What are the pros and cons of using CPI vs. other rent escalation methods?

If there happens to be contractual annual rent bumps for a tenant in a lease tied to CPI rather than a fixed %, keep in mind that there’s CPI for All Urban Consumers (CPI-U) & CPI for Urban Wage and Clerical Workers (CPI-W). Lease should specify which one is be used. Indexes for each month will typically be provided—summary tables may only provide increases year-over-year (YoY), so if you want to figure out the month-over-month or calendar year or specific fiscal period increase, you can calculate the implied % change on your own. #CREValueAdd 👈 Follow

The Consumer Price Index (CPI) is a tool that helps measure how much it costs for people in the United States to buy things. It helps keep track of how much things cost over time. When rent is increased using the CPI, it means that the rent goes up or down depending on how much the CPI changes. Example, if the CPI goes up 2%, then the rent will also go up 2%. The CPI looks at things that most people buy, like food, housing, transportation, and medical care. Bureau of Labor Statistics reports this information every month.

Overall, using CPI for rent escalation offers numerous benefits, including accuracy, fairness, transparency, predictability, and legal compliance, while also aligning rental prices with broader economic trends and mitigating inflation risk.

Using the CPI to increase rent has some good points. The CPI is based on the prices of things people usually buy so it's a way to avoid arguments between landlords and tenants and it also makes sure that rent goes up with inflation. Because the CPI is based on what most people spend money on, it's a fair way to increase rent.

One drawback is that it can be unpredictable because the inflation rate changes from year to year. This makes it tough to plan for future expenses or income. Additionally, the CPI may not reflect changes in the real estate market, like when there's a sudden increase in demand for properties. This means that rent might not increase as much as it could, and landlords may miss out on extra income.

One option is Fixed Increases, which means the rent goes up by a set amount every year. This way, landlords and tenants can plan ahead and know exactly how much the rent will increase. Another option is Percentage Increases, which means that the rent goes up by a certain percentage each year. This will help protect against inflation and still keeps things predictable. Market Rent Increases is also another choice, where the rent is based on the current rates for similar properties in the area and stays competitive with other properties in the market.

Some cities have renal increase caps. One option could be a net lease arrangement. Most rentals are under a gross rent agreement. Net lease agreement is more typical for CRE’s. Net lease is when the tenant pays a portion or all the property taxes maintenance and insurance costs in exchange for lower rent payments.

The lease decisions one makes as a Landlord should consider benefits during hold period but also what promotes maximizing value at time of sale. A few things to consider: - Annual rental increases are generally preferred by investors and lenders. Tenants like them as well as it spreads out the impact of an otherwise 'big bump' that you'd see in a typical 5-year renewal. - If you have to reduce rent or keep rent flat in order to help/keep a tenant, consider a mid-term bump that will catch rent back up to original schedule. - Another option is to set 'reset to market' rent adjustment at an option. Landlord and Tenant will both present comps and an adjustment is made accordingly. Evan Lyons [email protected]

Choosing the best rent escalation method depends on several factors. It's important to consider the specific situation, such as the property location, the local real estate market, and the goals of both the landlord and the tenant. Each method has its own advantages and disadvantages, so it's important weigh the options carefully. Fixed Increases might be a good option for those who want more stability and predictability. Percentage Increases might be a good choice for those who want to protect against inflation while still having some predictability. Market Rent Increases could be the right choice if a landlord wants to keep rent competitive with other properties in the area. Some questions need to be answered first before deciding

Some other things to think about when picking the best rent escalation method is how long the lease is, how much money the tenant has, and what the landlord needs for their own money. If the lease is short, it might be better to pick a rent escalation method that's more predictable and stable. If it's a longer lease, it might be better to pick a method that's more flexible. If the tenant is having trouble with money, it might be better to use a method that won't increase the rent too much too quickly. Landlords also need to think about their own money needs and how the rent increase will affect them. Landlords and tenants should pick the best rent escalation method for their current situation and what they can live with.

Great advice on rent escalations and the different types. Excellent recap! I had the responsibility to license waterfront property ( public trustee lands ) for a large municipality and the standards were a bit different as the “owners” we’re looking for “fair and equitable “ verses highest and best use. ( had to adjust to trustee lands ownership and responsibilities ) Limited uses also expanded with public need to include emergency services, not for profits accommodations and other public uses and needs. We found coupling the primary use with a CBA- community benefits agreement it made the end result a stronger bond in private- public partnerships. Creative thinking allowing practical solutions in the private - public sector