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.