A retail lease sets base rent plus 5% of sales above $800,000. The tenant sold $1,100,000 last year. The percentage (overage) rent was:
Correct Answer
D) $15,000 above the breakpoint
Why this is correct: Overage rent applies only to sales above the breakpoint: $1,100,000 sales - $800,000 breakpoint = $300,000 overage base × 5% = $15,000. Why the other choices are wrong: $5,500 as a flat participation would be 5% of total sales without a breakpoint. $55,000 on the full sales figure is 5% of total sales, ignoring the breakpoint. $40,000 at the stated percentage is a miscalculation. Exam tip: Overage rent = (Sales - Breakpoint) × Percentage.
Why This Is the Correct Answer
Option D is correct at $15,000. Sales of $1,100,000 less the $800,000 breakpoint leave $300,000 subject to the percentage, and 5 percent of $300,000 is $15,000. Only the excess is multiplied, which is what the phrase above $800,000 establishes. That overage is added to base rent to arrive at total rent for the year, and the appraiser then judges how much of it is sustainable enough to include in stabilized income.
Why the Other Options Are Wrong
Option A: $5,500 as a flat participation
$5,500 corresponds to one half of one percent of total sales and matches neither the stated rate nor the breakpoint structure. Calling it a flat participation also describes a lease type the stem does not create, since this lease clearly ties the payment to sales above a threshold. The figure appears designed to catch a candidate combining a decimal slip with a misread of the structure.
Option B: $55,000 on the full sales figure
$55,000 applies the 5 percent rate to the entire $1,100,000 of sales, ignoring the breakpoint completely. That would convert the lease into a pure percentage lease with no threshold, which is a different arrangement and would leave the base rent double-charged against the same sales. The words above $800,000 exist precisely to exclude the first $800,000 from the calculation.
Option C: $40,000 at the stated percentage
$40,000 does not follow from the stated rate and breakpoint under any correct operation, and it exceeds the maximum the arithmetic can produce from a $300,000 excess at 5 percent. It functions as a plausible middle figure for a candidate estimating rather than computing. Working the two steps explicitly, excess first and then percentage, eliminates it.
Only the excess gets a haircut
The breakpoint is a floor the percentage never reaches below. Subtract first, multiply second. If you multiply before subtracting, you have charged the tenant for sales the lease protects.
How to use: Write two lines: sales minus breakpoint, then result times the rate. Any answer equal to the rate times total sales is the trap for candidates who skipped the subtraction.
Exam Tip
If the stem gives base rent and a percentage but no breakpoint, compute the natural breakpoint by dividing base rent by the rate before doing anything else.
Common Mistakes to Avoid
- -Applying the percentage to total sales instead of the excess
- -Forgetting to compute a natural breakpoint when none is stated
- -Including a single strong year of overage rent as though it were stabilized
- -Overlooking lease definitions that exclude certain sales from the calculation
Concept Deep Dive
Analysis
This tests percentage rent in retail leasing, a structure that lets the landlord share in a tenant's success while keeping a floor under the income. The lease sets a base rent plus a percentage of sales above a stated breakpoint, and overage rent applies only to sales exceeding that threshold. With a breakpoint of $800,000 and sales of $1,100,000, the excess is $300,000, and 5 percent of that excess is $15,000 of overage rent for the year. The breakpoint here is stated explicitly, but many leases use a natural breakpoint instead, computed by dividing the base rent by the percentage rate, so that overage begins exactly where the percentage would first equal the base rent. For valuation the important judgment is reliability: percentage rent fluctuates with the tenant's business, so an appraiser considers several years of sales history before deciding how much of it to include in stabilized income, and typically capitalizes volatile overage differently from contractual base rent.
Background Knowledge
You need the structure of a percentage lease: base rent, breakpoint, and overage rent computed on sales above the breakpoint. You should also know how a natural breakpoint is derived by dividing base rent by the percentage rate, that overage rent is volatile and requires several years of sales history to stabilize, and that gross sales definitions in the lease determine what counts toward the threshold.
Real-World Application
Appraising a neighborhood center with three percentage-rent tenants, you collect five years of certified sales reports, find one tenant consistently exceeds its breakpoint while another has cleared it only once, and include stabilized overage only for the reliable tenant while explaining the treatment of the other in the report.
More Income Approach Questions
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