A retail tenant's lease includes a percentage rent clause of 6% of gross sales above a natural breakpoint. If the base rent is $48,000 annually and the tenant's gross sales are $950,000, what is the total annual rent?

Q: What is the correct answer to: A retail tenant's lease includes a percentage rent clause of 6% of gross sales above a natural breakpoint. If the base rent is $48,000 annually and the tenant's gross sales are $950,000, what is the total annual rent?

The correct answer is $57,000. Option B ($57,000) correctly applies the percentage rent formula. First, calculate the natural breakpoint: $48,000 ÷ 0.06 = $800,000. Since gross sales ($950,000) exceed this breakpoint, percentage rent applies to the excess: ($950,000 - $800,000) × 0.06 = $9,000. The total annual rent is base rent plus percentage rent: $48,000 + $9,000 = $57,000. This follows standard commercial leasing practices where percentage rent supplements, rather than replaces, base rent.

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

Percentage rent clauses are common in retail leases where landlords receive base rent plus a percentage of tenant sales above a specified threshold (breakpoint). The natural breakpoint equals base rent divided by the percentage rate. This creates a point where the tenant would pay the same amount whether under a straight percentage lease or the combination lease. Above this breakpoint, tenants pay additional percentage rent on excess sales. This structure aligns landlord and tenant interests while providing rent security. Commercial real estate professionals must understand these calculations for lease analysis, property valuation, and investment decisions.

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

B-ase rent divided by R-ate equals breakpoint, E-xcess sales times rate equals A-dditional rent, K-eep adding base plus additional for total. Think of 'breaking even' at the breakpoint - below it, you only pay base rent; above it, you 'break' into percentage territory. When you see percentage rent questions, immediately identify the BREAK components: calculate the breakpoint first, determine if sales exceed it, then calculate additional percentage rent on the excess only, and add to base rent for the total.

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

Always calculate the breakpoint first (base rent ÷ percentage rate), then check if actual sales exceed it. Only apply the percentage rate to sales above the breakpoint, never to total sales. Add this percentage rent to the base rent for the total.

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

A shopping center leases space to a clothing retailer with $60,000 annual base rent and 5% percentage rent. The breakpoint is $60,000 ÷ 0.05 = $1,200,000. If the retailer generates $1,400,000 in sales, they pay $60,000 base rent plus ($1,400,000 - $1,200,000) × 0.05 = $10,000 percentage rent, totaling $70,000. This structure helps the landlord benefit from the tenant's success while providing predictable minimum income.

Question

Commercial Real EstateLease TypesMEDIUM

A retail tenant's lease includes a percentage rent clause of 6% of gross sales above a natural breakpoint. If the base rent is $48,000 annually and the tenant's gross sales are $950,000, what is the total annual rent?

Answer Options

A

$48,000

B

$57,000

C

$105,000

D

$54,000