What Is a Lease Rate?
Let me explain what a lease rate really is. It's the payment you, as the lessee, make to the lessor for renting an asset, and it's often shown as dollars per month or per square foot in commercial real estate.
A lease rate is the amount of money you pay over a set time for renting something like real property or a car. This rate is what the lessor earns for letting you use their property, making up for the fact they can't use it themselves during the lease term.
Key Takeaways
- A lease rate is an amount you pay as the lessee to the lessor for using an asset over a set period.
- Lease rates are usually in dollars per month, but for commercial real estate, they can be dollars per square foot per year.
- The lease terms will detail the time period and any incremental increases in the rate for multi-year leases.
How a Lease Rate Works
The meaning of a lease rate changes based on what you're leasing. In commercial real estate, it's the cost to occupy the space, typically stated as a dollar amount per square foot per year. It can also be per month or per year, like in a standard rental agreement.
The lease terms will specify the period the rate applies to, and they might include step-up increases over multiple years.
To understand the full cost beyond just the lease rate, you need to know if it's a single, double, or triple net lease. A single net lease means you pay property taxes on top of rent.
A double net lease requires you to cover two of the three main expenses: taxes, utilities, or insurance. These are common for commercial tenants and called net-net or NN leases.
A triple net lease, or NNN, puts all property expenses on you, including taxes, insurance, and maintenance.
Since most commercial rates are per square foot, it helps you compare costs across properties of different sizes.
Special Considerations
You might wonder when to lease equipment or space instead of buying or building. The main factor is how long you'll use it. For short-term needs, like a temporary surge in demand, leasing avoids sunk costs.
If the demand looks long-term, owning often makes more sense because upfront costs fade compared to long-term savings and potential property appreciation.
Still, some companies choose long-term leasing to avoid dealing with maintenance and other non-core issues.
Types of Lease Rates
Let's break down the types, starting with auto leases. Here, the leasing company buys the car from the dealer and rents it to you. It's like they've lent the money for the purchase, and you're paying it back.
Even if the dealer and lessor are the same, this setup lets the dealership sell to their leasing arm, which earns on the 'loan' before reselling the car as used. You get the car without ownership hassles.
Your monthly payment depends on the car's expected depreciation, residual value at lease end, and the lease rate, which is like an interest rate. Payments cover depreciation and the cost of tying up the lessor's assets.
The lease rate factor, or money factor, handles the financing part.
For space leases in commercial property, the building is an investment meant to attract tenants. It's just you and the lessor, with the initial building costs built into the lease rate as part of the business plan.
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