Question

A lease is an arrangement under which a lessor agrees to allow a lessee to control the use of identified property, plant, or equipment for a stated period of time in exchange for one or more payments. There are several types of lease designations, which differ if an entity is the lessee or the lessor. The choices for a lessee are that a lease can be designated as either a finance lease or an operating lease.

Respond to the following in a minimum of 175 words:

• Discuss three different types of business leases and the merit of each one.

Answer 1

3 types of leases for business:

1. Gross Lease: Under this lease, the lessee pays a huge sum of lease payment that typically covers the rent payable during the period of time the lease and so the likely property taxes payable thereon. However the sum doesn't cover Utilities and insurance expenses, janitorial and other maintenance expenses. Hence these expenses have to borne by the landlord. Usually the lumpsum payment is a one-time single payment made at the inception of the lease. Rarely the lessee may have to pay towards compensating the inflation in costs during the lease period. This type of lease is advantageous to the lessee as he can concentrate his finances for other investments without any unnecessary headaches of managing lease expenses.
2. Net Lease:The disadvantage of the above method is that cannot match the rent paid with the services that he enjoys. This leads to lack of transparency. Hence the concept of Net Lease is developed. There are three types of Net lease:
   1. Single Net Lease: Under this type of agreement the lessee pays for the base rent and the property taxes thereon. And the landlord pays the utilities and insurance, janitorial and Maintenance Services.
   2. Double net lease : Under this agreement, the lessee pays for the base rent and property taxes as well as the utilities and insurance expenses. Thus the landlord has to bear the cost of maintenance and repair expenses only.
   3. Triple net leases: Under this agreement, the lessee bears the expenses pertaining to be rent and property taxes, utilities and insurance expenses, as well as all sorts of maintenance and repair expenses. Hence this is similar to to gross lease with an exception that the lessee can track the amounts paid with services he received.

Thus net lease is advantageous to landlord as they transfer the utilities and insurance expenses, janitorial and other maintenance expenses to the lessee.

3. Modified Gross Lease: Under this agreement, the lessee pays a huge sum towards rent and property taxes at inception of the lease. In addition to this, he will have to pay the utilities and insurance expenses, janitorial and other maintenance expenses periodically. Thus landlord can cover all expenses he incurs towards asset leased and lessee can keep track of expenses with benefits received.