Graduated Lease

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DEFINITION

A type of long-term, typically for commercial property, lease in which the payments are variable and adjusted periodically to reflect changes in the property's appraised value or changes in a certain publicized benchmark rate, such as the Consumer Price Index (CPI). A graduated lease provides for periodic changes in the payments rather than employing a fixed payment throughout the life of the lease. In addition to basing payments on current and changing market conditions, the terms of a graduate lease can state that the payments automatically increase by a specified percentage or dollar amount at regularly specified time intervals.

INVESTOPEDIA EXPLAINS

Graduated leases are intended to protect the interests of the owner/lessor of the property. In many cases, the value of the leased property increases and the payments can be adjusted accordingly. For example, if a company has a 99 year lease on land under a graduated lease, the payments can be adjusted every 10 years to reflect the current market value of the land. If market values increase, this helps protect the land owner against losses resulting from payments that would be too low for current market conditions. In a different scenario, a graduated lease may be used to entice a company to lease a property that in the beginning has relatively small payments. As time passes, the payments increase on a regular basis, such as with an annual rent increase of 5%. This scenario is helpful to entrepreneurs who need to save money in the first few years of a lease while the business is being established.


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