DEFINITION of 'Step-Up Lease'

A step-up lease is a lease agreement which stipulates that the rental rate will increase by predetermined amounts at various points in the future. Through the rent increases in the future, the lessor hopes to hedge against various risks such as inflation and other cost increases.

BREAKING DOWN 'Step-Up Lease'

Step-up leases are typically employed in longer-term leases spanning several years into the future. In these situations, the lessor incurs considerable risks by locking in a fixed rental rate while inflation and other costs remain variable.

In residential real estate, such as apartment complexes, lessors can mitigate these risks by offering only one or two year fixed-rate leases and adjusting rates when leases come up for renewal. But in commercial and industrial real estate, firms require long-term leases due to the costs involved in setting up operations and value of establishing a well-known location.

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