Glossary / Lease terms and deal stages
Also known as: Overage rent, percentage lease
Percentage rent is rent based on a share of the tenant's gross sales, usually paid on top of base rent once sales pass a set breakpoint. It is common in retail leases, and because it is unknown at signing, whether it counts toward a commission depends on the agreement.
The SIOR lease glossary defines percentage rent as a "lease provision requiring the tenant to pay a percentage of the tenant's gross sales as a component of rent." Wikipedia explains that tenants typically pay a fixed base rent plus a percentage of gross sales above a threshold, called the breakpoint.
A natural breakpoint is the base rent divided by the percentage rate. An artificial breakpoint is a negotiated figure set higher (better for the tenant) or lower (better for the landlord). According to Wikipedia, percentage leases are common in shopping centers and strip malls, where retail sales vary by season.
Percentage rent cannot be known when the lease is signed, so it does not fit neatly into a commission calculated on rent over the term. A Grubb & Ellis commission agreement, for example, calculated its fee on aggregate base rent for the initial term. Whether you share in percentage rent, and when you would be paid on it, depends on your commission agreement.
For retail brokers this matters because a lower Base rent paired with percentage rent can shrink a commission that is calculated on base rent alone.
On retail deals, check whether your commission agreement counts only base rent or also any percentage rent the tenant pays.
For example, a hypothetical retail tenant pays $60,000 a year in base rent plus 6% of sales. The natural breakpoint is $1,000,000 ($60,000 divided by 0.06). If sales reach $1,200,000, the tenant owes 6% of the $200,000 above the breakpoint, or $12,000 in percentage rent.
