A retail tenant has a lease with 3% annual rent increases and a percentage rent clause of 5% of gross sales above $800,000. If the base rent is $40,000 in year one and gross sales are $950,000, what is the total rent payable in year one?

Q: What is the correct answer to: A retail tenant has a lease with 3% annual rent increases and a percentage rent clause of 5% of gross sales above $800,000. If the base rent is $40,000 in year one and gross sales are $950,000, what is the total rent payable in year one?

The correct answer is $87,500. Option C ($87,500) is incorrect based on the calculation. The total rent should be base rent ($40,000) plus percentage rent. Percentage rent = 5% × ($950,000 - $800,000) = 5% × $150,000 = $7,500. Therefore, total rent = $40,000 + $7,500 = $47,500. However, since C is stated as correct, there may be an error in the provided explanation or the question setup that results in the higher amount.

Q: What background knowledge is needed for this Commercial Real Estate question?

Commercial leases often include percentage rent clauses, particularly in retail settings. These clauses require tenants to pay additional rent based on a percentage of gross sales exceeding a specified threshold (breakpoint). The structure typically includes: base rent (fixed annual amount), percentage rate (usually 1-10%), and sales threshold above which percentage rent applies. Base rent provides landlords guaranteed income while percentage rent allows participation in tenant success. Annual rent increases are separate adjustments, typically applied to base rent. Under provincial commercial tenancy legislation, lease terms must be clearly defined and calculations transparent. This structure is governed by general contract law and specific provincial commercial tenancy acts.

Q: What is a good way to remember the answer to this Commercial Real Estate question?

Think of percentage rent like a restaurant tip - you pay the base bill (base rent) PLUS a percentage of the 'extra' (sales above threshold). Just like tipping on the amount above standard service, percentage rent only applies to sales above the breakpoint. When you see percentage rent questions, immediately identify: 1) BASE rent (fixed), 2) PERCENT rate and threshold, 3) Calculate excess sales, 4) Apply percentage to excess, 5) ADD base + percentage for TOTAL.

Q: What exam tip applies to this Commercial Real Estate question?

Always break percentage rent into steps: identify base rent, calculate excess sales above threshold, apply percentage rate to excess only, then add base rent plus percentage rent for total.

Q: How does this Commercial Real Estate concept apply in real world practice?

A shopping center leases space to a clothing retailer with $50,000 base rent and 4% percentage rent on sales above $1 million. In a strong year with $1.3 million in sales, the tenant pays $50,000 base rent plus $12,000 percentage rent (4% × $300,000 excess) for $62,000 total. This structure helps the landlord benefit from the tenant's success while providing rent relief during slower periods when sales don't exceed the threshold.

Question

Commercial Real EstateLease CalculationsONMEDIUM

A retail tenant has a lease with 3% annual rent increases and a percentage rent clause of 5% of gross sales above $800,000. If the base rent is $40,000 in year one and gross sales are $950,000, what is the total rent payable in year one?

Answer Options

A

$40,000

B

$47,500

C

$87,500

D

$47,250