A retail tenant has a lease with 3% annual rent increases and pays $25 per square foot base rent plus 6% of gross sales over $500,000. If the tenant occupies 2,000 square feet and generates $800,000 in sales, what is their total annual rent?

Q: What is the correct answer to: A retail tenant has a lease with 3% annual rent increases and pays $25 per square foot base rent plus 6% of gross sales over $500,000. If the tenant occupies 2,000 square feet and generates $800,000 in sales, what is their total annual rent?

The correct answer is $68,000. Option B correctly calculates both components of the rent structure. Base rent equals 2,000 square feet multiplied by $25 per square foot, totaling $50,000. Percentage rent applies to gross sales exceeding $500,000, so ($800,000 - $500,000) × 6% equals $18,000. The total annual rent is the sum of both components: $50,000 + $18,000 = $68,000. This reflects the standard commercial lease structure where tenants pay both guaranteed base rent and performance-based percentage rent.

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

Commercial lease structures often combine base rent with percentage rent to balance landlord security and tenant performance incentives. Base rent provides guaranteed income calculated on a per-square-foot basis, while percentage rent allows landlords to share in tenant success through a percentage of gross sales above a specified threshold. This hybrid approach is particularly common in retail properties where tenant sales directly correlate with location value. Canadian commercial leasing follows provincial regulations, with lease terms governed by provincial tenancy acts and commercial lease standards. Understanding these calculations is essential for property valuation, lease negotiations, and investment analysis in commercial real estate practice.

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

Think of commercial rent like a salesperson's compensation: BASE salary (guaranteed square footage rent) plus BONUS commission (percentage of sales over threshold). Just like a salesperson gets their base pay regardless of performance, tenants pay base rent regardless of sales, then add bonus percentage rent when sales exceed the breakpoint. When you see percentage rent questions, immediately identify the BASE (square feet × rate) and BONUS (excess sales × percentage). Add them together for total compensation, just like calculating total pay for a commissioned salesperson.

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

Always break percentage rent into two steps: calculate base rent first, then percentage rent on only the sales amount exceeding the threshold. Add both components for total annual rent.

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

A shopping center landlord leases space to a clothing retailer. The lease includes $30/sq ft base rent on 1,500 sq ft plus 5% of sales over $600,000. When the retailer generates $900,000 in annual sales, they pay $45,000 base rent plus $15,000 percentage rent (5% of the $300,000 excess), totaling $60,000. This structure ensures the landlord receives minimum guaranteed income while participating in the tenant's success, making it attractive for both parties in prime retail locations.

Question

Commercial Real EstateLease CalculationsONMEDIUM

A retail tenant has a lease with 3% annual rent increases and pays $25 per square foot base rent plus 6% of gross sales over $500,000. If the tenant occupies 2,000 square feet and generates $800,000 in sales, what is their total annual rent?

Answer Options

A

$50,000

B

$68,000

C

$98,000

D

$78,000