California Real Estate Practice Exam

If a lessor wanted a long-term, uncomplicated income from a sale-leaseback arrangement, the type of lease best fitting this requirement would be a:

1. net

2. none of the foregoing

3. percentage

4. step up

The correct answer is: net

In a sale-leaseback arrangement, the seller of an asset sells it to an investor and simultaneously enters into a lease agreement to continue using the asset. This structure can provide a steady income stream for the lessor. A net lease is particularly beneficial for a lessor seeking uncomplicated long-term income. In a net lease, the tenant (lessee) is primarily responsible for covering property expenses beyond just the rent, such as property taxes, insurance, and maintenance costs. This structure simplifies the lessor's financial responsibilities, ensuring that they receive a predictable income without the complexities of managing additional property expenses. This is especially attractive for those looking for long-term income stability and a more straightforward arrangement since the lessee takes on more obligations. Other lease options, such as percentage or step-up leases, introduce variables tied to sales performance or predetermined increases in rent, complicating income predictability. Therefore, a net lease aligns well with the desire for uncomplicated and reliable long-term revenue.