Negotiating a commercial lease requires that you know and understand your commercial rent escalation. A commercial rent escalation clause allows the landlord to gradually increase the annual base rent based on an agreed calculation during the term of the lease agreement. Once you sign the lease, you agree to the terms of the clause. Hence, it is essential that you read this article to learn more about the things you need to know about your commercial rent escalation.
1. Understand Fixed Escalations
Study your lease document very well to understand the landlord’s formula for fixed escalations. Generally, fixed rent escalations have fixed increases. These can take the form of a percentage, such as a 2 percent annual increase, or they can be structured as a flat increase, such as having rent go up by 50 cents per square foot per year.
2. Reasonable Commercial Rent Escalation
Understanding your commercial rent escalation means that you learn more about what a reasonable commercial rent increase should be. As a tenant, it is important that you negotiate a lower percentage rent rate. This is because rent increases can easily add up to a significant company expense. On average, a percentage rent increase rate could be between 2% (this is near the consumer price index); and. 5% (this is on the high side of the market). It is important to remember that you can always negotiate for more favorable terms. If you are not satisfied with the increase, you can offer an extended-term or forgo concessions that are not important to your company.
3. Rent Escalations Options
There are essentially four main types of rent escalation options:
Stepped Increases
This type of rent escalation allows landlords to increase the amount of your rent by a set amount at specific points during your lease.
Pass-Through Escalation
This type of rent escalation is triggered when the landlord experiences an increase in costs as specified in the contract.
Direct Operating Cost Pass-Through Escalation
This type of rent escalation is triggered when operating costs like utilities, security, and maintenance increase.
Indexed Escalation
This type of rent escalation allows landlords to increase the amount of rent when an established index rises.
4. Refusing a Rent Increase
If you are not comfortable with the rent increase when you eventually move into the building, you can always “refuse and move.” This means that when the current rent expires, you can decide to move to another building. However, it is important that you move, so the landlord can find another tenant, and avoid risking an eviction case.
Generally, you can avoid this issue ahead of time by ensuring you learn more about your commercial rent escalation. In case of any doubts, work with a tenant rep.
Understanding commercial rent escalation clauses can take time, but it will be time well spent. Depending on the type of escalation specified in your lease, it is important to plan ahead for a possible increase. If your commercial rent escalation clause is not too clear, you can shorten the learning curve by working with an experienced commercial tenant broker.
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