What is a Graduated Lease And How Does It Work

November 2, 2022
Alok Suman
Lease Management

When it comes to leasing payments, it generally means a certain fixed amount is to be given as a lease rate. However, a graduated lease differs from this in terms of variable pay, which typically depends on periodic appraisals that the property gets.

This post aims to explore graduated leases under the lease management category, including what it is, how it works, who benefits from a graduated lease, and more.

What is a Graduated Lease?

A graduated lease is a type of lease agreement between a lessor and lessee where both parties involved agree to an adjustment of monthly payments on a periodic basis.

This means that if the property's value increases posts appraisal, the landlord can increase the monthly payment.

Put simply, a graduated lease is a long-term lease agreement on a property that is adjusted periodically to reflect the appraised value of the asset being leased.

How Does a Graduated Lease Work?

A graduated lease is used primarily in real estate. For example, if under a graduated lease agreement, the company was leasing land for 20 years, every five years, the lease payments may be adjusted.

This is to reflect the existing or current market value of the land. A graduate lease is sometimes also known as a step payment lease.

The concept of a graduated lease lets the lessor or the property owner charge higher rent as the property's value rises over time.

In the short term, the tenant might take ownership of a property at a reduced rate. This is useful mostly during the initial stages of a startup or a brand-new business.

Triggers for Rent Increase Under a Graduated Lease 

Below are some of the trigger points where the tenant and landlord may have to adjust the payments under a graduated lease:

Escalator Clause

Also known as the index clause, in this trigger, an increase in the periodic lease payment depends on either an economic index or a benchmark rate change. 

Participation Clause

In the participation clause, the tenant might end up contributing to the increase in various expenses related to real estates, such as maintenance, taxes, and more. 

Reappraisal Clause

In the case of a reappraisal clause, the rental payment may increase after the annual appraisal of the property. Therefore, if the value of the property increases, the rental payment also increases.

Step-up Lease

In this type of lease agreement, there is a provision for increasing the periodic monthly payment. Apart from this, this clause can be used to enhance the monthly payment for depreciating assets, such as equipment.

A step-up lease is specifically beneficial for startup companies as it could help them avoid purchasing new equipment. 

Graduated Lease – Whom Does it Benefit Most?

While a graduated lease is designed to benefit both tenants and landlords, they may benefit from it at different times. Here is how it works:

  • In the long term, the landlord or owner gets benefitted more from a graduated lease as the value of the property tends to increase over time, allowing the lessor or owner to charge more rent from the lessee or tenant. 
  • For tenants, on the other hand, graduated leases offer a short-term advantage because they get the property at a discount.

However, there is a downside to graduated rent agreements as well. For instance, in the case of a fixed graduated lease agreement, there may not be any option for ordinary termination of the property for up to 4 years.

Summing Up 

A graduated lease refers to an agreement between a landlord and tenant that sets out a periodic adjustment of monthly payments. The arrangement gives the property owner or lessor an excellent opportunity to charge increased rent as property values appreciate over time.

The tenant or lessee in a graduated lease arrangement can take possession of a property at what may be a discounted rate in the short term. This often helps during the ramp-up stage of a startup or a new business venture.

If you're engaged in managing diverse assets at your business, there are several advantages to be gained from a lease management software. Such software, using no-code platforms like Hubbler, can be easily designed to track the status and updates regarding all the active leases at your company.

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