Percentage Rent True-Up Math

The annual true-up reconciles what a retail tenant actually owes in percentage rent against what was billed during the year.

The basic true-up

1. Total reported sales for the lease year
2. Subtract the breakpoint
3. Multiply by the percentage rate
4. Subtract percentage rent already billed

sales:              $2,450,000
less breakpoint:    $2,000,000
excess:             $450,000
x 6%:               $27,000
less billed:        $0
true-up due:        $27,000

Where percentage rent is billed only at year end, that is the whole calculation.

When percentage rent is billed monthly

Leases that bill monthly usually pro-rate the breakpoint:

monthly breakpoint = annual breakpoint / 12 = $166,667

Each month, sales above $166,667 generate percentage rent at the stated rate. At year end the annual calculation runs, and monthly billings are netted out.

Where seasonal sales cause trouble

Consider a tenant with heavily seasonal sales:

Period	Sales	Monthly breakpoint	Percentage rent billed
Jan-Oct	$1,300,000	$1,666,670	$0
November	$280,000	$166,667	$6,800
December	$370,000	$166,667	$12,200
Total	$1,950,000	$2,000,000	$19,000

Annual sales of $1,950,000 fall below the $2,000,000 annual breakpoint, so no percentage rent is owed for the year. But $19,000 was billed in November and December.

The true-up produces a credit of $19,000.

Whether the tenant actually gets it back depends on the lease. Well-drafted leases state that monthly billings are provisional and trued up annually. Leases that are silent create a genuine dispute, and the tenant argument — that the annual breakpoint is the operative one — is usually the stronger reading.

Partial years

A lease commencing or terminating mid-year needs a pro-rated breakpoint:

pro-rated breakpoint = annual breakpoint x (months in period / 12)

A lease commencing April 1 with a $2,000,000 annual breakpoint has a nine-month breakpoint of $1,500,000.

This matters more than it looks for seasonal retail. A tenant whose lease runs April through December captures the holiday season but not the slow first quarter, so a straight-line pro-ration understates the breakpoint relative to the sales pattern. Some leases address this with a seasonally weighted pro-ration; most do not.

Lease year versus calendar year

Percentage rent runs on the lease year, which frequently is not the calendar year. A lease commencing October 1 has a lease year of October through September.

Getting this wrong shifts the entire sales period and produces a number that is simply for the wrong window. It is a surprisingly common error when reporting is collected on a calendar basis for accounting convenience but the lease specifies otherwise.

Recoverable expenses and percentage rent

Some leases allow percentage rent to be offset against CAM or tax recoveries — an “offset” or “recapture” provision. Where present, the percentage rent calculation has to run before the offset can be applied, which means the reconciliation sequence matters.

These provisions are less common than they once were, but they appear in older anchor leases and are easy to overlook when the abstract does not record them.

Compute a true-up with the percentage rent calculator.