Lance Leighton
Founder – HedgeFundSpaces.com
New York State Licensed Real Estate Salesperson
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.
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