Typical Commercial Lease Escalation
What is the typical range of escalation on a commercial lease? Does it vary between NNN and Full Service Leases?
Answers (7)
Alan B
Commercial Real Estate Director Griffin Property TopLinked.com LION WITS Business School Alumni Sydney Coordinator
In NSW Australia leases on commercial or industrial property are typically escalated at a fixed rate pa. In the current market in Sydney that rate is between 4 & 5% pa. If a lease is longer than 3 years there is often a market review after 3, 4 or 5 years. The escalation is applied to the net rental i.e excluding what we term as outgoings. Outgoings are charged at the actual cost.
Alan Barry Director
Griffin Property Commercial & Industrial
Leasing, Sales and Management of Commercial & Industrial Property
http://www.griffinproperty.com.au
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Gary A
CEO at Aminoff & Co. Realty Advisors, Inc.
Best Answers in: Government Policy (3), Personal Real Estate (3), Commercial Real Estate (1), Criminal Law (1), Wealth Management (1)
Typical escalation for a commercial lease in the USA would be in the 3% range. In some cases a CPI escalation is used with a minimum and maximum, e.g., the increase in the Consumer Price Index, with a minimum increase of 3% and a maximum of 5% per annum. The rate of escalation generally is not different if it is a NNN or a full or modified gross lease.
If you have a specific lease you would like some help in structuring, please feel free to contact me.
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Robert R
New York City attorney and corporate executive concentrating in Commercial Real Estate, Leasing and Litigation
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I think it's more likely to vary between retail and office and certainly market to market.
Ramesh M
Founding Director at CERTES REALTY LIMITED
Best Answers in: Business Analytics (1), Personal Real Estate (1)
Hi Martin.
In the Indian realty, the lease escalation is subject to the three factors of capital investment, tenure and desposits paid by the tenant to the lessor. Typically, on 9 year leases, the lease escalation varies between 15-20% EVERY THREE YEARS. Most tenants, landlords and consultants are comfortable on a zero annual escalation model, and prefer to take an increase every 2-3 years.
Having said that, every elase agreement is conditional and terms may vary.
If you have any specific query to the Indian realty scenario, you can mail me directly on menon(at)trustbanq(dot)com.
Hi Martin,
In the US commercial real estate market, commercial leases usually have an automatic annual escalation of the base rent. The amount of the annual escalation is either based on a fixed percentage increase, usually 3%, or the increase in the Consumer Price Index (CPI) over the previous year. In some cases, an escalation that is based on the CPI has a floor (usually around 2%) and a ceiling (usually around 5%). I
n some cases, particularly for larger temants, there will be no annual escalation, but there will be an escalation at the start of any lease extensions. The amount of escalation for a lease extension varies greatly; it can be a pre-determined escalation or it can be a to-be-determined amount based on the market rents at the time of the lease extension.
The above rent escalation norms apply to both NNN and full-service leases.
Steve
One of the most attractive benefits of commercial real estate to an owner/ investor is the hedge against inflation provided by escalation clauses. In the Charlotte market, typical escalation ranges have varied over the last 30 years as expectations of inflation have changed. Leases signed in the late 1970s and early 1980s were more likely to include an external index, e.g., CPI, to capture actual inflation each year. More recently, as inflation has been steady year-to-year, standard annual escalations of 2% to 4% have become common. It will be interesting to see how fears of future commodity and other price increases drive changes to escalation clauses in renewals and new leases.
Regarding the distinction between NNN and Full Service Leases, the investor/owner has maximum exposure to inflation risk on a Full Service lease since the utility, janitorial labor, and other costs are only controllable within limits. An owner/investor will seek to capture the future risk of full-service costs in either a higher escalation rate or a higher base rental rate to hedge against that risk. Base-year expense-stop clauses are also used in some leases, particularly office leases, to minimize the owner/investors exposure to expense growth.
Adam R
Vice President of Corporate Development at BG Capital Real Estate Investment Trust
Typically a commercial lease will escalate annualy in the U.S. based on the consumer price index (CPI) which is around 2.6% annualy right now. Full service leases are usually the same. Of course if you can get it, its better to get a contractual increase every year at a fixed rate of between 3 to 5%. Its usually easier to get a tenant on a full service lease to agree to a fixed annual increase because the landlord can make the argument that they bear the burden of absorbing all increases whether planed or as a result of commodity based services like energy.
