How to do a CPI rent review?

[harryb]

Can someone with experience please advise whether these calculations are correct.

Lease began 1 March 2016
Rent review is 1 March 2018

Accordingly CPI for Dec 2015 quarter = -0.5
CPI for Dec 2017 quarter = 0.1

Adding the two together produces a negative result of -0.4. However the lease states (C+D) shall not be less than 1.

Therefore is my CPI multiplier simply 1% ?

FORMULA
A = B X (C + D)
A= the CPI reviewed rent from the relevant CPI rent review date
B = the annual rent payable immediately before the relevant CPI rent review date
C = CPI for the quarter year ending immediately before the relevant CPI rent review date
D = CPI for the quarter year ending immediately before the last rent review date or if there is no previous rent review date, the commencement date of the current term of the lease

where (C+D) shall not be less than 1

[Davo36]

Well I think if you make C+D equal to 1, then A = B.

So the rent doesn't change is what that seems to say.

I googled it and found this thread: https://www.propertytalk.com/forum/s...nt-CPI-formula

[learner]

Hi harryb

Your formula is incorrect. If you have a look at the ADLS Deed of Lease formula, it is:

A = B x (C/D), ie it is C divided by D, NOT C+D (sorry, I can't produce the division symbol). You are NOT adding C and D.

This means in your example:

CPI Index for Dec 2017 quarter = 1006 (C)
CPI Index for Dec 2015 quarter = 977 (D)

So, C divided by D = 1006/977 = 1.029

Your new rent A = B x 1.029, where B is your current rent, and A is your new rent.

The CPI Index figures are from Stats NZ

[Lovethiscountry]

Hi Harryb

Just put the original rent in the CPI calculator and the new rent amount is calculated for you. Then print a copy and send it to the tenant. Inflation calculator - Reserve Bank of New Zealand

[Perry]

Unless the Lease documents mandate it, do not use the CPI. It borders on being fraudulent.

I used to use the CPI, but changed to use the HPI.

The HPI is found as a sub-set of the RBNZ Inflation Calculator, linked to, above.

[harryb]

Thanks learner, your contribution has been immensely helpful.
You saved me from being stung by my lawyer and I'm sure your post will continue to assist many in the future via their frantic Google searches.

[harryb]

Thanks Lovethiscountry for your contribution, your method is also valid.

And Perry as much as I would've liked market or fixed rent reviews, my tenant stipulated CPI so a compromise had to be made, many thanks.

[jcmk]

Best method for rent reviews

Which is the best method for commercial lease reviews?

Our lease is based on market rent reviews, but have discovered that after paying for a market rent valuation report, in this environment of low inflation, the cost of the reports negates the increase in rent.

From readings online - I was thinking that maybe a combination of perhaps 2 x CPI reviews and then a market review just to make sure that you are tracking in line with rents for your area.

I also understand that perhaps the best safety value is to have a hard ratchet clause that states that the rent can never be lower than the previous rent valuation.

[Davo36]

Sounds about right to me.

Will tenants agree to a hard ratchet clause these days?

[Scouser]

Based on an entirely representative sample of 1 - yes.

I have a one year old lease and it has CPI + 1% plus a hard ratchet clause - however, other matters were negotiated - so it's the entire deal that matters.

[Davo36]

Based on an entirely representative sample of 1 - yes.

I have a one year old lease and it has CPI + 1% plus a hard ratchet clause - however, other matters were negotiated - so it's the entire deal that matters.

Yeah for sure, so many points these can be negotiated on.

[jcmk]

Many thanks for feedback.

Tenant might be receptive to replacing the 2 yearly market rent review with CPI reviews, however I don't think the same could be said of adding the hard ratchet clause.

Proof that you definitely need to sit down with a "good" lawyer who is prepared to go through and explain the "important clauses in the agreement/deed of lease" before signing anything. Worth it's weight in gold to spend money upfront at this point, rather than finding at some stage later that you are going to be significantly out of pocket due to poor attention to detail before signing.