A lease rate is the monetary payment made over a specified period for the rental of an asset like real property or an automobile. The lease rate, which the lessor earns from renting out their property, compensates them for not being able to use the property during the lease term.
Key Points to Remember
- A lease rate is the amount the lessee pays the lessor to use an asset for a predetermined period.
- Lease rates are often expressed in dollars per month, but they can also be quoted as dollars per square foot of space per year, especially in commercial real estate.
- The lease terms spell out the duration the rate applies and may also include incremental increases for multi-year leases.
Understanding How a Lease Rate Works
The meaning of a lease rate depends on the type of property being leased.
In commercial real estate, the lease rate is often stated as a dollar amount per square foot of space per year. For residential leases, it is usually in dollars per month. The lease agreement outlines the duration and may mention rate increases over a multi-year lease period.
To fully understand rental costs, potential tenants need to consider whether the lease is single, double, or triple net. A single net lease means the tenant agrees to pay property taxes in addition to the rent. A double net lease requires the tenant to cover two of the three major expenses: taxes, utilities, or insurance. A triple net lease obligates the tenant to pay all three major expenses, including taxes, insurance, and maintenance.
Since commercial lease rates are often expressed as dollars per square foot, tenants can easily compare costs between different properties.
Special Considerations for Leasing
Deciding whether to lease or buy can be challenging for businesses. Typically, leasing is more advantageous for shorter-term needs, minimizing sunk costs during temporary expansions. However, for long-term needs, the upfront costs of owning may be offset by savings and potential appreciation over time.
Some businesses prefer long-term leasing to avoid the hassles of non-core business issues, such as equipment or building maintenance.
Types of Lease Rates
Automobile Leases
When leasing a car, the company essentially buys the vehicle upfront and rents it to you. The lessor has essentially lent the money for the purchase, and you repay through monthly installments. This setup involves three parties: the dealership, the lessor, and the lessee.
The monthly lease payment is based on the car’s expected depreciation and residual value, in addition to the lease rate stated as a percentage. The payments cover both the vehicle’s depreciation and the financing element, often referred to as the money factor.
Space Leases
In commercial property leases, the building is often an investment intended to generate rental income. The lease rate incorporates compensation for the initial investment in the building as part of the overall business plan.
By understanding these lease rate fundamentals, business owners and individuals can make more informed financial decisions regarding leasing versus owning an asset.
Related Terms: lessor, lessee, triple net lease, money factor, sunk costs.
