How To Navigate Commercial Rent Escalation Clauses
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Tenant Representation, Renegotiation, Right-sizing, Relocation, Economic Development, & CRE Optimization
Want to know a secret about your existing commercial lease? It's losing you money... and the biggest culprit??
Your rent escalation clause.?
How do we know this? Tenant Reps, it is our jobs to identify when leases do not benefit the budgets of our corporate clients. We have seen how much strain a poorly negotiated escalation clause can have on your bottom line. So if you want to learn more about your rent escalation and how you can ensure that it's drafted in your interest, this article is for you.?
The Escalation Clause in Your Commercial Lease
Unless you were lucky enough to negotiate a lease that remains fixed for its entire life?(and by lucky we mean that you found a magic lamp), you will have to deal with the provisions of its escalation clause. A?commercial escalation clause?is always included in commercial real estate leases. It allows the landlord to increase the rate of your rent according to a specific timeline or according to certain triggers included in the clause.
As a result of the inclusion of the commercial escalation clauses,?your rent will not be fixed over time.?Increases will build and create a huge impact on your occupancy cost over the period that your lease spans.?
When Does Your Rent Escalate?
This clause determines when your lease payments will go up and how much they will cost you. While escalations might seem far away when you first sign your lease, they will come into play eventually.?
Ok, but?when will your rent go up??
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This is one of the first factors the clause will cover (and it will largely depend on negotiations with your landlord).
Rent escalations typically occur at one of three times:
However, most leases?have?annual increases upon the lease's anniversary date.?If your rent payments started on March 1, you can expect them to go up on March 1 next year.
How Does Your Rent Escalate?
Typically, your can expect your rent to escalate in one of four ways.
1. Fixed Bump. These increases are for a set dollar amount per foot (or for the entire space). For instance, your $30 per square foot lease might go up by 50 cents per year. Bear in mind that this could mean that the increase goes down on a percentage basis over time. Fixed bumps are most often seen for warehouse or industrial leases.?
2. Percentage Increase.?In this structure, your rent escalates by a set percentage. So, if you have a $30 per square foot lease with 3 percent annual increase, it would go up to $30.90 in the next year, then $31.83 the year after that.?These increases compound, which can add up over time.?Most often, this will be the type of escalation you want. You know exactly what you're dealing with and have your elevating financial responsibilities clearly laid out for the remainder of your lease's term.