Breakpoint

A breakpoint is the sales level at which a retail tenant starts paying percentage rent in addition to base rent. Below it, the tenant pays base rent only. Above it, the tenant pays a percentage of the excess.

Natural breakpoint

The natural breakpoint is derived, not negotiated. It is the sales figure at which the percentage rate applied to sales exactly equals annual base rent:

natural breakpoint = annual base rent / percentage rate

With $120,000 of annual base rent and a 6% rate:

$120,000 / 0.06 = $2,000,000

At $2,000,000 in sales, 6% equals exactly the base rent. Above that, the tenant pays 6% of the excess. On $2,450,000 of sales, percentage rent is 6% of $450,000, or $27,000.

Artificial breakpoint

An artificial breakpoint is any figure the parties negotiate instead, and it overrides the natural calculation entirely.

A breakpoint set below natural means percentage rent starts sooner, favoring the landlord. One set above natural delays it, favoring the tenant. Both appear regularly, often as a trade against the base rate or a tenant improvement allowance.

The definition of sales is what gets disputed

The breakpoint is arithmetic; gross sales is not. Most leases exclude returns, sales taxes, employee discounts, gift card issuances, and increasingly online orders fulfilled from elsewhere.

Whether an in-store pickup of an online order counts as a sale at that location is now one of the most contested clauses in retail leasing, and it can move percentage rent materially.

Practical note

Most retail tenants never cross their breakpoint, which is by design — percentage rent is meant to be upside rather than baseline. A tenant paying it every year probably had its base rent set too low.

Because it is upside, it is easy to under-collect: it depends on sales reports arriving and someone remembering to compute the true-up.

Calculate both breakpoint types in the percentage rent calculator.