Accounting for Inflation in new leases and lease extensions

[Jacob W.]

I have a warehouse in downtown San Antonio I converted to office/retail suites about five years back. Most of our tenant leases have renewal options with automatic 3% rent increases each year. However, a few of the leases were for single terms, so renewal of those will be at market rate. The same applies of course to the occasional vacant suite. 

Is there language we can include in new leases and renewals for single-term leases that accounts for inflation that exceeds the 3% automatic increases? I'm not looking to gouge anyone, but if these higher inflation rates continue beyond next year it will of course reduce the real value of our revenue. 

Our building is in a part of downtown that is becoming more and more popular each year with lots of new multi-families popping up and many older buildings nearby being turned into bars, hip offices, etc... So I'm fairly confident in demand in our property remaining strong and only getting stronger in future years. 

I've thought about language that says rent will increase each year by 50% of the inflation rate (the previous year) that exceeds 3%. I.e., an 8% inflation rate in 2023 would result in a rent increase of the automatic 3% plus 50% of the remaining 5% of inflation for a total increase of 5.5%, if that makes sense. We would thus evenly share the pain of inflation increases with our tenant. Does that seem reasonable? Or should we just stick with 3% increases and note that renewals beyond this particular term will account for inflation during that term resulting in a fairly large bump in the next term? Anyhow, I'm grateful for any thoughts. 

[Chris Seveney]

@Jacob W.

You can put whatever you want in a lease, it does not mean the other party will agree to it.