What Are The Most Popular Lease Escalations in CRE?
In a hurry:
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How compounding rent escalations protect against inflation
Understand the difference between the main escalation types
By the end of this episode you’ll learn:
Why are lease escalations important to owners?
What are the differences between flat, fixed, step and indexed escalations?
How do you calculate escalations?
How is percentage rent an implied escalation?
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If income is one of the most important drivers of commercial property value, then lease escalations are one of the most important drivers of income. Unlike residential real estate, almost all commercial leases span multiple years, often 10 or more years.
Given the duration of commercial real estate leases, managing how the rent rate changes over time is critical. Every commercial lease specifies how the base rent rate will increase over time. The rate at which the rent increases is a hotly debated topic, especially for long leases, where the impact of rent growth can be profound on not only the value of the lease but also the value of the property.
The most straightforward escalation is a fixed percentage every year. However, different industries (big-box retail), different tenants (restaurants and public entities) and different circumstances (long leases and newer tenants) may call for a different structure.
Whether flat, step or indexed, lease escalations help an owner protect from inflation and greater long-term value.