When looking to rent a property for the long term, landlords are often worried about making losses in the long term. For the unversed, to help the property owners to avoid bearing such losses a graduated rental lease is advised while renting a property.
A graduated lease, also known as a graded lease, is an agreement where the tenant is liable to periodic adjustments of the monthly payment. These adjustments can be made either after the periodic appraisals of the property or based on mutual agreements made between the lessor and the lessee.
The increase in the payment may reflect the changing market conditions, an increase in the value of the property after the appraisal or simply to cover inflation costs. If after the periodic appraisal the value of the property proves to have increased, the fixed monthly payment shall also increase.
The value of the real estate is likely to increase over some time. This would in turn lead the landlord to suffer losses in the long run because their agreement would still be based on the past market value. But, Graduated Lease can be beneficial for landlords.
A graduated lease in most cases is a suitable option over other short-term leases designed for a period of one or two years. This lease is also specifically structured for the long term and helps the lessor avoid losses in the long run. There are various triggers under a graduated lease agreement that increase the price of monthly payments. Some of the triggers of the graduated lease are as follows:
● Some graduated lease agreements include an escalator clause that stipulates a trigger for an increase in the economic index. 10-year U.S treasury bonds are a common benchmark that is considered a base for the trigger.
● The lease that follows a reappraisal clause induces the rent hike on an annual appraisal of the property. If the appraisal indicates an increase in the value of the property, the landlord is entitled to increase the rent.
● Participation clause in a lease, binds a tenant to increase their contribution towards the rising expenses such as utilities and maintenance.
● A step-up lease is a form of graduated rental lease which stipulates the increase of monthly payment periodically. This stipulation is a part of the contract in a step-up lease.
While a graduated lease benefits the landlord over the long term, the arrangement is beneficial for the tenant as well.
