Question

Consider a lease for 120,000 square feet of space and specifies base rent of $5 psf. In addition, the lease provides for percentage rent of 3% of sales in excess of the natural breakpoint. a) Calculate the natural breakpoint for this lease.

Answer 1

$20M

Explanation:

You want the "natural breakpoint" for a lease that specifies rent is the maximum of $5 per square foot for 120,000 square feet, or 3% of sales.

Minimum rent

The minimum rent is ($5/ft²)×(120000 ft²) = $600,000.

Breakpoint

The amount of sales that makes $600,000 equal to 3% of sales is ...

$600000 = 0.03s

s = $600000/0.03 = $20,000,000

The "natural breakpoint" is $20M in sales.

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Additional comment

When sales exceeds $20M, 3% of sales is more than $5/ft², so the rent will be based on sales.