Understanding Property Leases: Types and Considerations

A lease is a contract written between two people one of whom is the owner of a property lending it to another party who uses it and gives financial compensation for the exchange. There are many different types of lease arrangements for property. They include full service, net, percentage, and gross leases (Lank, 2003).

 To begin with, full service lease is mostly used by tenants who use multi-tenant office buildings where the landlord provides all essential services to his or her lessee (Kennedy, 2005).

Such landlord-provided services include water as well as security.

Another kind of lease is the gross lease whereby the tenant pays for the gross rent but the landlord pays for the maintenance, insurance, and also the property costs (Steingold & Steingold, 2010). Conversely, the net lease is implemented whereby the tenant takes responsibility for all expenses and amenities which he or she needs to use in the running of his or her business (Peca, 2009). On the other hand, percentage lease plays out when the tenant pays a percentage of the gross revenue (Tamper, 2002).

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Further, when calculating the gross revenue, one has to deduct all the items that might overstate one’s revenue, for example, items that may overstate sales.

There are other lease terms which need to be taken into consideration when entering into a contract related to a lease property. They include lease hold improvements which, if overlooked, can ultimately be very expensive. Knowledge of these issues ensures that the landlord makes any necessary renovations or else leave it open for the tenant to improve for himself or herself, as per certain guidelines and restrictions.

In addition, the lease length matters since the duration depends on the landlord, all the amenities offered, as well as the tenant.

The advantages of leasing building, medical equipment, and office furniture and equipment include: -

Flexibility, when we lease a building, there is room to relocate to another area which suits our provision of medical services to the people. This arrangement can enable us to shift our services to a place where we can access more customers than if we built it in a place where there is low demand for our services.

Moreover, there are few responsibilities attached to the management since most of the responsibilities are passed onto the land lords, thus increasing the turnover. Conversely, there is less tax paperwork since the income tax will be simpler to file. This is because building owners normally have very many forms to fill which will not be present in leasing.

When we want to run the business without affecting the cash flow, it will be more beneficial to preserve the cash flow by leasing equipment rather than buying them since high initial capital is required to purchase the medical equipment. Further, when we lease equipment, it helps to maintain and build a strong credit background which helps to expand the working capital through smaller initial investment (Haight & Singer, 2005). Further, such an initiative helps in reduction of tax since one does not pay tax on the leased properties. In turn, this helps the business to regain money spent on regular expenses which are adjusted to increase credits and deductions.

Lease of property allows business operators to satisfy the business needs on the allotted budget which is more flexible than when purchasing a commodity. Leasing agents always try to please their customers and thus always offer upgrades. The initial capital of upgrading your equipment is therefore highly minimized since one does not purchase them but the leasing agent improves his equipment. This allows one to use improved equipment. The cost of purchasing equipment is spread over a long period of time. After leasing the equipment, it is still owned by the leassor thus one has security of their money, therefore making one to have a credit check pass rather than other forms of finance. A lease contract is always fixed, therefore making it easier to budget.

The major disadvantages of leasing property are that there is no ownership of property or equipment. One cannot thus upgrade his or her equipment to improve the performance of one’s office. If the equipment becomes outdated, one cannot sell or discard them without paying much money so as to cancel the contract. The purchase of the equipment may be very hard since it may be difficult to arrange for the purchase which is not simple. Rather, arranging for the purchase of the mostly very expensive items is easier. Sometimes it becomes a long-term expense, although it saves one from paying a large sum of money at once.

This is clearly seen when one uses the standard lease wherein one pays for the cost of purchase with the charges of the leasing company. After a leasing period expires, one has to continue paying rent so as to use the equipment. The money one pays for an equipment is thus considerably more than the actual marked price of the product. Although one has not purchased the product, he or she has to maintain and repair it. If one lacks trained personnel, it may prove to be very expensive when a major repair is required, thus increasing the monthly payments (Perlis & Bradley, 2004).

A lease has a high interest cost because the lessor makes returns from the leased products, implicating that they get high returns thus making their firm more qualified to borrow so as to purchase other assets. There is lack of the recovery value of the product if one needs to purchase the product. This is evident in products which depreciate in value. There is also difficulty in improving the products. This is because one is prohibited to make improvements on the products without the owner’s approval.

It makes it hard to put finances on the leased property, thus making the lender the security to improve the product. If a product becomes outdated, one continues to pay for it till the lease period is over and even continues to use it even if it increases the production cost of one’s products. There are other expenses which follow if the owner had not paid for them, for example, one has to insure property if the owner had not insured.

If you have to purchase a property, you lack background information about it unless a nearby neighbor sells to you, a situation which makes many leases to be inflexible (Boiron & Boiron, 008). When one wants to purchase a product, the market is usually untested to the resold product. There is also depreciation of the asset value before the end of the lease period.

When it comes to selling of the companies head office, it is a very bad idea to sell and lease it again as this can cause a lot of damages to the company’s outlook if the owner decides not to lease it back. Further, we have to go and search for another to lease. If we decide to get any mortgage loan, we shall lack property to assist us in securing a loan which can help us run the business. The advantage of selling the head office is that we can shift to an area with high market for our services.

References

Boiron. P.; & Boiron, C. (2008). Commercial real estate investing in Canada: The complete reference for real estate.  Hoboken, NJ: John Wiley and Sons.

Haight, G. T.; & Singer, D. (2005). The real estate investment handbook. Hoboken, NJ: John Wiley and Sons.

Kennedy, J. (2005). The small business owner's manual: Everything you need to know to start up and run your business. Career Press.
Lank, E. (2003). Modern real estate practice in New York: For salespersons and brokers. La Crosse, WI: Dearborn Real Estate.
Peca, S. P. (2009). Real estate development and investment: A comprehensive approach. Hoboken, NJ: John Wiley and Sons.

Perlis, A.; & Bradley, B. (2004). The unofficial guide to buying a home. Hoboken, NJ: John Wiley and Sons.

Steingold, F. S.; & Steingold, F. (2010). Legal forms for starting & running a small business. Berkeley, California: Nolo.

Tamper, R. (2002). Mastering real estate mathematics. La Crosse, WI:  Dearborn Real Estate.