What Is a Lease Rate?
A lease rate is the amount of money paid over a specified time period for the rental of an asset, such as real property or an automobile. The lease rate that the lessor earns from allowing someone else to use their property compensates them for not being able to use that property during the term of the lease.
- A lease rate is an amount paid by the lessee to the lessor for use of an asset for a set period of time.
- Lease rates are generally expressed as dollars per month, but they can also be stated as dollars per square foot of space per year—as is the case with commercial real estate.
- The terms of the lease will spell out the time period that the lease rate applies for and may also spell out incremental increases in the lease rate over multi-year leases.
How a Lease Rate Works
A lease rate can have different nuances depending on what type of property is being leased. In commercial real estate, the lease rate is the cost to occupy the space, commonly stated as a dollar amount per square foot of space per year. The lease rate can also be stated in terms of dollars per month, as with a rental agreement, or even dollars per year.
The terms of the lease will spell out the time period that the lease rate applies for and may also spell out incremental increases in the lease rate over multi-year leases. To get a true idea of the cost of renting a space, in addition to the lease rate, the potential tenant will need to know if the lease is single, double or triple net, in other words, whether they or the property owner will be responsible for expenses such as utilities, maintenance, and property taxes.
Because most commercial lease rates are set out in dollars per square foot, it makes it easier for the potential lessee (tenant) to compare the leasing costs of properties with different size profiles.
The question of when to lease equipment or space rather than building or buying is one that businesses struggle with. Generally speaking, the key factor is how long the leased property is expected to be in use. For shorter-term surges in equipment demand or operational expansion pushed by temporary market conditions, leasing is an excellent solution that minimizes sunk costs.
If the increased demand is expected to be long term, then the up-front costs of ownership usually dwindle in comparison with the savings over time and the potential for appreciation in a commercial property.
That said, some companies prefer to lease over the long term anyway, as it relieves the company from having to worry about non-core business issues like equipment and building maintenance.
Types of Lease Rates
When it comes to cars and equipment, the leasing company essentially buys the car from the dealer and rents it to you. So the lessor has “lent” the money for the purchase upfront and you are paying back on that loan.
Although the dealer and the leasing party can be the same person, setting up the three-party agreement allows the dealership to sell inventory to the leasing arm and the leasing arm to generate income on these pseudo loans before moving the vehicle back into the dealership as used inventory. The lessee gets a car that they can use without the burden of ownership.
In the case of an automobile lease, the monthly payment on the vehicle is based on the car's expected depreciation and residual value—a predetermined amount that the car will be worth at the end of the lease term—as well as the lease rate, which is usually stated as a percentage. Through monthly payments, the lessee compensates the automobile dealer for both the vehicle's depreciation and for tying up assets in vehicles instead of investing that money elsewhere.
In this case, the lease rate is roughly equivalent to an interest rate. The lease payments include the lease rate factor, also called the money factor, that captures the financing element of car leases.
In the case of commercial property, the building has been constructed as an investment with the hopes of bringing in tenants. There are only two entities in this transaction, and any compensation for the initial investment in the building is baked into the lease rate as part of the overall business plan.