Market rentals do not necessarily follow escalation-rate path

August 2002

In an inflation environment, the purpose of contractual rental escalation rates is to obviate the need to renegotiate the contractual rental once a year or so. In a hyper-inflation environment, this “or so” could be monthly, of course. Instead, the periodic in-lease rental escalation is an attempt by the parties to the lease to forecast the growth path of market rentals over the duration of the lease. Hence the market escalation rate on rentals is at any one time nothing but a forecast by the market of the probable growth rate of market rentals over the duration of the lease.

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