A lease charges additional overage rent of 5% of annual sales exceeding $800,000, with no other overage provisions. Sales are $1,100,000. What overage rent is due, excluding base rent?
Correct Answer
A) $15,000
(1100000−800000)×0.05 = 15000. Common errors: applying 5% to all sales instead of only the excess gives $55,000; applying 5% to the breakpoint instead of the excess gives $40,000; reporting the excess sales without applying the 5% rate gives $300,000.
Why This Is the Correct Answer
Option A is correct because overage rent is ($1,100,000 − $800,000) × 0.05 = $300,000 × 0.05 = $15,000. Overage rent is the percentage rent paid above base rent, and this clause applies the rate only to sales exceeding the breakpoint.
Why the Other Options Are Wrong
Option B: $40,000
Option B, $40,000, applies 5% to the breakpoint ($800,000 × 0.05) instead of to the excess sales. The clause charges 5% of sales above $800,000, which is $300,000 × 0.05 = $15,000.
Option C: $55,000
Option C, $55,000, applies 5% to all sales ($1,100,000 × 0.05). Only sales over the $800,000 breakpoint are subject to the percentage, giving $15,000.
Option D: $300,000
Option D, $300,000, is the excess sales amount ($1,100,000 − $800,000) without applying the 5% rate. Multiplying by 0.05 gives the overage rent of $15,000.
Only the excess pays extra
Subtract the breakpoint from sales first, then apply the percentage to what is left.
How to use: Use subtract-then-multiply for any percentage rent clause with a sales breakpoint.
Exam Tip
Read whether the percentage applies to all sales or only to sales above the breakpoint before calculating.
Common Mistakes to Avoid
- -Applying the percentage to total sales
- -Applying the percentage to the breakpoint
- -Reporting the excess sales as the rent
Concept Deep Dive
Analysis
This question tests calculating overage (percentage) rent under a breakpoint clause. The percentage applies only to sales above the $800,000 breakpoint. The excess of $300,000 times 5% gives the overage rent due.
Background Knowledge
Percentage leases, common in retail, combine a base or minimum rent with overage rent calculated as a percentage of sales above a breakpoint. Overage rent is paid over and above the guaranteed minimum rent. Appraisers analyze the sales history and the stability of overage rent when projecting income.
Real-World Application
An appraiser reviewing a shopping center rent roll finds a tenant paying 5% of sales above $800,000 in addition to base rent. With reported sales of $1,100,000, the appraiser includes $15,000 of overage rent after evaluating whether that level is sustainable.
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