In accounting, "straight-line" methods provide a means to evenly spread costs over a fixed length of time. Often used when determining the depreciated value of an asset, straight-line depreciation assumes an asset’s value decreases steadily throughout its useful life, rather than loses its value unevenly in a bell-curve type model. Straight-line rent uses the same principle, assuming rent costs are standard for the life of a lease.
TL;DR (Too Long; Didn't Read)
As an accounting method, straight-line rent assumes that the total liability under a lease is the same for every year of the lease term, even if the lease payments themselves fluctuate.
What is Straight-Line Rent?
In many cases, particularly in commercial leases, landlords don’t charge tenants a standard recurring rent. Sometimes rents increase partially through a tenancy, or landlords provide discounted months to entice renters. At other times, landlords periodically charge additional fees, such as quarterly maintenance fees or assessments in addition to rent. To calculate a straight-line rent, accountants total all expenses and subtract all discounts for the life of the lease, then divide that figure by the total number of payment terms in the lease. This average figure is known as straight-line rent.
What is a Straight-line Lease?
To better forecast costs across a lease term, some companies and agencies require that their leases be constructed on a straight-line basis. Landlords in this situation merely need to calculate the average periodic rent, in a similar fashion, totaling expenses and dividing it by the number of rent payments a tenant needs to make. Using straight-line rent accounting methods, a landlord may eliminate lease clauses and additional costs for maintenance or rent differentials and receive the same amount over the life of the lease.
Reporting Straight-line Rents on Property Sales
When examining rental properties as an investment, GAAP rules encourage landlords to report rental revenues using straight-line rent when preparing a property for sales. Because many properties house tenants at different points in their lease who may receive vastly different price-per-square-foot figures when determining their rent, straight-line rent allows investors to bring a property’s basic potential for revenue into focus when they consider the purchase of a property with existing tenants.
Shortcomings of Straight-line Rent
Although straight-line rent accounting methods may be useful in determining average costs of a tenancy, they can be misleading when investors consider rental revenue on a property when rents increase over the lease term. Because straight-line rents represent the average rent, not the actual cash flow generated by rents at any point of time in an investment, they may under-represent incomes if many of a property’s leases are in an early phase of their lease with below-average monthly rents. This may result in investors receiving much smaller cash rent than anticipated before the sale.