Tricks for young players - rent review clauses

It's not often that a seasoned pm gets caught out on a rent review when the methodology is clear.

Many commercial leases will use CPI (Aust) or CPI (Capital city) or CPI + X%

Today's brain teaser was framed as:

Rent = (Current Rent x current CPI / Previous CPI) + 1%

Previous Property Accountants & PMs had calculated instead as:

Rent = Current Rent x (Current CPI + 1%) / Previous CPI

At first glance it may make only a small difference however when you have a large rent and long lease term with infrequent market reviews, the shortfall becomes quite large.

 

ah, a BIMDAS problem rather than a lease problem

Once tenant was advised of wrong amount, were they able to amend or was it too late?

 

@D.T. - I doubt that it'll be chased but still worth a few grand. It becomes a pain as there have been 3 subsequent reviews both correctly and incorrectly calculated on the wrong amount.

The Market review is this year, all sins forgiven.

Lucky that there's a turnover rent clause as well.

 

Lucky you noticed! It really pays to check statements.

 

Not listed on the statements. Rent reviews are notified by letter in accordance with the lease.

I am currently undertaking an audit of about 400 leases and this is just one issue which has been uncovered.

 

That’s a lot of leases to audit! Obviously worth the effort so far though.

 

Hey Scott loving these posts, but you got me, I don't see the difference

Current Rental: $100,000
Current September CPI (weight 8 cap) 111.4
Previous September CPI (weight 8 cap) 109.4
(link to CPI figures used)

Evaluated as follows for the "correct" way,

Rent = (100,000 x 111.4 / 109.4) + 1%
= (100,000 x 1.01828154) + 1%
= 101,828.154 + 1%
= 102,846.435 or $102,846.44

Evaluated the other way

Rent = 100,000 x (111.4 x 1%) / 109.4
= 100,000 x 112.514 / 109.4
= 100,000 x 1.02846435
= 102,846.435 or $102,846.44

What did I do wrong here

I normally find that people use the "percentage change" instead of the "index numbers" which leads to issues with rounding errors. i.e. for the above the CPI figures the percentage change listed is 1.8% were it is actually 1.828154. Or they use the wrong quarter.

 

@ComPropAgent, using your numbers:

Rent = 100000 x 111.4/109.4 x 1.01 = $102,846.44 vs
$100,000 x ((111.4/109.4) + 0.01) = $102,828.15