Variable lease

Most long-term leases have some sort of variable lease arrangement that allows the property owner to raise the rental payment charges. The basic methods for such adjustable leases are the graduated and the index leases, which are similar to their mortgage counterparts.

The index version of the variable lease makes periodic adjustment to the rental rate based on a predetermined index. The most commonly used index is the consumer price index (CPI), issued by the Federal government. However, other indices may also be used, such average rents reported by industry groups, trade journals, governmental bureaus or business media.

For example, to guarantee that they are not being overcharged for their penthouse office space, the Chicago accounting firm of Dewey, Cheatham and Associates negotiate an index leases that ties their base rent to the average base rent paid in the downtown area, as reported each year by Crain's Chicago Business.

Because index leases can become complicated and expose landlords to disputes about calculations, some landlords opt for the graduated lease format. The basic graduated lease normally sets up a stepladder arrangement, in which the base rent increases at predetermined anniversary dates. For example, an industrial lease may charge a base rent of $4 per square foot, with annual increases of 7.5% beginning on the third anniversary of the lease signing.

The graduated lease may also be arranged on a seasonal schedule. For example, a storeowner on the tourist destination of Mackinac Island negotiates a lease, which arranges the rental payments so that they coincide with the tourist season. So, winter rents are dropped to $100, while summer rents may be adjusted to $1,200 per month.

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