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You have a sales total. The breakpoint is a number in the lease. You spread the lease flat on the table in front of you, finger hovering over the line that references percentage rent, as you cross-reference last quarter’s finalized sales report sitting next to it. You don’t want to miscalculate what you owe, or leave money on the table if you qualify for any pre-negotiated adjustments tied to temporary occupancy limits or shared space closures earlier in the period.
Calculate your adjusted gross sales first
The sales number you pull from your point-of-sale system isn’t always the number the lease uses for percentage rent calculations. Most leases specify adjusted gross sales as the relevant metric, and you need to calculate that first before you compare anything to your breakpoint. Follow these four steps to get an accurate adjusted gross sales number for the reporting period:
- Subtract any state and local sales tax you collected and remitted directly to government agencies, as these funds never hit your operating revenue and are almost always excluded from percentage rent calculations per standard lease language. You can pull your remittance confirmation from your state’s department of revenue portal to confirm the exact amount you sent for the period, so you don’t have to estimate the deduction.
- Deduct the value of any returned or exchanged merchandise from the period, as long as you have receipts or point-of-sale records to back up the refund amounts you’re claiming. Make sure you only deduct returns processed during the reporting period, not returns from prior periods that you process after the reporting window closes, as the lease almost always ties returns to the period they are processed, not the period the original purchase was made.
- Remove any income you earned from non-retail activities not outlined in your permitted use clause, like subleasing a small portion of your space to a pop-up vendor for three weeks, if your lease explicitly excludes that passive income from sales calculations. If you’re unsure if a specific income stream counts, check the “sales definition” section of your lease, which lays out exactly what counts and what does not count toward your reported sales total.
- Add back any discounted or complimentary goods you provided to staff or promotional partners, if your lease specifies that in-kind offerings count toward your reported sales total at their full retail value. Some leases allow you to exclude these items, but many require you to count them at full price, so double check the language to avoid underreporting.
Define natural vs stated breakpoints for this lease
Most commercial leases with percentage rent clauses use one of two breakpoint types, and you need to confirm which one applies to your agreement before you run any comparison calculations. A stated breakpoint is a fixed, hard number written directly into the lease, agreed to by both you and the property owner when you signed the term sheet. A natural breakpoint is a calculated number, derived by dividing your annual base rent by your agreed-upon percentage rent rate, and it represents the point where your base rent equals your set percentage of total sales.
Illustrative example: If your annual base rent is $120,000 and your percentage rent rate is 6%, your natural breakpoint is $2,000,000 in annual sales, even if your lease states a breakpoint of $1,800,000 to incentivize higher sales contributions earlier in your term. Some leases specify that the lower of the two breakpoints applies, while others explicitly state that only the stated breakpoint is used for all calculations. If your lease doesn’t specify which takes priority, note that for your next check-in with your property manager to clarify before you submit your sales report.
Compare your sales number to the relevant breakpoint
Now that you have your adjusted gross sales number and you know which breakpoint applies, you can run the direct comparison to see if you owe any percentage rent for the period. If your adjusted gross sales for the reporting period (adjusted to an annual number if you use an annual breakpoint) fall below the breakpoint, you do not owe any percentage rent for that period, and only pay your standard base rent as outlined in your lease. If your adjusted sales fall above the breakpoint, you owe the agreed-upon percentage rate only on the amount of sales that exceed the breakpoint, not your entire sales total.
For example, if your quarterly adjusted gross sales are $492,000, and your quarterly breakpoint (annual stated breakpoint of $1,800,000 divided by four) is $450,000, you only pay 6% on the $42,000 of sales over the breakpoint, which equals $2,520 in percentage rent for the quarter. Keep in mind that some leases calculate percentage rent on an annual basis only, even if you submit sales reports quarterly, so if you have a strong first quarter followed by two slow quarters that bring your annual total below the breakpoint, you may be eligible for a refund of any percentage rent you paid earlier in the year. Check your lease’s calculation frequency clause to confirm how often the final amount is reconciled.
Account for pre-negotiated carveouts that apply right now
Before you finalize your calculation, check for any pre-negotiated carveouts that adjust your breakpoint or sales calculations for the current reporting period. Common carveouts include temporary breakpoint increases for the first 12 months of your lease to give you time to build your customer base, breakpoint adjustments for periods where the property experienced reduced foot traffic due to construction or common area closures, or partial exclusions for sales from new product lines you launched after you signed the lease.
You can find these carveouts in addenda attached to your main lease document, or in written email confirmations from your property manager that you saved when you agreed to the adjustment. If you have your lease stored with Lease Jacket, you can pull up all attached addenda and supplementary documents in seconds to confirm which carveouts apply to the current reporting period, without digging through physical file folders or scattered email threads. Make sure you have written proof of any carveouts you apply to your calculation, so you can submit that proof along with your sales report to avoid discrepancies later.
Document every adjustment for your property manager submission
Once you have your final percentage rent calculation, compile all supporting documentation to send along with your sales report to your property management team. This documentation includes your point-of-sale sales summary for the period, your sales tax remittance receipts, records of returns and exchanges processed during the period, written proof of any carveouts you applied to your calculation, and a one-line breakdown of how you arrived at your adjusted gross sales number and final percentage rent owed.
Clear documentation reduces the chance of delays or back-and-forth with your property manager, who reviews dozens of tenant sales submissions each month and may not have your specific carveouts memorized. You should keep a copy of all submitted documents stored with your lease file, so you can reference them later if there is a question about your submission, or if you need to compare this period’s numbers to the same period last year for your annual budget planning.
Pull up this page when you run end-of-month sales reports next
When you open this page next month to run your end-of-month sales calculations, you’ll have a fresh set of sales numbers to work through, and you can follow the same steps to confirm if you owe percentage rent that month, or if you’re still tracking below your annual breakpoint for the year. You can jot down notes directly on this page about any adjustments that apply for future periods, like a scheduled breakpoint increase that kicks in next quarter, or a new carveout you agreed to for the holiday season, so you don’t have to flip through the full lease document every time you run your calculations.
You can also use this page to track your progress toward your annual breakpoint over the course of the year, so you can set aside cash for any potential percentage rent payments ahead of time, instead of being caught off guard by a large reconciliation bill at the end of the annual reporting period. If you renegotiate your lease terms later this year, you can update the breakpoint and percentage rate numbers here to reflect the new agreement, so your calculations are always aligned with your current lease terms. (Word count: 1327)