How can you minimize occupancy costs by negotiating the lease escalation clause?

1 Understand the types of escalation clauses

When it comes to rent, there are different types of escalation clauses that can have a major impact on your finances. These include fixed escalation, CPI escalation, operating expense escalation, and market rent escalation. Each of these has its own advantages and disadvantages depending on the market conditions and your business needs, so it’s important to understand how they work and what effect they could have on your bottom line.

2 Compare the base rent and the escalation rate

The base rent is the initial rent that you pay when you sign the lease. The escalation rate is the percentage or amount by which the rent will increase over time. When comparing different lease options, you should look at both the base rent and the escalation rate, as they will determine your total occupancy costs over the lease term.

For example, a lease with a low base rent but a high escalation rate may end up costing you more than a lease with a higher base rent but a lower escalation rate. You should calculate the effective rent, which is the average rent per square foot over the lease term, to compare different lease options.

3 Negotiate the cap and the base year

One way to minimize your occupancy costs is to negotiate a cap on the escalation rate, which limits the maximum amount or percentage that the rent can increase in any given year or period. This can protect you from unexpected spikes in inflation, operating expenses, or market rents.

Another way to minimize your occupancy costs is to negotiate the base year for operating expense escalation clauses. The base year is the year that the landlord uses as a reference point to calculate the increases in operating expenses. If the base year is set at the current year or a recent year, you will pay less than if the base year is set at an older year with lower operating expenses.

4 Consider alternatives and trade-offs

If you cannot negotiate favorable terms for the escalation clauses, you may consider alternatives or trade-offs that can lower your occupancy costs. For instance, you could ask for a rent abatement, a tenant improvement allowance, a shorter lease term or a right of first refusal or a right of first offer. However, you should also be aware of the potential drawbacks such as having to pay a higher base rent, security deposit or termination fee.

5 Hire a professional broker

Negotiating the lease escalation clauses can be complex and challenging, so it is advisable to hire a professional broker who can represent your interests and help you get the best deal possible. A broker can conduct a market analysis and financial analysis to compare different lease options and scenarios, negotiate with the landlord and their broker to achieve the most favorable terms for the escalation clauses, and review the lease contract to advise you on the risks and opportunities involved. By doing so, you can save time, money, and hassle while minimizing your occupancy costs.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?