One of the things I’m proudest of in how we run our lease audits and due diligence is that we go in with a clean slate. We have no preconceived notions about how the property is currently operated. We analyze the property, identify who we believe the excluded tenants should be (because they are likely not paying full prorata), look for spaces that may have vertical transportation within, outparcels that have no direct ingress/egress to public roads, which portion of the parking lot or roof have different colorations – really anything that may impact the cash flow outside of the lease. We then read the leases and do our own calculations before we ever look at what the owner, manager, or seller has already billed. Form your own view of what the lease requires before anything else can talk you into, or out of it.

Last week, that discipline got tested from a direction I didn’t expect: myself.

We were doing a lease audit for a really strong institutional owner and an its equally strong managing equity partner  – both with excellent lease administration already in place. Going in, our expectations were low. For the most part, that held. After our high level initial review, GMK, Raj, Naryanan, Anand, Murugan, Ajith, Saravanan, Baskar, Deepak and Udaya put together a long series of adjustments totaling several hundred thousand dollars in additional billings that could be picked up and billed. Enough for the clients to be happy, but we always like to generate more!

But one adjustment, a relatively small one on paper, caught my attention for a different reason. It was percentage rent.

Typically, in lease audits, percentage rent adjustments are fewer and further between. Most of what we recover lives in CAM, tax, and insurance — excluded areas, whether it’s “tenant” or “premises” greater than some square footage, minimum occupancy provisions applied (or not applied), cap resets and other complex issues. Percentage rent tends to be a bit more mechanical, and once the breakpoints and reporting are right, there’s not much room left to find money.

So when the team brought me a percentage rent adjustment, I paid attention. The clause read something to the effect of:

“If Tenant’s annual gross sales are less than $2,000,000, percentage rent shall be seven percent (7%) of Tenant’s gross sales. If Tenant’s annual gross sales equal or exceed $2,000,000, percentage rent shall be nine percent (9%) of Tenant’s gross sales.”

For the year in question, the tenant’s sales came in just over $2.1 million over the $2m, but not by a lot.

Here’s how it had been billed:

$2,000,000 × 7% = $140,000
$100,000 (the amount over the breakpoint) × 9% = $9,000
**Total billed: $149,000**

That’s the way almost every stepped percentage rent clause I’ve encountered in nearly 40 years works – steps, bracket by bracket, like a tax table. The first $2,000,000 gets the 7% rate, and only the sales above the breakpoint get bumped to 9%. It’s such a common structure that I didn’t think twice when I saw the number. I shared that I thought we might be losing the adjustment and walked them through my calcs.

**Here’s what the clause actually required:**

$2,100,000 x 9% = **$189,000**

Read it again: “If Tenant’s annual gross sales equal or exceed $2,000,000, percentage rent shall be nine percent (9%) of All of Tenant’s gross sales.” Not “the portion of sales above $2,000,000.” Not “the excess.” All of Tenant’s gross sales. The entire $2.1 million gets billed at 9% the moment sales cross the line – a cliff, not a staircase.

Adjustment needed: just over $40,000.

GMK, Raj, Naryanan, Anand, Murugan, Ajith, Saravanan, Baskar, Deepak and Udaya had actually gotten this right the first time. They read the clause as a band and billed it that way. I’m the one who almost talked us out of it. Sitting around the monitor together (I am over with the team last week and this week), I ran it the other way in the typical way, the way I’ve seen it and done it a thousand times and told the group, essentially, “That’s not how these usually work. Let’s make sure before we send this.” They could have deferred right there. I’ve got the years in the business. I’m not usually the guy in the room getting pushed back on.

But instead, that group sat with me and parsed the clause line by line, word for word, until I was the one who came around. There was no ambiguity in it, once we (really I) actually read it instead of assuming it. “Equal or exceed.” “Shall be nine percent of All of Tenant’s gross sales.” Full stop.

Here’s the part I want to sit with. This team wasn’t right because they second-guessed their own gut. They were right because they read the words on the page and did exactly what those words said, no more and no less, and then they held their ground with me until I saw it too. I was the one substituting “what these clauses usually say” for “what this one actually says” and nearly 40 years of mostly seeing stepped percentage rent structures is exactly what almost cost the clients $40,000. Their read was right from the start. I could not be happier that they pushed back. That to me is a true win and showcases and understanding and passion for this work.

The lesson isn’t “trust your gut” or “defer to experience.” It’s that neither experience, nor what’s typical, nor what you’ve seen a hundred times before gets to set the number. The lease does. Every time. Read it before you decide you already know the answer, even when you’re the one with the most years in the room.