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a variable lease is an agreement where
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the payments made by the lessee
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fluctuate due to market conditions and
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other factors knowing the different
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lease types and how they work in real
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estate is essential to passing your real
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estate exam so if you want to pass your
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real estate exam you're in the right
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place hello everybody it's Zach here
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from real estate.com today we're talking
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about variable leases let's get started
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so what is a variable lease in real
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estate well a variable lease is a rental
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agreement where the lessee's payments
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vary throughout the term due to changing
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market conditions variable leases are
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most commonly used in commercial real
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estate commercial real estate obviously
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refers to properties included by
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business owners to make profit examples
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of commercial properties where tenants
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may make variable payments would include
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Office Buildings retail stores medical
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centers warehouses and even something
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like an assembly plant now there are two
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types of variable leases and they are
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index leases and graduated leases so
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let's talk about those an index lease is
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an agreement where the rent amount is
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tied to index in most cases the index is
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the Consumer Price Index or the CPI a
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measure of how rent prices essentially
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change over time however the index can
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also refer to the local rental market
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conditions and other factors the rent
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price in the index lease is variable
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because it changes with the CPI and
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rental market in most cases tenants
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can't expect their future payments to
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increase over the lease term for example
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if a tenant is leasing an office
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building their rent payments will change
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as the average rent price fluctuates in
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their City because property values tend
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to increase over time the payments are
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likely to go up now there are a couple
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other examples of indexes that Elise
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could include and I'll throw them on the
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screen but essentially they all pretty
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much do the same thing now we have to
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talk about that second type that
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graduated lease a graduated lease is an
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agreement where the monthly rent amount
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increases according to agreed upon
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schedule one way that a graduated lease
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can work is based on property value the
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property owner may choose to increase
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variable lease payments according to
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changes in how much the property is
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worth for example the owner May hire an
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appraiser to determine the property's
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value over the next three years or over
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every three years if the property value
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has increased let's say it comes three
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years and it's increased then the tenant
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must essentially have a higher lease
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payment the property owner can also
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increase variable lease payments
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according to a schedule so in this case
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the landlord and tenant agree you know
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in advance on how much and how often
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variable these payments will go up for
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example in graduated lease May stipulate
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that the rent increases by four percent
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every September the lessor may also
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increase rent seasonally such as every
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spring or summer in this type of
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graduated lease the tenant has a better
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idea of how much their future lease
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payments will cost now let's do an
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example let's say Richard is a new
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business owner interested in renting out
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an office space he hopes to enter a
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lease agreement with an initial low rate
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while he gets his business off the
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ground Teresa is is a real estate
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investor who owns an office building she
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proposes to Richard A 15-year graduated
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lease agreement with discounted initial
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rates per the agreement Richard's
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variable lease payments will increase
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every five years when the property value
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is reassessed this deal is an example of
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a graduated lease payment system or a
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graduate lease in commercial real estate
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Richard and Teresa both benefit from the
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agreement Richard pays a lower initial
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variable lease payment and Teresa earns
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income from monthly rental payments so
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let's discuss the pros and cons of
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variable leases so obviously that first
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one the pros and cons of an index lease
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landlords benefit from index leases
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because tenants are less likely to
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dispute rent costs because the rent is
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based on Independent indexes tenants
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can't really negotiate their lease
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payments down much lower the leasing
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terms in an index lease are transparent
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resulting in fewer problems between the
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lessor and Lee c one drawback of index
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leases is that both parties are
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vulnerable to fluctuations in the rental
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market if inflation causes prices to go
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up tenants want to make higher lease
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payments an index lease can also be
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problematic for landlords as the CPI is
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sometimes inaccurate and accuracies with
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the index can lead to landlords losing
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out on money now let's talk about the
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pros and cons of a graduated lease so
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graduate leases are excellent long-term
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investment for landlords as property
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values tend to increase over time as the
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property value increases the landlord
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can keep raising the rent a graduated
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lease is also benefit chauffeur tenants
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as they generally receive a discounted
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rate at the beginning this helps new
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business owners looking to lease
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property for a reasonable price one
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drawback of a graduated lease is that
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landlords can lose money if the property
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value does not increase for this reason
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landlords must invest in properties
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where the value will likely appreciate
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over time a drawback of graduated leases
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for tenants is that variable lease
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payments increase over time causing them
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to spend more money the long run so what
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specifically do you need to know for the
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real estate exam well you do need to be
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familiar with the different lease types
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and that includes variable leases a
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variable lease is a rental agreement
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where the lease payments vary over time
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due to changing market conditions if you
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can understand that you're one step
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closer to getting your real estate
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license passing the real estate exam and
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really doing whatever you want to do
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with your life in terms of real estate
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if you like this video please click here
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for more videos about leases and click
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here to subscribe thank you guys so much
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for watching until next time see ya bye
