WHAT IS AN ESCALATION CLAUSE? | WHAT IS AN ANNUAL INCREASE?
An Escalation Clause is often referred to as an Annual Increase Clause, an Annual Rent Increase or an Annual Rent Bump. An Annual Increase is a clause in a lease which provides for the base rent amount or operating expenses to be increased and/or to reflect changes in expenses paid by the landlord such as real estate taxes, insurance, operating costs, etc.
The Escalation Clause or Annual Increase may be accomplished by several means such as fixed periodic increases such as 3% per year or $1.00 per SF per year, or increases tied to the Consumer Price Index or adjustments based on changes in expenses paid by the landlord in relation to an Expense Stop or Base Year amount. The majority of leases will have an Escalation Clause or Annual Increase tied to the Base Rent or Full Service Rent or Gross Rent. The majority of leases will also contain a clause that allows the
landlord to collect an increase in the NNN or operating expenses as those costs increase beyond the first year of the lease.
Essentially, the Annual Increase is the amount of money the rent increases each year beyond year one of the lease.