Consumer Price Index rent adjustments are simple to calculate, right? Divide the current index figure by the base index figure to find the percentage increase in CPI, then multiply that percentage by the rent to arrive at the adjusted rent. What could be difficult about this?
You probably know that there is an index - The National CPI (All Items) that is published monthly. It is a broad-based index encompassing the cost of living for approximately 87% of the United States metropolitan population. You are probably aware of the narrower CPI-W (All Items) index that encompasses the cost of living for approximately 32% of the metropolitan population. Did you also know there are CPI-U and CPI-W indices for four regions and 27 major metropolitan areas, some of which are only published semiannually or bimonthly? On top of these confusing choices, add seasonally adjusted indices, old series and new series indices and market indices (food, medical costs, housing and transportation). Not quite so simple now, but the lease language should specify the applicable CPI index.
The CPI clause in the lease should specify, at a minimum, a detailed description of the applicable CPI index, the exact date when the first rent adjustment should occur and the frequency of subsequent adjustments, the publication date of the base CPI index and whether the base date changes in subsequent adjustment periods. With this information in hand, the CPI adjustment may be calculated as described above. But it can become more complicated!
Often, there is either a floor (minimum) or ceiling (maximum) cap or both, on the amount of the adjustment. Should the percentage increase in CPI fall between these two figures, the actual CPI percentage increase is used to adjust the rent. If the CPI falls outside the prescribed range, either the floor or ceiling percentage is used for the adjustment.
Many rent adjustments occur annually, on each anniversary of the commencement date. Occasionally, an adjustment will occur only every other year or on the renewal dates. In these cases, it is important to be cognizant of the dates of the base index and adjustment index, as misinterpretation of either of these numbers will yield an incorrect adjustment. Another common error occurs when the base index is established at a fixed date (commencement) over the life of the lease, but the adjustment index advances from year to year. The increase in the CPI index should be applied to the initial rent, not the adjusted rent. In this case, the compounding effect of annual CPI increases multiplied by the most recently adjusted rent is erased. Another dilemma in the calculation of CPI adjustments occurs when the specified index is not published on the prescribed adjustment date. To avoid this problem, lease language may be added to the index date that says, “or the next date for which the index is published.” We have been involved in cases where this “compounding” effect results in hundreds of thousands of dollars in increased rent as a result of a small CPI error.
Please help your future lease administrator avoid the above situations and attempt to perform the CPI adjustment calculation as written in the lease before signing the document. Consider putting an example of this calculation in the lease; it’s a good practice.