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What are Real Estate Escalations and How do They Affect a Tenant’s Base Rent?

Picture of Lance Leighton

Lance Leighton

 

Escalations are a method by which landlords increase rent annually in an effort to adjust for external economic factors.   These increases are often correlated to a negotiated wage increase, published index or direct expenses that a landlord incurs for operating the asset.

The three most common types of escalations in Hedge Fund Office Space Leases are as follows:

1)    Direct Operating Escalation:  The tenant pays their proportionate share of increases in operating expenses for the building over the base year. 

Example:  A 25,000 square foot tenant in a 100,000 square foot building is responsible for 25% of the increases in the building’s expenses. 

 

2)    Fixed Percentage:  The tenant pays a fixed percentage of their base rent (usually about 3%) to account for increases in operating expenses.  This escalation compounds annually.

Example:  A hedge fund signs a lease at $100.00 per square foot with a fixed percentage increase of 3%.  The rent schedule would look something like this-

3)    Porters Wage without Fringe Benefits:  This method is based on the theory that costs to run a building go up at the same rate as a porter’s salary.  Similar to a direct operating expense escalation, the porter’s wage concept is based on increases over a base year.  The porter’s wage is determined every 3 years by an agreement between the Realty Board on Labor Relations and the union 32B/32J.  The tenant is then required to pay their proportionate share of increases in the porter’s wage.