There are some strategies you can suggest in contract negotiations to lessen the impact of rent-escalation clauses.
Having a long-term commercial real estate lease with a fixed rate is relatively rare because it is to the advantage of landlords to build in rent-escalation provisions.
Landlords sometimes will insist on annual increases based upon the percentage increases in the Consumer Price Index (CPI). If you are confronted with such a request, do two things.
First, attempt to arrange for the increase to not kick in for at least two years.
Second, propose a cap on the amount of each year’s increase; for example, no more than a 3% increase in any year. Here is a sample clause for doing that:
“Any rent increases under this Lease shall commence no earlier than two (2) years after the date of the commencement of this Lease. The maximum amount that the rent may be increased in any one year (starting in the third year of this Lease) shall be 3% over the beginning base rent under this Lease.”
If you have to live with a rent escalation clause, consider a predetermined fixed amount; for example,
- $2,000 a month for the first year
- $2,200 a month for the second year
- $2,400 a month thereafter.
Such a provision gives you more predictability in planning your business. Make sure that your business plan projections adequately reflect such increases.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States. For more information call 520-299-3400.