What is Natural Breakpoint?
The sales level at which percentage rent begins, calculated by dividing annual base rent by the percentage rent rate.
Definition
The natural breakpoint is the sales volume threshold above which a tenant begins paying percentage rent to the landlord. It's calculated by dividing the total annual base rent by the negotiated percentage rent rate. For example, if annual base rent is $120,000 and the percentage rent rate is 6%, the natural breakpoint is $2,000,000. The tenant pays no additional percentage rent until their gross sales exceed $2M. The natural breakpoint effectively determines how successful a location must be before the landlord participates in the upside through additional rent. In deal analysis, comparing the natural breakpoint to projected sales is critical — if projected sales are well above the breakpoint, the total occupancy cost will be significantly higher than just base rent + NNN. Some leases specify an artificial breakpoint that differs from the natural calculation, often negotiated to favor one party.
Example
A lease with $100,000 base rent and 5% percentage rent has a natural breakpoint of $2,000,000. If the tenant projects $2,400,000 in sales, they should budget an additional $20,000 in percentage rent.
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