The rent is one MAX formula; what the lease is worth depends on treating the top-up as the geared, fragile income it is.
Turnover rent is calculated as the higher of the base rent and an agreed percentage of the tenant's sales, so the landlord receives the base rent plus a top-up equal to the percentage of sales above the natural breakpoint (base rent divided by the percentage). An illustrative shop on a 150,000 base rent and 8 per cent of sales breaks even at 1,875,000 of sales; at 2,300,000 it pays a top-up of 34,000. Valued properly, with the top-up averaged and capitalised at a higher yield than the base, the lease is worth 2,591,692, not the 2,830,769 you get by capitalising the peak year at the base yield.
Worked in full in Retail Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Turnover leases are common in shopping centres and outlets because retail is the only property type whose tenants report what they sell. That gives the landlord a share of the upside, and it gives the valuer a problem: part of the rent is secure, part of it moves with sales, and the two parts do not deserve the same yield. The calculation of the rent is simple. The calculation of what it is worth is where buyers overpay.
| Input | Value |
|---|---|
| Base rent a year | 150,000 |
| Base rent per m² | 250 |
| Turnover percentage | 8% |
| Reported sales, year 1 | 2,150,000 |
| Reported sales, year 2 | 2,300,000 |
| Reported sales, year 3 | 2,240,000 |
| Service charge and rates a year | 30,000 and 45,000 |
| Yield on the base rent (illustrative) | 6.5% |
| Yield on the turnover top-up (illustrative) | 10.0% |
Natural breakpoint = base rent ÷ turnover percentage
Top-up = MAX(0, percentage × sales − base rent)
Total rent = base rent + top-up = MAX(base rent, percentage × sales)
In Excel, with sales in B2: =MAX(0,0.08*B2-150000) for the top-up. Most UK leases write it as "the greater of" the base and the percentage, which is the same thing.
The breakpoint is 150,000 ÷ 8% = 1,875,000. Below that level of sales the tenant pays the base rent and nothing else; above it, every additional 100 of sales adds 8 to the rent.
| Year | Sales | 8% of sales | Top-up | Total rent | Per m² |
|---|---|---|---|---|---|
| 1 | 2,150,000 | 172,000 | 22,000 | 172,000 | 287 |
| 2 | 2,300,000 | 184,000 | 34,000 | 184,000 | 307 |
| 3 | 2,240,000 | 179,200 | 29,200 | 179,200 | 299 |
| Average top-up | 28,400 |
In year 2 the top-up is 18.5 per cent of the rent. Add the service charge and rates and the tenant's total occupancy cost is 259,000, 11.3 per cent of sales, which is the number to compare with the ceiling for the trade before assuming the top-up will last. How that ceiling is set is worked in how to calculate a retailer's occupancy cost ratio.
The base rent is a contractual obligation backed by the tenant's covenant. The top-up exists only while sales stay above the breakpoint, and it falls much faster than sales. Value the two separately: the base at the yield for the covenant, the top-up on a sustainable figure, usually the average of the last three years rather than the best one, at a higher yield.
Value = base rent ÷ base yield + average top-up ÷ top-up yield
150,000 ÷ 6.5% = 2,307,692, plus 28,400 ÷ 10.0% = 284,000, gives 2,591,692.
| Method | Value |
|---|---|
| Base at 6.5%, average top-up at 10.0% | 2,591,692 |
| Year-2 total rent at 6.5% | 2,830,769 |
| Overpayment | 239,077 |
Capitalising the peak year's total rent at the base yield overstates the lease by 9.2 per cent. The top-up is 18.5 per cent of the peak rent but only 11.0 per cent of the value, and the blended yield on the average total rent is 6.88 per cent, not 6.5.
| Sales change | Sales | Top-up | Total rent | Top-up change | Rent change |
|---|---|---|---|---|---|
| −20% | 1,840,000 | 0 | 150,000 | −100.0% | −18.5% |
| −10% | 2,070,000 | 15,600 | 165,600 | −54.1% | −10.0% |
| −5% | 2,185,000 | 24,800 | 174,800 | −27.1% | −5.0% |
| Base case | 2,300,000 | 34,000 | 184,000 | 0.0% | 0.0% |
| +5% | 2,415,000 | 43,200 | 193,200 | +27.1% | +5.0% |
| +10% | 2,530,000 | 52,400 | 202,400 | +54.1% | +10.0% |
Above the breakpoint, total rent moves one for one with sales; the top-up moves 5.4 times as fast. A 10 per cent fall in sales takes away more than half the top-up, and a 20 per cent fall takes it all, leaving the landlord with the base. That gearing is the reason for the higher yield on the top-up.
The top-up depends on a sales report the tenant prepares. A lease without an audit right, a clear sales definition and a penalty for late reporting is a lease whose top-up should be valued close to nil.
Treating the top-up as rent. It is a geared share of a retailer's sales, it disappears in the first bad year and it is often the first concession asked for at renewal. Capitalising it with the base, on the best year, is how a 9.2 per cent overpayment happens on a lease whose arithmetic is perfectly correct.
Compute the rent as MAX(base, percentage × sales), then value the base and the averaged top-up at different yields: 2,591,692 here, against 2,830,769 on the shortcut. The unit-by-unit version, with the turnover clause tested before signing, is in the free workbooks for this case, and the US equivalent with a stated breakpoint is in how to calculate the natural breakpoint for percentage rent.
It depends on the trade's margin, so fashion, food and electricals carry different rates. The method is the same at any rate: the top-up is the percentage times sales, less the base rent. On an illustrative 150,000 base rent at 8 per cent, the top-up starts at 1,875,000 of sales and each further 100 of sales adds 8 of rent.
Normally no: the lease defines gross sales net of VAT, returns and staff discounts, and the definition matters more than the rate. If 12 per cent of an illustrative 2,300,000 of sales moves into an excluded online channel, the top-up falls from 34,000 to 11,920, a 64.9 per cent loss with no change in trade.
They separate it. The base rent is capitalised at the yield for the tenant's covenant; the top-up is taken on a sustainable figure, usually a three-year average, at a higher yield. On an illustrative lease that gives 2,591,692, against 2,830,769 when the peak year's total rent is capitalised at the base yield, an overstatement of 9.2 per cent.
This article is one calculation from Retail Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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