Rent escalation is a provision within commercial lease agreements that allows for periodic increases in rent over the duration of the lease term. This provision recognizes that the costs associated with owning and maintaining a commercial property are subject to change due to factors such as inflation, increased operational expenses, or improvements made to the property. There are various mechanisms for rent escalation, including fixed increases at scheduled intervals, tying rent adjustments to changes in a specific index, or incorporating a percentage-based increase.

From an investor's perspective, understanding rent escalation is crucial for projecting future Net Operating Income (NOI) and assessing the potential impact on Capitalization Rate (CAP rate). It also serves as a means for property owners to ensure that rental income keeps pace with the evolving costs of property ownership. Investors may strategically negotiate rent escalation terms to align with market conditions and enhance the property's overall income growth potential over the lease term.

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