To calculate percentage rent, subtract the breakpoint from your gross sales for the period, then multiply the result by the percentage rate in your lease: Percentage Rent = (Gross Sales − Breakpoint) × Percentage Rate. That number is what you owe on top of base rent. Before you can run it, you need four things from the lease itself: the base rent, the percentage rate, how the lease defines gross sales, and where the breakpoint sits.
Pull These Four Numbers From Your Lease First
Every percentage rent calculation starts in the “Rent,” “Percentage Rent,” or “Gross Sales” clauses. Look for these figures in the Summary of Lease Terms, the Rent Rider, or the main Rent article:
- Base rent. The fixed monthly or annual minimum you owe regardless of sales.
- Percentage rate. The multiplier applied to sales above the breakpoint. Rates typically fall between 5% and 10%, with 6% the most common benchmark for general retail. Restaurants and high-margin businesses like jewelry stores tend to sit at the higher end (6% to 10%); high-volume, low-margin operations like supermarkets and discount stores negotiate lower rates.
- Gross sales definition. The lease’s own description of which revenue counts and which is carved out. This one clause changes the answer more than any other.
- Breakpoint. The sales threshold you must cross before any overage is owed, and whether it applies monthly or annually.
Get these right up front. A misread rate or a missed exclusion compounds every reporting period.
What Counts as Gross Sales
Not every dollar that crosses the register counts. Most leases carve out categories that either don’t reflect the store’s performance or would double-count. Standard exclusions include:
- Sales tax collected from customers and remitted to the government.
- Customer refunds and the value of merchandise returned for exchange.
- Sales to the tenant’s employees at a reduced price.
- Inter-store transfers between locations under common ownership, since no sale occurred.
- Vending machine and lottery ticket revenue, where the tenant earns only a small commission.
- Gift cards at the time of purchase. Under most lease formulations, a gift card sale is excluded until the card is redeemed for merchandise. A gift card purchased elsewhere and redeemed at your store, however, typically counts as a sale at your location.
Reconcile your point-of-sale reports and sales tax filings against the lease’s definition before you calculate. Anything you fail to exclude, you pay percentage rent on.
Finding Your Breakpoint
Your lease uses one of two breakpoint types.
Natural Breakpoint
A natural breakpoint is derived, not stated. Divide annual base rent by the percentage rate:
Natural Breakpoint = Annual Base Rent ÷ Percentage Rate
If your base rent is $60,000 per year and the rate is 6%, the natural breakpoint is $1,000,000. Below that, you owe only base rent. The number is called “natural” because at that sales level, the percentage rent (6% × $1,000,000 = $60,000) exactly equals the base rent.
Artificial Breakpoint
An artificial breakpoint is a flat dollar amount negotiated into the contract. It doesn’t follow the base-rent-to-rate math and can be set higher or lower than the natural breakpoint. A higher artificial breakpoint favors the tenant; a lower one favors the landlord by triggering overage sooner. It changes only if both parties amend the lease in writing.
Check whether your breakpoint applies monthly or annually. Calculating against the wrong period can trigger payments the lease doesn’t actually require.
Worked Example
Once you have gross sales (after exclusions) and the breakpoint, the math is short.
- Annual base rent: $120,000
- Percentage rate: 6%
- Natural breakpoint: $120,000 ÷ 0.06 = $2,000,000
- Annual gross sales after exclusions: $2,800,000
- Excess sales above breakpoint: $2,800,000 − $2,000,000 = $800,000
- Percentage rent owed: $800,000 × 0.06 = $48,000
Total annual rent: $120,000 base plus $48,000 overage, or $168,000. If gross sales had stayed at or below $2,000,000, only the base rent would be due.
Run the calculation for each reporting period the lease specifies. Some leases require monthly calculations with an annual reconciliation; others use one annual calculation. On a monthly-reporting lease, you may be paying estimated percentage rent throughout the year that gets trued up once final annual sales are in. Overpayment at reconciliation is typically credited against future rent.
Adjusting for Online Sales
E-commerce has complicated the gross sales input. Whether an online order counts depends on the specific language in your lease, and there is no universal rule. Landlords push to include any online sale connected to the physical store; tenants push to exclude sales completed entirely off-premises. Three factors usually drive the answer:
- Where payment occurred. If the customer paid online rather than at the store’s register, the sale is more likely excludable.
- Where the order was fulfilled. If the item shipped from a centralized warehouse rather than the store’s own inventory, it leans toward exclusion.
- Where the customer was when ordering. A transaction completed from the customer’s home is more likely excludable than one placed at an in-store terminal or with help from a store employee.
Buy-online-pick-up-in-store orders fall in a gray area. If the sale ran through the store’s point-of-sale system or was fulfilled from the store’s own inventory, many leases treat it as an in-store sale. Older leases drafted before omnichannel retail became common may not address online sales at all. If yours is silent, negotiate an amendment before an audit forces the question.
What Your Reported Number Exposes You To
The percentage rent figure you submit is not just a payment; it’s a statement the landlord can audit. Most leases require a certified sales statement, signed by a company officer, on a monthly or quarterly basis, with an annual reconciliation due within 30 to 60 days after the lease year ends. Landlords have the contractual right to audit, and leases commonly require you to retain sales records for three to five years.
If an audit finds underreporting, you owe the shortfall immediately plus interest. Interest rates on underpayments vary but often run well above market — some leases specify a flat rate such as 18% per year; others use a benchmark like prime plus a margin. Many leases include an audit-cost threshold, commonly around 2% to 3% of reported gross sales, above which the tenant reimburses the landlord for the full cost of the audit, including accounting and attorney fees. Reporting accurately is dramatically cheaper than paying for the landlord’s auditor.
Lease Terms That Sit Alongside the Calculation
A few other clauses don’t enter the formula but can change what you actually pay or owe, and readers often assume they do.
Radius restrictions prohibit you from opening another store within a set distance of the leased location, often three to fifteen miles. A common remedy for violation is to add the offending location’s gross sales to your store’s gross sales for percentage rent purposes, so you effectively pay overage on both. Some leases also give the landlord the right to terminate.
Recapture clauses let the landlord terminate the lease if sales stay below a specified level for a certain period. The trigger sits alongside the breakpoint as a number worth tracking.
Co-tenancy provisions tie your rent obligation to the presence of anchor tenants or a minimum occupancy level. If a major anchor closes or occupancy drops below the stated threshold, the clause may reduce your rent to base only, waive percentage rent, or let you terminate.
ASC 842 treatment. If your business reports under U.S. GAAP, percentage rent is a variable lease payment tied to sales. It’s excluded from the initial measurement of your lease liability and right-of-use asset, and recognized as a variable lease expense in the period the triggering sales occur.