Rent Ceiling in Commercial Real Estate

Rent Ceiling in Commercial Real Estate

A rent ceiling is the highest price that a landlord can charge for rent. In most cases, rent ceilings apply to multifamily properties and are a result of city and/or state rent control regulations. A rent ceiling is only effective if it actually sets rents below the current market rate. While rent ceilings are supposed to make properties more affordable for residents in a specific area, in practice, this isn’t always the result, especially due to increased “black market” costs in the form of key fees and additional rent paid in cash.

In addition, rent ceilings often reduce the amount of multifamily units on the market, as decreased rental costs mean that more people can afford units. While this may sound beneficial, the people occupying these units are not always the lower-income individuals that these laws are attempting to assist.

Rent Ceilings for Non-Multifamily Commercial Properties

It’s currently extremely uncommon for purely commercial properties to have rent ceilings, though New York City and several other municipalities have experimented with this in the past. In recent years, certain New York City council members have suggested restarting commercial rent control, due to the increasing number of vacant storefronts in the city. The proposed law would allow tenants to renew their leases for 10-year periods, and, if a landlord refused, the tenant would be able to take them to arbitration.

Rent Ceilings in Commercial Leasing

Commercial leases often have rental escalation clauses, which sometimes include variable increases based on changes in the consumer price index (CPI). These variable changes are usually capped at a specific annual amount, often 3%. While these caps are not a rent ceiling in the traditional sense, they do slow down what otherwise could be a large and unstable increases in a commercial tenant’s rental costs.

To learn more, speak with a commercial real estate loan specialist today.