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Cpi Escalation Not Clear?

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Cpi Escalation Not Clear?

Postby Delton » Mon Dec 05, 2016 1:35 am

I am a Landlord.  I have a Lease Proposal from a prospective tenant. The first term is 10 years and it's clear--a specific dollar amount for each year 1-10. There are also(2) 5 year extensions, and I'm confused on those.  The first extension states:  "Rent for the years 11-15 of the Extended Term shall be in an amount that shall be adjusted to coincide with the adjustment to the Consumer Price Index(C.P.I.) as published by ther US Department of Labor, Bureau of Labor Statistics."   It seems vague to me. what exact index?, what month?, adjust every year? difference b/t what and what? Thank you!
Delton
 
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Cpi Escalation Not Clear?

Postby MacDomhnall » Mon Dec 05, 2016 10:48 pm

I am a Landlord.  I have a Lease Proposal from a prospective tenant. The first term is 10 years and it's clear--a specific dollar amount for each year 1-10. There are also(2) 5 year extensions, and I'm confused on those.  The first extension states:  "Rent for the years 11-15 of the Extended Term shall be in an amount that shall be adjusted to coincide with the adjustment to the Consumer Price Index(C.P.I.) as published by ther US Department of Labor, Bureau of Labor Statistics."   It seems vague to me. what exact index?, what month?, adjust every year? difference b/t what and what? Thank you!
MacDomhnall
 
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Cpi Escalation Not Clear?

Postby Titus » Tue Dec 06, 2016 12:12 pm

Jay:

Good that you asked this question.   The Lease Proposal must state SPECIFICALLY which of the MANY Consumer Price Indices that are published by the Bureau of Labor Statistics that the Landlord and Tenant have agreed to use.    Without stipulating the precise index the adjustment could be disputed by either party.   You should go the the on-line Department of Labor site and find an index that you both agree to and stipulate that you will use that index when the computation is required.

Additionally, the provision to increase the rent using a specific index must specify that the parties agree to utilize the specifically published monthly or quarterly index for an agreed to base date and the specific stipulated comparison period index.  Let me explain.

The CPI escalation computation is determined by comparing an agreed to index for a specific base lease date(usually the first month of the lease or the index for the date that is 12 months earlier than the next lease year) with the index published at the time the CPI rent increase is to occur.  The lease needs to state that; for example, the base figure used for the CPI escalation computation shall be the most recently published index(You must use the "most recently published index" because the index for any month or quarterly period is always published behind schedule - so you must use the index that is available for use at the time the computation must be made. For example, the December index may not be published until February 25th, so if your rent adjustment is to occur on December 1st, you will likely have to use the actual October index because that will be the "most recently published index" available on December 1st) for the start of the last lease year and the comparison year index shall be the most recently published index published at the start of the first extended term.  You then compute the mathematical value for the statistical increase during that 12 month period, and increase the monthly rent being paid by the tenant during the last year of the lease by whatever the increase is mathematically determined to be by the indices.   

You may find; as a landlord, that it may be more advantageous for you and the tenant for the rent beginning with the extended term be determined to be Fair market Value Rent as mutually agreed by the parties.    It is often the case that market rents for your space shall be vastly different ten years from now than what a ten year CPI increase would determine, or using my example in the previous paragraph, a one year CPI increase in rent for the first year of the extended period when added to the rent in the last year of the first ten year term may not be acceptable to you either.  However, you will need to be very careful about the language you employ to determine how Fair Market Value rental value will be determined for the extended term.     

Finally, if you decide to utilize a CPI escalation for the extended rental period, most leases stipulate that the increase by the CPI index be made for each lease year.  In some cases the tenant will request that the lease limit the maximum amount of CPI increase that can occur in and one lease year.   You will need to determine if that will be acceptable to you.

You may find that it would be helpful to contact your nearby commercial board of realtors office and ask them for appropriate text that you can use and insert into the proposal/lease.

Good luck,

- Jim
Titus
 
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