How do I even begin to understand percentage rent? What is it, and why is it part of my rent expenses?

By Ingrid Kushinsky

Tenant Leasing is unique because of this one concept.

Percentage rent, sometimes called “overage rent”, is, in its most basic form, rent paid to the landlord by calculating a percentage of your gross sales. The theory behind percentage rent is that tenants and landlords share an obligation to drive foot traffic to their shopping centers, and so rent should include a portion of excess sales.

In pre-pandemic times, percentage rent was pretty simple. Now, in a post-pandemic world, dealmakers on both sides are looking to more creative and equitable solutions to keep the lights on.

The most important thing to remember: READ. YOUR. LEASE.

Percentage rent provisions, the more complex they are, can often be written such that the intent is confusing. It shouldn’t turn into a word salad, but it happens, so be careful when analyzing your lease terms.

Some key terms you’ll encounter:

  • Percentage Factor: The % of gross sales to be paid.
  • Breakpoint: The minimum gross sales figure on which overage rent is calculated. If your gross sales are less than the stated Breakpoint, your Percentage Rent obligation would be $0.
  • Natural Breakpoint vs. Unnatural Breakpoint: A Natural Breakpoint is determined by taking the annual base rent and dividing it by the Percentage Factor. An Unnatural Breakpoint is a negotiated figure that may or may not have math behind it. It can be an arbitrary figure if the Natural calculation is unrealistic.
  • Lease Year / Calendar Year / Fiscal Year: Pay close attention to how percentage rent is paid year-to-year. It may not always synch up with your rent steps.
  • Gross Sales vs. Net Sales: Your lease will have a long laundry list of what can be included/excluded in Gross Sales. Some leases use the terms Gross and Net interchangeably, so be aware.
  • Internet Sales: A hot topic these days – when should they be included, when should they not? Often carve outs and restrictions will accompany this concept.
  • Incremental Payments: How often is percentage rent paid? Percent in Lieu? Monthly? Quarterly? Semi-Annually? Annually? Cumulative monthly?
  • Percent in Lieu: A percentage of gross sales, often paid monthly, without a breakpoint.
  • Cumulative Monthly: Percentage rent will not be paid until the month in which your gross sales have hit an annual breakpoint, and then will be paid monthly thereafter for the remainder of the year.

Hungry for more? Do you have questions stemming from existing leases? Start the New Year off right with Classroom Live! NRTA kicks the series off with Percentage Rent Peer-To-Peer!

NRTA’s Industry Experts, including Ingrid Kushinsky, will tackle this must-know lease administration topic during NRTA’s hands-on, interactive 4-course training series scheduled to start Thursday, January 13, 2022.

Reserve your spot today!