Escalations in commercial real estate refer to specific clauses in lease agreements that allow landlords to increase rent over time Federal policies suggest a shift toward slower economic growth and a steeper yield curve.2 in this environment, we believe properties with high income yields above financing costs and income streams less tied to the business cycle are best positioned to outperform. These clauses enable landlords to keep pace with rising costs associated with property ownership.
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The actual amount of expenses that are tied to the base year (property taxes, insurance and operating expenses) becomes the baseline or ‘floor’
As the lease advances in years, the tenant is responsible for paying any increase above the base year amount.
Without protections in the lease, operating expenses can increase significantly above the base year amount Tenant’s are also sometimes surprised about the increase in operating expenses they have to pay year over year on a percentage basis. Under a semi gross lease, the tenant pays only the increase over the base year expenses In both scenarios, tenants are required to share the cost of building expenses, based on their occupancy share of the premises.
Rent escalation clauses sometimes involve a set percentage increase over time (i.e 3% increase per year), or, they may include a variable percentage increase, often based on the consumer price index (cpi), an index maintained by the u.s Bureau of labor statistics which measures the average change over time in overall consumer prices over time. For subsequent years, the tenant is responsible for any increase in these expenses over the base year amount
This means that if operating costs rise, the tenant will pay more, but if they decrease or stay the same, the tenant's costs remain unchanged.
In some commercial real estate leases, cpi is used as a means to reasonably increase or decrease a tenant’s rent by tying their base or additional rent to fluctuations in the national or regional cpi, essentially tying rent to national or regional inflation. Today, sweeping changes in u.s
