Escalation Clause

An escalation clause defines how and when rent rises during a lease. There are three common forms. Fixed escalations increase base rent by a set percentage or dollar amount each year (for example, 3% annually). Index-based escalations tie increases to a benchmark such as the Consumer Price Index. Expense-based escalations, common in NNN leases, pass through increases in operating expenses and taxes above a base year. Closely related is rent escalation, the general term for these built-in increases. For a healthcare tenant signing a long lease to justify an expensive buildout, the escalation clause can quietly become one of the most expensive terms: a 4% annual escalation nearly doubles rent over a 15-year term. Negotiating a cap on escalations, or a fixed and predictable schedule, protects the practice from compounding cost.

Escalation clauses compound over time and can dominate the true cost of a long lease. Negotiating the structure and a cap upfront prevents rent from outpacing a practice's growth.

A clinic signs a 10-year lease at $30/sq ft with a 3% annual escalation. By year 10, the rent has risen to roughly $39/sq ft — a 30% increase over the term, built in from day one.