What is Percentage Rent?
Percentage rent is a common term in commercial real estate, specifically referring to an additional rental fee that tenants pay based on a percentage of their gross sales exceeding a specified threshold. This form of rent is typically found in retail leases like those for malls, shopping centers, and other multi-tenant retail properties. The purpose is to align the interests of property owners and tenants, fostering a partnership where both parties benefit from increased sales.
The main component of a percentage rent clause involves:
- Base Rent: A fixed amount the tenant pays regularly (monthly, quarterly, or annually).
- Breakpoint: The sales amount above which the percentage rent comes into play.
- Percentage Rate: The agreed-upon percentage of sales exceeding the breakpoint.
Examples
To illustrate, consider the following standard percentage rates for different types of retail stores often seen in neighborhood shopping centers (adapted from the Urban Land Institute’s “Dollars & Cents of Shopping Centers”):
| Business Type | Percentage Rate |
|---|---|
| Card & Gift Shop | 5.0% to 8.0% |
| Drugstore | 2.5% to 4.0% |
| Liquor and Wine Shop | 1.5% to 5.0% |
| Pet Shop | 5.0% to 8.0% |
| Restaurant | 4.0% to 7.0% |
| Supermarket | 1.0% to 2.0% |
For example, if a restaurant has a base rent of $5,000 per month, a breakpoint of $100,000 in monthly sales, and an additional percentage rent rate of 5%, then any monthly sales exceeding $100,000 will incur an additional rent charge at 5% of the excess amount.
Frequently Asked Questions (FAQs)
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What is a “natural” breakpoint?
- A “natural” breakpoint is calculated by dividing the base rent by the agreed-upon percentage rate. For instance, if the base rent is $60,000 annually and the percentage rate is 5%, the natural breakpoint would be $1,200,000 in annual sales.
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What happens if sales are below the breakpoint?
- If a tenant’s sales do not surpass the breakpoint, they only pay the base rent without additional percentage rent.
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Can percentage rent agreements vary by retail sectors?
- Yes, the percentage rates and terms can vary significantly by retail type, location, and the landlord’s or tenant’s negotiations.
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Why do landlords use percentage rent?
- Landlords use percentage rent to incentivize tenant success, aligning their income with the tenant’s performance and potentially making overall rent income more dynamic and lucrative.
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Can both parties renegotiate percentage rent terms?
- Terms are typically negotiated and signed into lease agreements, but both landlords and tenants can mutually agree to renegotiate terms as contracts expire or context changes.
Related Terms
Percentage Lease: A lease where rent includes a base fixed rent plus an additional percentage of the tenant’s gross sales.
Gross Sales: The total sales revenue generated by a tenant, usually before taxes and discounts.
Base Rent (Minimum Rent): The fixed lowest rental amount a tenant must pay according to the lease agreement, exclusive of any percentage rent.
Breakpoint: The sales threshold a tenant must exceed before additional percentage rent is applied.
Online Resources
- Urban Land Institute (ULI) Research Reports: uli.org/research
- National Retail Federation (NRF): nrf.com/resources/resources-library
- International Council of Shopping Centers (ICSC): icsc.com/knowledge/industry-news-analysis
References
- Urban Land Institute, “Dollars & Cents of Shopping Centers”, Washington, D.C.
- National Association of Realtors (NAR), nar.realtor
- International Council of Shopping Centers (ICSC), icsc.com
Suggested Books for Further Studies
- “Retail Leasing: Strategies and Techniques” by Peter Conti and Peter Harris
- “Shopping Center Development Handbook” by John C. Garn
- “Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer
- “Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
