Nikka Sulton

The rising popularity of serviced apartments attracts guests seeking hotel-like comforts while maintaining their privacy. To stand out among the competition and increase profitability, it’s crucial to enhance your marketing strategies for your multiple properties in town.

Exploring the property sector necessitates a grasp of the diverse types of lease options on offer. Every leasing model presents its own set of advantages and responsibilities, influencing both landlords and tenants profoundly. Within this guide, we’ll unpack the subtleties of various lease alternatives, ensuring you’re well-prepared to make knowledgeable choices.

What Is a Lease Option?

A lease option is a contract that provides a tenant the opportunity to buy the leased property either during the lease term or at its conclusion. This arrangement also restricts the landlord from selling the property to other potential buyers. At the term’s end, the tenant has to decide to either proceed with the purchase or relinquish the option. This is commonly referred to as a rental agreement with a purchase choice.

A lease option provides a potential purchaser with greater leeway than a typical rent-to-buy contract, where the tenant is obligated to purchase the property at the lease’s termination. The property’s price is predetermined by the tenant (the prospective buyer) and the landlord, generally based on the present market value. This arrangement enables the tenant to lock in the current value for a future purchase.

For this privilege, the landlord usually imposes an initial fee, which could be around 1% of the property’s selling price. If the tenant opts to acquire the property after the lease, this fee contributes to the initial deposit. Lease options are particularly beneficial for those improving their credit rating or lacking adequate savings for an initial deposit. Nonetheless, several aspects of lease options should be weighed up.

Lease Option Vs. Lease Purchase Agreement

Distinguishing a lease option from a lease purchase agreement is essential in real estate contracts. In a lease purchase agreement, both buyer and seller are bound to the property’s sale after the lease term. On the other hand, with a lease option, the renter is not obligated to proceed with purchasing the property.

What’s Required For Lease Options?

A comprehensive lease option contract should cover the following essential details:

Lease term: Clearly state the duration of the renter’s occupancy before they can exercise the option to buy.
Option fee: The contract must include the agreed-upon fee paid to the property owner for the opportunity to purchase the property.
Purchase price: Whether the renter buys the property or not, the contract must specify the purchase price.
Rental amount: Both parties should agree on the monthly rent amount for the lease duration.
Rent credit: Outline the portion of the monthly rent that will be credited towards the future down payment.
Mandated homeowners insurance: While not obligatory, it’s advisable for renters to ensure that the property owner maintains homeowners insurance throughout the lease term to safeguard the property’s value in case of unforeseen events.

Lease With Option To Buy: How It Works

Let’s delve into the step-by-step process of lease options:

Contract Signing: The lease option commences with an agreement between the tenant and the landlord or real estate investor. Key aspects, such as lease duration and the home’s sales price (typically the market value at the lease signing), must be mutually agreed upon.
Option Fee Payment: After signing the contract, the renter, now a potential buyer, must pay the option fee, usually ranging from 2% to 7% of the total purchase price.
Rent Payment: During the lease period, the renter pays above-market rent for residing in the property. Additionally, they make an extra monthly premium (referred to as a rental credit), which contributes towards their down payment should they proceed with the purchase at the lease end.
Buy or Forfeit Decision: At the lease term’s conclusion, the renter has the choice to buy the property or walk away. Opting out means forfeiting the money put towards the option fee and the additional monthly payments. However, there are no further repercussions, and the property’s owner can then choose to rent or sell the home as they see fit.

Common Myths About Lease Options

Myth 1: Renting an apartment is the same as leasing commercial space

Thinking commercial and residential leases are alike can foster misleading confidence among novices. Commercial leasing involves intricate complexities, differing from the straightforward process of renting a dwelling.

Moreover, commercial real estate agreements invariably involve extensive negotiations between landlords and tenants. In contrast, residential leases tend to be standard, rarely catering to tenant-specific adjustments.

Key point: Renting a residence doesn’t translate to expertise in commercial real estate leasing.

Myth 2: Buying is better than getting a lease option

While this might hold true in numerous scenarios, assuming that buying your office or warehouse space is universally superior is inaccurate. Every business possesses distinct requisites and growth strategies that should shape a durable real estate plan.

For instance, it might be wiser to channel company capital towards expanding into new markets, as opposed to sinking it into real estate assets in a solitary location. Even though commercial real estate is generally perceived as a stable investment, hasty property disposal or a bearish market could lead to financial losses.

Key point: Opt for property acquisition if your intent is enduring market engagement and the property is poised for potential expansion.

Myth 3: It is Cheaper to Lease than to Buy

Contrary to the previous myth, some organisations believe that leasing is always more economical than purchasing real estate. Leasing, they argue, doesn’t demand a substantial upfront investment akin to a down payment. Nonetheless, leasing office or warehouse space can be rather costly contingent upon your company’s circumstances. For instance, inadequate credit might necessitate a significant deposit. Additionally, self-financing the outfitting of your space can prove expensive. Moreover, should you opt to relocate once the lease ends, the money expended on tenant improvements is irretrievable. Lastly, monthly rent payments frequently surpass mortgage payments.

Key point: Companies must factor in their financial status, future growth strategies, and prevailing market conditions when determining whether to lease or buy.

Myth 4: Only the attorney’s will be able to negotiate a good lease

Some business proprietors and CEOs mistakenly assume that their legal counsel or internal legal department will not just provide legal protection in real estate dealings, but also secure the most advantageous lease terms. Although solicitors should certainly be part of the leasing process, they should not be the sole representatives in any real estate transaction.

Specifically, legal experts are not well-versed in rental and vacancy rates, spatial arrangement, construction, and various other facets of lease transactions. What’s necessary is forming a team of specialists and allocating each professional to their respective area of expertise.

Key point: Entrust legal matters to your solicitor, lease negotiation to your tenant representative, and spatial planning to your interior designer.

Myth 5: It’s unnecessary to hire a tenant rep broker

One of our preferred myths to dispel is the idea that enlisting a tenant representative broker to advocate for you in your quest for space is an unnecessary expenditure. Well, here’s the positive news. Employing a tenant representative will not incur any cost to you! Although they work on your behalf as the tenant, tenant rep brokers are remunerated for their services by the landlord. They can aid in comprehending the local market, locating the most promising properties, leading negotiations, finalising the deal, divesting unused space, and much more.

Key point: Discover a tenant representative who comprehends your enterprise and utilise their extensive expertise to optimise and steer your real estate strategy.

Myth 6: Any Real Estate Professional Can Give You Good Advice.

Renowned American poet Carl Sandburg once wisely remarked, “Beware of advice—even this.” Merely because someone presents themselves in a professional manner or displays eagerness to assist in your real estate pursuit does not guarantee their competence or alignment with your best interests. For instance, you might come across several real estate brokers willing to aid you in locating a property for lease. However, they might conveniently omit the fact that they also represent certain landlords and thus prioritize showcasing their properties to prospective tenants.

Bottom line: Redirect all unsolicited advice and inquiries to your tenant representative broker to steer clear of misinformation and unfavourable transactions.

Types of Lease Options:

Leases can vary widely, yet certain types are prevalent in the property industry. The design of a lease is often shaped by the landlord’s inclination and prevailing market dynamics. Some leases may heavily favour the tenant, while others might lean towards benefiting the property owner. Moreover, there’s a spectrum of variations that fall between these extremes. Here’s a look at the most typical tenancy contracts.

1. Absolute Net Lease

In a full repairing and insuring (FRI) lease, the tenant assumes all responsibilities, encompassing insurance, taxes, and upkeep. This kind of lease is typical in single-occupancy scenarios, wherein the landlord constructs a dwelling tailored to a tenant’s specifications. Once completed, the tenant takes possession for an agreed period.

Such arrangements often involve established corporations familiar with the lease stipulations and prepared to manage the associated costs. Since the majority of obligations rest with the tenant, landlords typically charge more modest monthly rents.

2. Triple Net Lease

The triple net lease incorporates three main cost categories: insurance, upkeep, and property taxes. These costs are sometimes termed pass-through or operational expenses since they are transferred from the landlord to the tenant as additional rent charges. Occasionally, these added charges are labelled as taxes, insurance, and common area maintenance (TICAM).

Frequently known as NNN, these agreements are standard for both single and multi-tenant properties. In a single-tenant setup, the tenant oversees aspects like landscaping and the exterior’s upkeep. Essentially, during their tenancy, they dictate the property’s aesthetics.

Conversely, in a multi-tenant setup, the landlord retains complete authority over the property’s appearance, ensuring a consistent look and preventing any tenant from detracting from the building’s overall visual appeal. Moreover, in multi-tenant scenarios, tenants typically contribute a consistent pro-rata share towards operational expenditures.

Given this setup, tenants have the privilege to review the property’s operational expenses. With a triple net lease, the responsibility of janitorial services doesn’t lie with the landlord. Instead, each tenant shares in the costs of janitorial services and internal maintenance.

3. Modified Gross Lease

The modified gross lease places the majority of responsibilities on the landlord. Under its terms, the landlord covers insurance, property taxes, and common area maintenance. Conversely, the tenant is responsible for utilities, janitorial services, and internal upkeep.

In this lease structure, elements such as the building’s roof and structural components are under the purview of the landlord. However, due to the landlord bearing most of the leasing costs, the monthly rental charges are typically higher than other lease forms.

This kind of lease is favourable for tenants, as the landlord handles many of the associated risks, including operational expenses. Tenants benefit from consistent rates throughout the year and remain relatively uninvolved in property matters. However, to offset the management costs, landlords might opt to impose a slightly elevated monthly fee.

4. Full Service Lease

As implied by its title, the full service lease covers the majority of a building’s operational expenses. However, there are certain exclusions, notably data and telephone charges.

The property owner bears other costs, including those for common areas, taxes, interiors, insurance, utilities, and cleaning services. Consequently, the monthly rent tends to be on the higher side. Such leases are prevalent in large multi-tenant properties where dividing a building into smaller units isn’t feasible.

This setup is beneficial for tenants as they aren’t burdened with additional charges beyond the stipulated monthly rent. On the downside, the landlord might opt to add a modest surcharge to the monthly fee to accommodate tenancy expenses. Many landlords favour the full service model as it grants them complete oversight of the building’s aesthetic appeal.