Graduated Lease
A graduated lease is an agreement under which a tenant and landlord agree to a periodic adjustment of monthly payments. This type of lease is a form of graduated lease whereby increases in rent are built into the agreement and may be used for the lease of an asset that will depreciate in value, such as machinery. A graduated lease allows the property owner or lessor the opportunity to charge increased rent as property values increase over time. From a lender’s perspective, a graduated lease is a better fit for real estate agreements than equipment agreements because real estate values tend to appreciate over time. A graduated lease is an agreement between a landlord and tenant, or a lessor and a lessee, that sets out a periodic adjustment of monthly payments.
What Is a Graduated Lease?
A graduated lease is an agreement under which a tenant and landlord agree to a periodic adjustment of monthly payments. For example, the agreement may reflect an increase in the tenant’s payments due to market conditions or an increase in the value of the leased property.
How a Graduated Lease Works
A graduated lease tends to benefit the property owner over the long term, but the arrangement offers advantages to both the landlord and the tenant. A graduated lease allows the property owner or lessor the opportunity to charge increased rent as property values increase over time. The tenant or lessee can take possession of a property at what may be a discounted rate in the short term. This can often help during the ramp-up stage of a new business venture.
Graduated leases are also known as graded leases. Graduated leases tend to be structured for longer terms than traditional straight or fixed leases, which typically have one to two-year terms.
From a lender’s perspective, a graduated lease is a better fit for real estate agreements than equipment agreements because real estate values tend to appreciate over time. A lessor would be unlikely to offer a graduated lease on an automobile, for instance, because the value of a car depreciates steadily over time. This depreciation could lead to decreasing monthly payments.
Triggers for Rent Increase Under a Graduated Lease
Traditionally, adjustments in graduated leases occur due to one of the following four factors:
Related terms:
Acquisition Fee
An acquisition fee is charged by a lessor to cover the expenses, usually of the administrative variety, that they incur in arranging a lease. read more
Appreciation
Appreciation is the increase in the value of an asset over time. Check out an easy way to calculate the appreciation rate for assets and investments. read more
Gross Lease
A gross lease is a commercial lease where the tenant pays a flat fee that encompasses rent and all costs associated with ownership. read more
Landlord
A landlord is a person or entity who owns real estate for rent or lease to a tenant. Learn how landlords make money and what they can and cannot do. read more
Lease
A lease is a legal document outlining the terms under which one party agrees to rent property from another party. read more
Leasehold
A leasehold refers to an asset or property that a lessee contracts to rent from a lessor in exchange for scheduled payments over an agreed-upon time. read more
What Is a Step-Up Lease?
A step-up lease is a lease agreement that includes set price increases at specific times throughout the lease. Discover more about the step-up lease here. read more
Triple Net Lease (NNN)
A triple net lease assigns sole responsibility to the tenant for all costs relating to the asset being leased, in addition to rent. read more