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Commercial Real Estate Investment/Using CPI to calculate rent increase
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Question
I inherited a commercial building and am negotiating a 5 year lease with a new tenant. The previous lease stated that each year the rent increases in an amount calculated using the USBLS Consumer Price Index for All Urban Consumers, US City Average Index (1982-84=100). The prospective tenant wants the CPI figure used to calculate rent increases capped at 2.5% annually. Is a 2.5% cap reasonable? I've also read that landlords may include a "floor" to ensure that some increase is received each year. Would you recommend a floor as well? What is a reasonable figure?Thank you for any information you might be able to provide.
Becky:
Reasonable? The answer is dependent upon how strong the demand is for the the premises that your potential new tenant is desirous of leasing. It is also related to what you believe our economy is going to do for the next five years - and that is anyones guess at this point.
If you have the only space for ten miles in every direction that is suitable for the needs of this particular tenant, or the space includes a fully functioning commercial kitchen and the current prospect wants to open a restaurant, then you would likely be able to get the prospective tenant to accept a five percent (5%) cap or no cap at all.
However, if this particular space has been vacant for the last 18 months, you would likely want to be prepared to be flexible and carefully consider a tenant's low offer.
You need to consider the specifics of what you have to offer before you decide the answer to your question.
A "cap" and a "floor" are common limiting provisions in a lease escalation provision. The reasonableness of either is related to the overall terms of the lease given the current leasing market.
- Jim
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Answers by Expert:
Jim Avancena, CPM
Expertise
Best qualified to answer questions that involve commercial leases, that is, basic issues as well as the often unexpected effects of the complexities and inter-relationships of the provisions a lease may contain, explain how seemingly innocuous text in your lease can have a major impact on a Tenant or Landlord and their business operations, and the common practices utilized in the industry. I can untangle most matters that may come up from the time a tenant begins searching for a office or store space and the lease acquisition process, concerns related to remodeling/improving the leased premises, moving-in, subletting or assigning the leased space, and a long list of problems that may come up during the lease term and even after a tenant moves out. I have practical experience with most property management issues and resolving landlord and tenant disputes - especially those involving what may appear to be overcharges assessed for additional lease charges like CAM costs, operating expense reimbursement, real estate taxes, utilities, construction improvements etc. Note that I am not an attorney and cannot provide legal advice.
Experience
Thirty years active experience in the commercial real estate industry as a licensed real estate broker in the Washington DC Metro area (DC, Northern Virginia & Maryland). I have been admitted (approved) by the Maryland and DC courts to testify as an expert witness on the subjects of Commercial Leasing and Property Management in the area of standard industry practices. I have had a business for the last 14 years advising virtually every form of business entity from large national corporations to the smallest ma & pa new businesses regarding a wide range of commercial real estate matters in addition to property management and commercial leasing.
Organizations
Currently my three children keep me so busy that it is difficult to participate in organizations with continuing and specific time requirements.
Publications
I publish a local commercial real estate newsletter titled: "Tenants First". My firm was the subject of a high profile Washington Post business section cover page (2.25 full pages) feature story on January 13, 1993; titled "Overcharging Overhead".
Education/Credentials
BA in Political Science from Memphis University, and five years of study in the real estate development summer program at MIT. I was certified as a commercial property manager (CPM-IREM), and currently hold a brokers license in Maryland and the District of Columbia.
Awards and Honors
The same plaques and honors that most others in my industry have earned. I have none that I consider especially meaningful.
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Past clients include: The World Bank, George Washington University, National Association of Criminal Defense Attorneys, US Department of Commerce, The American Benefits Council, K-Mart Development, many law firms, a national union, other major organizations, and many, many small business firms and retail operators that I am most honored to serve. I estimate more than 1,500 firms/organizations.
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