Commercial Lease Escalation Rates: What You Need to Know

Commercial Lease Escalation Rates: What You Need to Know

Maximizing the profitability of your lease agreements is one of the most important priorities as a commercial real estate owner. One way to achieve this is by understanding and utilizing commercial lease escalation rates.

What are Commercial Lease Escalation Rates?

Escalation rates refer to the annual increase in rent that a tenant is required to pay over the course of their lease term. As a commercial real estate owner, commercial lease escalation rates allow you to keep up with inflation and other operating costs throughout a multi-year lease. In this blog post, we will explore the different types of escalation rates, how they can be used to maximize the profitability of your lease agreements, and how STRATAFOLIO can ensure you aren’t losing money.

Types of Escalation Rates

There are several types of commercial lease escalation rates that a commercial real estate owner can use. The most common types include fixed escalation rates, Consumer Price Index (CPI) escalation rates, and operating cost escalation rates.

Fixed Escalation Rates

A fixed escalation rate is a predetermined rate that is agreed upon in the lease agreement. For example, the lease may specify a 3% annual increase in rent. Fixed escalation rates can provide a predictable and steady increase in rent, but may not keep pace with inflation or changes in operating costs.

CPI Escalation Rates

A CPI escalation rate is tied to the inflation rate as measured by the Consumer Price Index. The rent increase is based on the percentage increase in the CPI. CPI escalation rates can provide an increase in rent that is tied to inflation, but may not accurately reflect the specific costs associated with your property.

Operating Cost Escalation Rates

An operating cost escalation rate is based on the landlord’s operating costs, such as property taxes, insurance, and maintenance expenses. The rent increase is calculated based on the percentage increase in operating costs. Operating cost escalation rates can provide an increase in rent that is directly tied to the costs associated with maintaining your property, but may be subject to unexpected fluctuations.

Maximizing Profitability through Escalation Rates

We know that, as a commercial real estate owner, your main goal is to maximize profitability. To do this, it’s important to consider which type of commercial lease escalation rates are best suited for your property and your business tenants. For example, if your property is located in an area with high inflation, a CPI escalation rate may be the best fit for you. If your property has high operating costs, an operating cost escalation rate may be more suitable than a CPI escalation rate. It’s important to consider the unique characteristics of your property and the needs of your tenants when selecting commercial lease escalation rates.

Negotiating Escalation Rates

When negotiating a commercial lease agreement, it’s important to clearly define what type of commercial lease escalation rates are being used and calculated. It is also important to ensure that the tenant understands all of the terms of the lease agreement. By negotiating and clearly defining the escalation rate, you can avoid misunderstandings and ensure a mutually beneficial lease agreement. Also be prepared to possibly negotiate:

  • the length of the lease,
  • the rent amount, 
  • or other terms of the lease agreement.

Using STRATAFOLIO for Commercial Lease Escalation Rates

Effectively managing your commercial lease escalation rates is a crucial aspect of your business as a commercial real estate owner. However, manually calculating and keeping track of these increases can feel like an impossible task. It’s time consuming, complicated, and frustrating, which can lead to missed escalations and less money in your pocket. Nine out of ten companies we encounter have missed lease rate escalations.

Luckily for you, we know how to take care of this! STRATAFOLIO offers a comprehensive commercial property management solution that allows you to organize data on your tenants, rents, common area maintenance, and much more. Our program automates the escalation process by sending you email reminders of upcoming escalations, and your invoices will always reflect the most current rent increases. Additionally, we seamlessly integrate with both QuickBooks Desktop and QuickBooks Online, making it easier for you to manage your finances. Schedule a 1:1 demo with us today and discover how STRATAFOLIO can fulfill all your business needs.

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