It’s a fact of life that prices increase. The cost of commercial property management — and subsequent rent — is no exception. Lease rate escalations are common clauses built into commercial leases allowing for automatic periodic increases on a tenant’s rent.
Let’s define it
This clause has been known by many names: an escalation clause, an annual increase clause, an annual rent increase, or an annual rent bump. Whatever it may be called, this pre-negotiated clause in a lease allows landlords to keep up with inflation and other rising expenses over the course of a multi-year lease.
There are two ways the clause can handle lease escalations: by tying the increase directly to rent, and/or by tying it to operating expenses and taxes. Increases can be based on a specific timeline or triggered by certain criteria. Here is your answer to what are lease rate escalations:
Escalations Based on Rent
Lease rate escalations tied to rent could be outlined in a lease in three different ways:
- Fixed increases, or stepped increases, often occur on a per-square-foot (PSF) basis. Rent will increase a set dollar amount for every year of the lease. For example, if rent costs $25 PSF in year one of the lease with a $1 annual increase, it would jump to $26 PSF in year two and $27 PSF in year three. Stepped increases could also encompass the entirety of the rented space instead of individual square feet.
- Percentage increases escalate rent based on a predetermined percentage. For instance, if the lease sets rent as $25 PSF in year one with a 5% annual increase, it’ll be $26.25 PSF in year two and $27.56 in year three.
- Inflation-based increases utilize the CPI (Consumer Price Index), maintained by the United States Bureau of Labor Statistics. This allows landlords to synchronize rent with inflation. CPI increases are capped at 3% for many leases.
Escalations Based on Other Expenses
Commercial tenants may pay more than just their base rent. This is because tenants often benefit from shared areas outside of their rented space such as elevators and landscaping. They also split the cost of some services with other tenants: utilities, custodial staff, insurance, and the like. Because of this, many leases will hold tenants responsible for common area maintenance (see our What is Cam Reconciliation article for more information). Landlords are able to escalate these fees to offset increased property management costs.
As a landlord’s property taxes increase, tenants could be responsible for this as well. Known as tax pass-through escalation, tenants help cover the cost of tax increases based on the percentage of the property they are renting. If you have more questions about what lease rate escalations are, please contact us to learn how STRATAFOLIO can help automate the process.
Use STRATAFOLIO to Manage Your Commercial Properties
If you’re a commercial real estate owner who wants to turn a profit, then managing lease rate escalations are a crucial aspect of your business. But calculating and keeping track of increases can be a time-consuming and frustrating process. For most companies, this process is manual and ripe for the opportunity to miss an escalation. In fact, nine out of ten companies we encounter have missed lease rate escalations in the last month. For some, this amounts to thousands of dollars of missed income in just a single month.
The good news? STRATAFOLIO provides a total commercial property management solution allowing you to organize data on your tenants, rents, common area maintenance, and so much more. Our program will even automate the process: you’ll receive email reminders of upcoming escalations, and your invoices will reflect the most current rent increases. Plus, we seamlessly integrate with both QuickBooks Desktop and QuickBooks Online. Schedule a 1:1 demo today and see how STRATAFOLIO fulfills all of your business needs.