By Justin Beck, CCIM, CPM | President
Retail leases should be a partnership between the Retailer and the Landlord. Retailers in almost any multi-tenant setting can benefit from a variety of factors. In general, these factors are often the product of a savvy developer and operator, and they can include:
-Increased traffic from an ideal tenant mix
-Strong anchors that provide a base of customers
-Enhanced aesthetics from professional property management
-Synergies from mixed product type such as multi-family and office uses
When a developer creates these added benefits, it’s customary for the landlord to ask for percentage rents in a tenant’s lease. Percentage Rent is a form of rent paid in addition to, or in lieu of, Base Rent. Most often, the Percentage Rent is calculated using the natural breakpoint. The natural breakpoint is derived from dividing the base rent by the percentage.
BASE RENT / X% = Breakpoint Sales Number
For example, Joe’s Café pays $85,000 per year in Base Rent. They also pay Percentage Rent of 6% over a natural breakpoint. Therefore $85,000/6% = $1,416,667. So, when Joe’s Café’s sales exceed $1,416,667, it must pay the landlord 6% of every dollar it brings in for the remainder of the year.
Beyond the Natural Breakpoint, there is also an Artificial Breakpoint. In this method, Base Rent and Percentage Rent are fixed independently. The Landlord and Tenant agree on the Base Rent and the Percentage Rent paid above a set gross sales number.
Finally, in order to properly adhere to a Percentage Rent clause within a lease, the Tenant must submit accurate and timely sales numbers to the landlord, as well as other provisions.
The idea of Percentage Rent is a pretty straightforward, but it can get complicated when it comes to breakpoints, inclusions and exclusions. As should be the case with anything in commercial real estate, the lease should be read carefully and its details should always be scrutinized.