What Is a Graduated Lease?
Let me explain what a graduated lease is directly to you. It's an agreement where you, as a tenant, and the landlord set up periodic adjustments to your monthly payments. For instance, your payments might go up because of market changes or because the leased property's value has increased.
How a Graduated Lease Works
From my perspective, a graduated lease generally favors the property owner in the long run, but it provides benefits to both sides. As the landlord, you get to raise the rent as property values climb over time. If you're the tenant, you can start with what might be a lower rate initially, which is helpful if you're ramping up a new business.
You should know that graduated leases are also called graded leases. They usually run for longer periods than standard straight or fixed leases, which often last one to two years.
If you're looking at this from a lender's viewpoint, graduated leases fit better with real estate than with equipment leases because real estate tends to appreciate. You wouldn't typically see a graduated lease on something like a car, since cars lose value over time, which might even lead to decreasing payments.
Key Takeaways
Here's what you need to remember: A graduated lease is simply an agreement between landlord and tenant that outlines periodic monthly payment adjustments. You might end up paying more rent as a tenant due to market shifts or rising property values. Overall, these leases suit real estate deals where values go up over time.
Triggers for Rent Increase Under a Graduated Lease
Traditionally, rent adjustments in these leases happen because of one of four main factors, and I'll walk you through them.
Main Triggers for Rent Increases
- An escalator clause: Many agreements include this, triggered by rises in economic indexes like the Consumer Price Index (CPI) or 10-year U.S. Treasury Bond, allowing the landlord to increase payments when prices go up.
- A reappraisal clause: This lets rent hike after an annual property appraisal, which usually results in an increase.
- A participation clause: Here, you as the tenant contribute to rising expenses like utilities, taxes, or maintenance, though this can be capped by an expense stop provision.
- A step-up lease: This is a type of graduated lease with built-in rent increases, often used for depreciating assets like machinery, where a startup might opt for it to delay larger payments until future cash flows kick in.
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