Expert: Jim Avancena, CPM - 3/5/2010

Question
QUESTION: I own commercial property that is currently tied in a 10 yr lease. The lease period ends May of 2013.  My tenant has 6 five year options available after the initial lease is up.  In our agreement I am able to raise the rent after the initial 10 lease is up and then every 6 yrs after that based on the CPI.   The tenant currently pays 7000. a month rent.  Could you please tell me roughly how much I can raise his rent in 2013?

ANSWER: Jodi:

Are you saying that you can raise the rent BASED ON THE CPI after the first ten year term?  Or just that you can raise the rent after the first ten years and then by the CPI every six years (Did you you mean five years?) after the end of the first(5 year?)renewal period?

Additionally, your lease should stipulate a very specific CPI standard to utilize when you calculate the increased rental.   You need to get the specific CPI figures for the standard stipulated in the lease.  There are many standards used by the Bureau of Labor Statistics to compile the CPI figures.  Once you know which standard is stipulated, you can get the figures you need to compute the rental increase.

Send me a follow-up with the particular CPI standard included and I can explain the computation for you.  Note that if you are supposed to compute the increased rental starting in May of 2013 using the lease stipulated CPI standard, you won't be able to complete the final rental computation until at least the end of March in 2013.  I will explain this when I explain how to do the 2013 rental computation.

-Jim

---------- FOLLOW-UP ----------

QUESTION: Yes. the rent will go up after the first 10 year lease and every additon 5 yr options.  the lease states.

"the amount of rent shall be adjusted by the amount of inflation in the economy since the beginning of the last term as determinied by the Consumer Price Index Infation Calculator of the U.S. Bureau of Labor
Statistics"

Answer
Jodi:
This may be your lucky day.

You can go to the "www.bls.gov" website which will contain more than you want to know about consumer prices and the hundreds of various indices.

Since your lease uses very general wording and does not actually specify one index of the many that exist (this is unusual in a lease) to use in making your rental calculation, I believe you should be able to use the "CALCULATORS" feature identified on the front page of the above indicated BLS website which is described lower down on the front page as follows: "Easily find out how the buying power of the dollar has changed over the years using the inflation calculator."

If you click on the small colored diagram headed with "Calculator", next to "Tutorial", you will be immediately switched to a page with a bright yellow box topped by navy blue at the top in the center of the page.   Simply plug in the $7,000 dollars total that you said was the first year rental per month the lease began; and below the $7,000 you just entered, key in the four (4) digits that are the very first calendar year when the lease term began.

Then in the same box, just below the words: "has the same buying power as in", just key in 2013 for the year.  Clicking on "Calculate" will then generate the new monthly rent your tenant should pay in each monthly rent payment when the first five (5) year renewal term begins.  Note that the index used in this simplified calculation uses the "average consumer price index for a given year".  

It seems that this easy-use calculator provided by BLS on the website actually (by luck) matches the exact terminology cited in your lease text.  If you want the rental calculation to be narrowly calculated on a specific 120 month period since the lease commenced, you may need to contact BLS and ask them if they could identify where the monthly "average CPI" index figures they use in their "Calculator" can be found and you could then compute the $7,000 monthly rent by the 1st lease month "average CPI" value by the 120th lease month "average CPI" value.

I hope that I have not made a simple method of arriving at your renewal rental value more complicated.   If you have any further questions, please send another follow-up.

Good luck.

-Jim