Defining the natural break point in restaurant leases.
The Natural Break Point is the occurrence when all of the base rent has been met and a negotiated percentage rent above the natural break point is begins.
Here is the assumption,
You have a base rent of $25.00 PSF and 5,000 SF $25.00 PSF x 5,000 SF = $125,000.00 = Total annual base rent Yr. 1 of lease term.
$125,000.00 Divided by 6%*= $2,083,333.30
*Note the 6% is an arbitrary number that is inserted for all other operating expenses, usually it’s 4% on Retail and 6% on Restaurants, but considering inflation these percentage numbers can change, but in any case this is the formula.
Assume there is a negotiated percentage rent above the natural break point, this is the point where a landlord has added in value to a deal, providing for TI allowance or some monetary concessions, usually a lower base then market and or TI allowance above the vanilla shell, for improvements, so they can share in the upside.
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