Magazine article Journal of Property Management

Rent Escalation: How to Get What Is Coming to You

Magazine article Journal of Property Management

Rent Escalation: How to Get What Is Coming to You

Article excerpt

Effectively collecting rent increases requires a thorough knowledge of your tenants, of methods to calculate the escalation, and of when it is best to bill that increase to your tenant. Each part of the process is crucial to the whole. Nevertheless, a manager with know how, patience, and understanding can increase rents successfully.

Systematizing escalation

Start by taking each lease and extracting the escalation component on a form specifically designed for calculating rents. This can be either hand generated or done on the computer. The agent should also prepare another form for unusual clauses for each tenant.

These two forms should be kept in a looseleaf binder (henceforth building binders), which has the extracts for all the tenants in the building arranged by space number. In this way, the manager can know immediately when increases are due and if the lease contains any extraordinary clauses not found in other leases in the building.

In the management back office, the escalation forms should also be in building binders in the leasing and bookkeeping departments. The form should be filed by type of escalations (i.e., porter wage, real estate taxes) and by the month when the charges are to be billed and calculated. The escalations should be integrated into your billing computer so that they will be part of the tenant's rent bill.

All too often managers neglect to take advantage of all their computers have to offer. There are many programs available in the property management and lease analysis fields that are helpful and simple to use. However, for all the bells and whistles of some of the more sophisticated programs, I still find Lotus spreadsheets offer the simplest to use, the most reliable, and the easiest to read lease analysis printouts.

FIGURE 1:

Sample Real Estate Tax Escalation Form

Date:     February 21, 1995

Tenant:   XYZ Corp.
          7th Floor
          123 West 456th St.
          New York, NY 00000

1994-1995 Real Estate Taxes:                       $ 275,000

Less Base Year 93-94:                              $ 250,000

Amount of Tax Increase:                            $  25,000

Tenant's Share of Increase
8.33%                                              $2,083.25

Due July 1, 1994 per month                         $  173.60
FIGURE 2:

Sample Cost of Living Adjustment Escalation Form

Cost of Living Worksheet

Date:     February 21, 1995

Tenant:   XYZ Corp.
          7th Floor
          123 W. 456th St.
          New York, NY 00000

Base Rent:                  $60,000
Base Index:                 155.60 (12/93)
Current Index:              158.90 (12/94)

Calculations:               60,000.00                    61,272.49
                             x 158.90                  - 60,000.00

                         9,534,000.00                     1,272.49
                                                             x 80%

                                                          1,017.99
                         9,534,000.00                  + 60,000.00

                         155.60 = 61,272.49              61,017.99

New Rent Per Annum:      $60,017.99
New Rent Per Month:      $5,084.83
Old Rent Per Month:      $5,000.00
Increase Per Month:      $84.83
Effective Date:          12/1/94

Bill Three Months Retroactive: 3 x $84.83 = $254.50

Doing the billing

Next is the actual billing of your tenants. It is important when presenting the increase that it not just be a number on a bill. The escalation should be on a specifically designed form, which explains the calculation of the increase in a step-by-step method that any literate person can understand (Figure 1). …

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