Leasing Terms: Escalations

Escalations typically refer to annual increases the landlord charges to account for the rise in operating expenses, inflation, market increases, and profit.

A standard Manhattan escalation is 3% per year, but can sometimes be negotiated especially in a soft market. Certain landlords will ask for higher escalations (4-5%) and in certain instances we’ve seen a landlord charge a 4% increase, but not hold a tenant responsible for their proportionate share of real estate tax increases. So in that case, the tenant is probably better off.

On a longer lease, there is typically a bump, in addition to an escalation, around the 5-7th year.

Certain landlords won’t require a fixed increase, but will instead adjust the lease annually according to the consumer price index (inflation). This is less predictable and not necessarily worse (depending on how the economy is), but is more dangerous. For example, if inflation spikes tremendously (e.g. 8%) in the second year of a ten year lease, you are suffering the consequences for the rest of the lease.

If a landlord requires CPI instead of a fixed increase, we usually suggest having the CPI limited or capped to for example, 5% (but obviously, the lower the better).