While it's a fact of life that your rent is going to escalate every year, getting stuck in a lease with horrendous escalations is avoidable. There are a range of formulas that are used to calculate your escalation and the differences between them can be substantial. Some of the most common escalations from best to worst are:
Direct Operating Expense Increase
This escalation formula apportions to you the increase in the buildings operating expenses over the prior year on a pro-rata basis, generally yielding an escalation in the range of $0.40-$0.50 per square foot.
This escalation is directly tied to the increased cost of labor in your building and runs between $0.50-$0.60 PSF. The basic feature is preferred over the “with fringes” add-on, which includes the increased costs of the porters benefits which can be another $0.20-$0.40 per square foot.
The most common form of escalation found in leases today, a fixed percentage escalation is one that increases in relation to your base rent (e.g. 3% annual increase). This escalation can usually be negotiated down to 0.5-2.5% lower
This escalation is directly tied to the increase in the consumer pricing index (CPI). Certain landlords have also thrown in a more onerous valuation and surprised the unsuspecting tenant by charging 150% of the actual CPI increase.