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Step-up Lease

DEFINITION

Lease term that increases the rental rate periodically.

EXPLANATION

A step-up lease includes a list of future dates that are set in order to increase prices for a lessee through a contractual agreement. The step-up lease was introduced in order to serve as a safeguard for rental property owners, it protects against the inflation and rise of market prices in the event of a long terms lease. The dates that are set for the periodic price accretion are generally scheduled for occasions that are years into the future. The act of offering and signing such an agreement is seen as a risky commitment by both the renter as well as the landlord as the rates that are set throughout the contract may become financially obsolete if a property or its surrounding areas  see a substantial rise in prices. A standard lease can adhere to the unforeseen costs that may call for a rise in rental rates that may stem from something like an increase in maintenance costs. This, in turn, will cause an unforeseen hike in rental rates which can be reflected in the cost of the next lease.

When Are Step-Up Leases Typically Used?

A step-up lease is rarely used in any other scenario that doesn’t involve a commercial property. In the case of residential real estate practices, renters are able to work around price surges and inflation by agreeing to short-term contracts. It is highly unlikely that a residential rental agreement is leased out to someone for over a year and it is even more infrequent to find such an agreement that is for over two or more years. Industrial and commercial real estate differs due to companies looking for long-term lease agreements. Most of these corporations or companies look for these type of leases due to the amount of time and effort that is associated with their respective affairs. Creating a well-known, official location for a business is vital for a company’s success and this calls for a foreseeable cost for years to come.

Components Associated With A Step-Up Lease

Commercial leases are known throughout the real estate market to call for comprehensive contract negotiations.  These negotiations are traditionally started with the renter and property owner agreeing on the dates and rates of the increase in rent.  Step-up leases can mention other industrial and commercial lease agreements from nearby areas that can be cited by an accredited source or the CPI (consumer price index) in order to justify the rate of increase. Like most contractual agreements, the renter and property owner have differing motives, the landlord wants their prices to reflect the market rate as accurately as possible over the term of the lease, while the renter wants a steady rate that is affordable. Clauses can be added to the contractual agreement in order to provide stipulations that places a cap on how much the rent can increase on the set dates. Negotiations are a vital part of both parties receiving fair compensation for their participation in the lease agreement.

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