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Understanding CPI in Commercial Real Estate

clf-consumer-price-indexThanks to all who joined us for last week's article about Percentage Rent. Today's article is about the method of calculating Additional Rent referred to as CPI. Although rarely seen in new deals, CPI is still used to a lesser extent in commercial real estate leases, most often in government leases.

CPI Defined

Consumer Price Index (or CPI) is an index generated by the Bureau of Labor Statistics (BLS) that measures "the prices paid by urban consumers for a representative basket of goods and services."

The BLS doesn't only publish one CPI either. There are several different indices based on the following factors:

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Additional Rent: Percentage Rent for Retail Explained

clf-percent-rentIn last week's post, I introduced the much misunderstood concept of Gross Up: how it sometimes gets a bad reputation but is actually intended to protect both the landlord and the tenant. In today's article, I'll define and explain the retail-specific mechanism of Percentage Rent.

Percentage Rent Defined

Percentage Rent is a form of rent paid in addition to, or in lieu of, Base or Minimum Rent. It is almost exclusively reserved for retail tenants and is based upon a percentage of the tenant’s gross sales, with or without a breakpoint.

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Additional Rent: Understanding Gross-Up

clf-gross-upFollowing up on the previous post about Caps on Operating Expenses, today's post is all abut the often misunderstood concept called Grossing Up or simply Gross Up. The Gross-Up of operating expenses is a critical mechanism that allows landlords to equitably allocate operating expenses that are variable in nature. Specifically, the operating expenses that vary as a result of occupancy are increased to an amount that have been incurred if a defined level of occupancy were achieved.

In a typical gross-up scenario, the level to which a landlord may artificially increase variable expenses due to a gross-up clause is 95% or 100% (also known as full occupancy).

While this may seem like an unfair method for the landlord to artificially inflate expenses and overcharge a tenant, the goal of a well drafted gross up clause is to protect both parties from dramatic swings in recoverable operating expenses.

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Additional Rent: Caps on Operating Expenses

clf-component01-opex-capsAfter reading last week's blog post about digging into operating expenses, it may appear that a landlord has free reign to pass along every expense they incur in the operation and management of a building. The truth is though that there are several conventions within commercial real estate leases that control the expenditures being passed back to the tenant.

Caps on Operating Expenses

Rather than excluding a particular component of operating expenses, as described in the previous section, it may be decided to limit the increases in one of three ways

  • On a specific item
  • On the expenses as a whole
  • On a portion (or pool) of the expenses
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Additional Rent: Digging into Operating Expenses

clf-component01-opex

In this post, we have arrived at the topic of Operating Expenses, a component of additional rent typically paid by each tenant on a pro rata share basis. Most other items of additional rent, such as percentage rent, late fees, CPI and Porters Wage adjustments are paid independent of a tenant's proportionate share.

Operating Expenses can vary from building to building but can be defined in principle as Landlord costs in running a building or series of buildings that are passed on to those who actually occupy the building. Operating expenses may combine any number of items including some of these common items:

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Rent: Understanding Proportionate Share

clf-component01-prsToday is the return of the Commercial Lease Fundamentals Blog series for the first time in the new year. If you've stumbled onto this post without reading the first two months of the series, you can read through all the previous posts in our blog tagged as "Commercial Lease Fundamentals." 

In the last article posted back on December 11th, I introduced the basic concepts of additional rent including the difference between Gross Leases and Net Leases, as well as the variations contained within each. In today's post, I'm introducing the concept of Pro Rata Share

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Rent: Introduction to Additional Rent Concepts

clf-component02-net-grossIn last week's post, I introduced the basics of Base Rent in Commercial Real Estate Leases and offered all readers a chance to grab the quick and dirty Excel Base Rent Calculator I use when the lease administration application doesn't have that built-in functionality.

In this article, I'm going to introduce a multi-part section on Additional Rent.

What is Additional Rent?

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Basic Lease Information Part III: The Term Dates of a Lease

clf-component01-termLast week, we broke down the trickier parts of defining a commercial real estate lease premises over the life of the agreement. Although a lot of that information might seem obvious or commonly available, the most useful part may have been the timeline example of how to visually summarize expanding and contracting suites within a leased premises over the course of multiple lease documents. In this article, we tackle the finer points of understanding a commercial real estate lease term dates.

First, lets start with some definitions:

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The Four Components of a Commercial Real Estate Lease

Continuing our Commercial Lease Fundamentals series, today's topic is a breakdown of the four components of a commercial real estate lease.clf-cover-300w

Component 1: Basic Lease Information

Whenever I read a lease or a lease-related document, I like to think of myself as an investigative journalist or a private detective. My job is to put together the pieces of the story so I can summarize it, find out if the story being told lines up across all documents and identify (then highlight) any unusual situations. If I find language that might be a costly risk to the landlord or if the landlord is missing an opportunity for revenue, I want to know about it.

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Wrap Up from Building Owners & Managers Conference 2013

illinois-real-estate-journals

Last Friday, Property Managers in the Chicagoland area gathered at the Marriott Oak Brook to participate in Illinois Real Estate Journals' Building Owners and Managers Conference. The half-day event schedule started with a networking breakfast followed by two expert panels with an intermission between them for additional networking and booth visits.

During the second panel, "In the Trenches: What Keeps Property Managers Up at Night?" experts including Bob Best of Jones Lang LaSalle, Geoffrey Kassleman of Op2mize LLC, Scott Bernstein from the National Retrofitting Group and Realogic's own President Dale Vanderlaan analyzed the ways that their work affects a property manager's biggest concerns.

 
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Jean Dorans to speak at CFO Forum in New York

Realogic Analytics, Inc. is proud to sponsor IMN’s 2nd Annual Real Estate CFO Forum(East) in New York on September 30-October 1, 2013. This forum will examine the current issues and challenges real estate CFO’s, treasurers and controllers encounter and the strategies and tools they employ to meet these challenges.

The event will take place at the Marriott New York Downtown, located on 85 West Street, where attendees will hear panel discussions featuring industry leaders speaking about specifically-tailored content, meet exhibitors and enjoy networking luncheons and dinners.

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