If you’re looking at leasing retail space for your business, chances are that the landlord is going to require you, as the Tenant, to pay Percentage Rent in addition to the Minimum Annual Rent (aka Monthly Base Rent). Basically, the landlord wants a cut of your sales when you are running a successful business! You generally will not have to pay Percentage Rent until your business reaches a certain threshold of sales (referred to as a Breakpoint; more on that later).
So, let’s take a look and break it down, shall we? You may see a provision in your lease that states Percentage Rent will be 6%. Ok. Sounds easy enough, right? But what is it 6% of, and at what point are you responsible for paying it? Enter Gross Sales and Breakpoints. Let’s say your lease says that you are responsible for paying Percentage Rent in the amount of 6% of your Gross Sales exceeding the Natural Breakpoint. What in the name of all that is holy does that mean?! I don’t know about you, but I don’t have an advanced degree in quantum physics.
Don’t fret, it’s actually a very easy concept that real estate folks and lawyers like to muddy and obscure to a point that rivals the existence of Bigfoot or E.T. (not unlike most other provisions in a lease agreement). For example, you might see a clause in your lease agreement that looks something like this:
“Within ten (10) days after the end of each calendar month, Tenant shall pay to Landlord the amount, if any, by which the product of the Percentage Rate multiplied by the Gross Sales during the immediately-preceding calendar month, exceeds the installment of Minimum Annual Rent which Tenant shall have paid for such month.”
This probably sounds like Charlie Brown’s teacher. You know, wah wah wah, wah wah, wah wah wah.
Now, after you read it slowly 47 times it will probably start to make sense (if not, don’t get down on yourself).
So here’s the deal. Let’s assume your Monthly Base Rent is $2,500.00 per month. Gross Sales encompass pretty much every sale of products and/or services you make via your business. The Natural Breakpoint (the point at which you actually pay Percentage Rent) is the point when your Gross Sales figure is multiplied by the Percentage Rate (i.e. 6%) and the resulting number is more than the $2,500 per month you are paying in Monthly Base Rent. Here’s a basic equation to figure out what your Natural Break Point is:
2500 (Monthly Base Rent)/.06 (Percentage Rent) = 41,666.67.
I know, I know, stupid math! BUT all this means is that you would pay, as Percentage Rent, to the Landlord 6% of any amount over $41,666.67 in Gross Sales for the month. So, if you did $50,000.00 in Gross Sales in one month, you would pay an additional $500.00 in Percentage Rent (8333.33 x .06 = 499.9998), resulting in a total payment of $3,000.00 for that month (at least for Base Rent and Percentage Rent as there may be other additional rental amounts you are obligated to pay). If your Gross Sales do not exceed the $41k and change, you are not responsible for paying any Percentage Rent.
Keep in mind that this is a very general breakdown and every lease is different. You should always have an attorney review any lease you are thinking about entering into to ensure you understand all of the nuances and obscure provisions, including any Percentage Rent provisions.