Percentage rent: the breakpoint decides whether you ever see any
Percentage rent looks like participation in a tenant's success. Whether it is depends entirely on one number in the lease, and that number is often set where it will never be crossed.
How the clause works
The tenant pays a base rent, and above a stated level of sales — the breakpoint — pays a percentage of everything beyond it. Below the breakpoint, the clause pays nothing at all.
A natural breakpoint is base rent divided by the percentage, so the clause begins paying exactly where the percentage would have produced the base rent on its own. Anything higher than that is an artificial breakpoint, and it is negotiated.
The part that gets modelled wrong
Percentage rent is not a percentage of sales. It is a percentage of the sales above the breakpoint, and the difference is most of the number.
A tenant doing well against a breakpoint set high contributes nothing. A tenant doing modestly against a natural breakpoint may contribute steadily. The headline rate — 5%, 6%, 8% — tells you almost nothing without the breakpoint beside it.
What to ask for
The breakpoint, in dollars, and whether it is natural or artificial. Then the tenant's reported sales for the last three years, which the lease usually obliges them to provide.
If the sales are nowhere near the breakpoint, the clause is decoration and should be modelled at zero. If they are near it, the clause is real and worth projecting — but it is a projection of somebody else's revenue, which is the least reliable input in the deal.
Every figure above is asserted against the calculation engine in percentage-rent-example.test.ts — the same code a live deal runs.