns with both parties, as the landlord benefits from the tenant’s business being successful.
The natural breakpoint can be calculated when you simply divide the base rent by the established percentage. For example, if rent is $50,00 and the established percentage is 5% which equals $1,000,000 in gross sales as the Natural Breakpoint.
Artificial Breakpoint
An Artificial Breakpoint in the context of percentage is a predetermined sales threshold set by the landlord in the lease agreement. Unlike Natural breakpoint, which is based on the tenant’s performance, an Artificial Breakpoint is often established as a calculated amount. Once the tenant’s sales pass this Artificial Breakpoint, they become liable to pay the landlord. This agreement is commonly used to ensure that landlords receive additional rent once a certain level of sales activity is reached. This happens regardless of the tenant’s actual performance.
The Artificial Breakpoint is Simply a dollar amount of sales that the tenant and landlord agree on. A landlord may negotiate that 5% of gross sales over $500,000 should be paid in percentage rent. If the gross sales are $1,000,000 then the tenant pays 5% of $500,000, or $25,000 in extra rent.
This link provides a great example of both Breakpoints with some numbers to help get a better understanding. Percentage Rent: How it Works – PropertyMetrics
Please note: The information provided here is not legal, financial, or any other form of professional advice. When talking about percentage rent seek professional legal counsel from a real estate attorney who specializes in commercial lease agreements.
