Percentage rent is a commercial lease structure in which the tenant pays a base rent plus a percentage of its gross sales. In most cases, the percentage applies only to sales above a set level, called the breakpoint.
It is most common in retail leases, such as shopping centers and malls, where the landlord’s investment in traffic, anchors and marketing helps drive the tenant’s sales.
How it works
A percentage rent lease defines a few key terms:
- Base rent: a fixed minimum rent, paid monthly
- Percentage rate: the share of sales owed above the breakpoint, often a single-digit percentage that varies by retail category
- Breakpoint: the sales threshold above which percentage rent applies
- Gross sales definition: what counts as sales, and what is excluded, such as returns, sales tax or gift card purchases
There are two kinds of breakpoints:
- Natural breakpoint = Annual base rent / Percentage rate
- Artificial breakpoint: a negotiated dollar amount that can be higher or lower than the natural one
Worked example
A hypothetical clothing store pays $60,000 a year in base rent, with a 6% percentage rate and a natural breakpoint.
- Natural breakpoint: $60,000 / 0.06 = $1,000,000
- Annual sales: $1,250,000
- Sales above breakpoint: $250,000
- Percentage rent: $250,000 x 6% = $15,000
Total rent for the year is $60,000 base plus $15,000 percentage rent, or $75,000.
Why it matters for landlords
Percentage rent lets you share in a tenant’s success and can make a lease easier to sign, since the tenant pays a lower base rent in slower years. It also adds administration: you need sales reports, a clear definition of gross sales, audit rights and a process for annual true-ups. Tracking these charges alongside CAM and base rent is easier in a system built for commercial property management. Have an attorney draft the percentage rent clause.
Related terms
In practice. How the term shows up day to day.
What is a natural breakpoint?
It is the sales level at which the percentage of sales equals the base rent. You find it by dividing annual base rent by the percentage rate.
How does a landlord verify tenant sales?
Percentage rent leases usually require the tenant to submit periodic sales reports and an annual statement, and they often give the landlord the right to audit the tenant's records.