Percentage Rent

Percentage rent is a lease provision common in retail properties where the tenant pays additional rent based on a percentage of their gross sales above a specified breakpoint, on top of base rent. For example, a retail tenant might pay $20/SF base rent plus 5% of gross sales exceeding $500,000 per year (the 'natural breakpoint'). If the tenant generates $800,000 in sales, the percentage rent would be 5% of $300,000 = $15,000 in additional annual rent. Percentage rent clauses align landlord and tenant interests - the landlord benefits when the tenant's business thrives. They are most common in shopping centers, malls, and high-traffic retail locations. For NNN investors evaluating retail properties, percentage rent provides upside potential but should not be heavily relied upon in underwriting since it depends on tenant sales performance. Some investors treat percentage rent as gravy above the base NOI.