Written by So you found the perfect commercial space. Great location, reasonable rent, and your business is ready to take off. Whether you’re looking at available commercial real estate Indiana or scouting properties in any other state, you sign the lease, shake hands, and two years later you’re wondering why your rent jumped from $3,000 to $4,200 a month. Welcome to the world of lease escalations—those sneaky little clauses that can make or break your business budget.
Most business owners? They focus on the base rent and ignore everything else. Big mistake. I’ve been doing commercial real estate for over a decade, and I can’t tell you how many panicked phone calls I get from tenants who got slammed with unexpected rent increases. The thing is, these escalations aren’t hidden—they’re right there in your lease agreement. You just need to know what to look for.
The Foundation: Understanding Lease Escalations
Think of lease escalations as the rent increase rules baked into your contract. They’re not there to screw you over (usually). Landlords need them because their costs go up every year too. Property taxes increase, insurance premiums skyrocket, and don’t even get me started on maintenance costs. Without escalation clauses, they’d lose money on every lease they sign.
But here’s what kills me—tenants sign these agreements without doing the math. I had one client, runs a successful marketing agency, who signed a 10-year lease with a 3% annual increase. Seemed reasonable, right? Wrong. By year seven, his rent had jumped 22% from the original amount. That “small” percentage had eaten into his profit margins like crazy.
Your lease escalations aren’t just next year’s problem. They compound over time and directly impact your cash flow for the entire lease term. Understanding them now saves you serious money later.
Delving Deeper: Types of Lease Escalations
Not all escalations work the same way. There are three main types, and each one hits your wallet differently.
Fixed Increase (Graduated Lease)
This is the straightforward option—your rent goes up by a set amount or percentage at specific times. Maybe it’s 3% every year, or $150 more per month annually. Whatever the number, it’s locked in from day one.
The good news? You can budget for this easily. You know exactly what your rent will be in year five, year seven, whenever. That’s gold for financial planning, especially if you’re running a tight ship.
The bad news? You’re stuck with these increases even if the market crashes. I’ve seen businesses paying above-market rates because they locked into fixed escalations right before a recession hit. Market flexibility? Zero.
Fixed escalations work best for companies that need predictable expenses. Startups, small businesses, anyone who can’t handle surprises—this might be your best bet.
Indexed Increase
Here’s where things get interesting. Instead of fixed increases, your rent adjustments follow an economic index, usually the Consumer Price Index (CPI). So if inflation goes up 2%, your rent might go up 2%. If inflation hits 6%, well, you’re looking at a 6% increase.
The idea makes sense—your rent increases should match real economic conditions. During stable times, you might see smaller increases than you would with fixed escalations. But during periods like we’ve had recently with high inflation? Some of my clients saw their rent jump 7-8% in a single year when they’d budgeted for 2-3%.
Indexed escalations are a gamble. You’re betting that inflation will stay reasonable over your lease term. Sometimes you win, sometimes you don’t. Just make sure you can handle the uncertainty.
Pass-Through Expenses
This one’s completely different. Instead of just increasing your base rent, you pay a share of the building’s actual operating costs. Property taxes, insurance, utilities, common area maintenance—you get a bill for your portion of whatever the landlord actually spends.
Sounds fair, right? You pay your share, nothing more. But here’s the catch—you have no control over these expenses. If the landlord decides to upgrade the lobby or if property taxes spike, you’re paying for it whether you like it or not.
Pass-through expenses show up in different lease types. Full-service leases where the landlord covers most costs, modified gross leases where you split some expenses, and triple net leases where you pay almost everything. The key is knowing exactly what expenses get passed through to you.
I always tell clients to scrutinize the pass-through language. What’s included? What’s excluded? Can you audit the landlord’s numbers? These details matter because they directly impact your monthly bills.
Strategic Comparison: Which One is Right for You?
Choosing the right escalation type isn’t about finding the “best” option—it’s about finding the right fit for your business. Here’s how to think about it:
Go with fixed increases if you need predictable costs. You’re a startup, you’re bootstrapping, you can’t afford surprises. Pay the premium for certainty.
Consider indexed increases if you can handle some uncertainty and want rent that reflects actual economic conditions. Just don’t do this if variable costs will stress your cash flow.
Pass-through expenses work when you want to pay only your fair share of building costs. But you need to stay on top of the landlord’s expenses and make sure they’re managing the building efficiently.
The worst thing you can do? Choose based on which option gives you the lowest initial cost. Think about the entire lease term, not just year one.
Mastering the Negotiation Table
Here’s the thing about lease negotiations—landlords expect you to negotiate. That first offer? It’s a starting point, not the final deal. Don’t just accept it and move on.
Always push for caps on increases. Even if you’re doing indexed or pass-through escalations, try to negotiate maximum annual increases. “Rent increases by CPI, capped at 4% per year.” This protects you when things get crazy.
For pass-through expenses, demand transparency. You should have the right to review the landlord’s expense calculations and challenge questionable charges. I’ve saved clients thousands by catching errors in CAM calculations.
Pay attention to the base year for pass-through expenses. This sets your baseline for future increases. A more recent base year usually means lower costs for you over the lease term.
Do your homework on market conditions. Know what comparable spaces are renting for and what concessions other landlords are offering. This gives you leverage when negotiating.
Beyond the Clause: Long-Term Implications & Due Diligence
Small percentages add up over time. That 3% annual increase doesn’t sound like much until you realize it’s cost you an extra $50,000 over a 10-year lease. These aren’t just next year’s costs—they’re compounding expenses that can eat into your profits for years.
Before you sign anything, project the total escalation costs over your entire lease term. Ask questions about anything that’s unclear. Get specific examples of how increases are calculated.
And please, get a commercial real estate attorney to review your lease. I know it costs money upfront, but I’ve seen too many businesses get burned by escalation clauses they didn’t understand. A few hundred dollars in legal fees can save you thousands in unexpected costs.
My Expert Take: Navigating Complexity with Confidence
After a decade in commercial real estate, I’ve learned that success isn’t about avoiding complex lease terms—it’s about understanding them well enough to make smart decisions. Lease escalations are part of the game. The goal is to choose the right type for your situation and negotiate terms that work for your business.
Knowledge equals control. When you understand how escalations work, you stop being a passive tenant who just pays whatever bill shows up. You become someone who actively manages their occupancy costs and makes strategic decisions about their real estate.
Lease escalations—whether fixed, indexed, or pass-through—are going to be part of your commercial lease. They have a real impact on your business finances, so you need to understand how they work and choose the right type for your situation.
The key is being proactive. Don’t just focus on the base rent. Look at the entire lease term, negotiate for terms that protect your interests, and always consider the long-term implications. Ask questions, get expert advice, and don’t be afraid to push for better terms.
Your real estate costs should support your business goals, not undermine them. With the right approach to lease escalations, you can avoid costly surprises and build a solid foundation for your business’s future.