The contract includes payment terms when a lessor and potential lessee agree to a lease. One of the types of payments a contract might call for is fixed lease payments.
First, the fixed payment includes the stated lease payment in the lease agreement.
Next, the payment includes any in-substance lease payments. These are payments that appear variable but that are unavoidable per the lease terms. For example, if the lease contract calls for an additional monthly lease payment of the greater of $250 or 5% of monthly revenue, the lessee knows it must pay at least $250 each month on top of the stated monthly rent.
Finally, the fixed payment will exclude any lease incentives paid or payable to the lessee. These incentives would also be found in the lease agreement. A lessor might offer such an incentive to entice a lessee to sign the agreement.
Example:
Suppose a municipality owns a property downtown that it's looking to rent out. The municipality wants to promote growth in the community, so it’s offering a move-in incentive to entice a new business to rent the space.
The monthly rent is $2,500, but the lease also requires an additional lease payment of $250 or 5% of monthly revenue, whichever is higher. To calculate the fixed payment, the lessee will add the monthly rent and the additional lease payment but then subtract the move-in costs paid by the lessor.
A lease agreement will state the monthly/quarterly/annual lease payment amount, but that doesn’t always tell the whole story. Other lease provisions, including in-substance payments and incentives, can also impact the fixed payment. Some payment provisions, such as in-substance lease payments, will increase the fixed payment. Meanwhile, other provisions, such as lease incentives, will decrease the lease payment. Having a clear understanding of the lease’s payment terms can help both the lessee and the lessor meet their contractual obligations.