Glossary / Lease terms and deal stages
Also known as: Rent escalation, rent bumps, escalator
An escalation clause is a lease provision that raises the tenant's rent over the term, either by fixed steps, by an index such as CPI, or by passing through increases in the landlord's operating costs. It shapes the total rent your commission may be based on.
The SIOR lease glossary defines an escalation clause as one that "provides for the rent to be increased to reflect changes in expenses paid by the landlord such as real estate taxes, operating costs and the like." In practice the term also covers scheduled increases to base rent.
Cove describes the main structures. A fixed escalation writes each increase into the lease, so every future figure is known at signing. A CPI escalation raises rent by the change in a price index. A partial pass-through raises rent by only a fraction of the index change, and hybrid clauses apply whichever of a fixed step or the CPI change is greater.
If your commission is a percentage of total rent over the term, fixed increases raise the total and therefore the commission. For instance, one CBRE commission agreement with the State of Michigan set the fee as a percentage "of the total rent over the term of the Lease."
Not every escalation counts. A Grubb & Ellis commission agreement excluded adjustments to base rent made to cover increases in operating expenses over the Base year amount. CPI increases are unknown at signing, so how they are counted, if at all, should be spelled out in your commission agreement.
Ask whether your commission is calculated on scheduled rent including bumps, or on starting rent only, and get it in writing.
For example, on a hypothetical 3-year lease of 5,000 square feet starting at $40 per square foot with 3% annual increases, rent is $200,000 in year 1, $206,000 in year 2 ($41.20 x 5,000), and $212,180 in year 3 ($42.436 x 5,000), or $618,180 in total. Without increases it would be $600,000. At a hypothetical 5% rate, the commission is $30,909 versus $30,000.
