Better alternative to CPI for annual increase clauses?
I don't believe CPI accurately reflects the inflation that actually is happening in the country (US) and will happen in the next few years, and not just because of the fed and the "pandemic" right now. So, I am wondering if anyone has a better type of metric that can be used for annual increase clauses that better protects against actual inflation. Any ideas?

In addition to that, anybody have a nice CPI clause wording they use in leases? I have one, but not loving it and curious how others implement increase using a variable metric.
[{"id": "gx0rgsw", "text": "How much do you think CPI is off by? 1%? 2%? You could try to make your variable increases CPI + x%. Good luck!", "replies": [{"id": "gx0vx5i", "text": "This definitely could work, I think for now it's only off a few percent like you suggest.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gx0t7tp", "text": "Just a flat percentage increase 3-5%", "replies": [{"id": "gx0wdqq", "text": "Calculating CPI adds to the admin and overhead, while not entirely difficult, go with the flat increases and call it a day. Easier on everyone.", "replies": [{"id": "gx0y3w6", "text": "Agreed", "replies": [], "depth": 3}, {"id": "gx0z41c", "text": "I could see this being a pain with 200 tenants, but I don't have that many and looking up the 12 month change only takes 60 seconds on data.bls.gov .", "replies": [], "depth": 3}], "depth": 2}, {"id": "gx0wf21", "text": "And how exactly does that protect against CPI potentially being inaccurate compared to what actually is happening?", "replies": [{"id": "gx0y22h", "text": "You can have the annual increase be on the base rent and make the tenant responsible for their proportionate share of increases in expenses or their proportionate share of expenses. Not sure what type of property you\u2019re referring to but the more complicated you make it will increase the difficulty in billing and you\u2019ll have tenants disputing the charges. Flat increases are the easiest way to bill and for many years now have been a better deal for the landlord. But I understand your concern going forward where we are probably entering a period of hyper inflation.", "replies": [{"id": "gx10ja9", "text": "I wish flat increases would work, because it is easy and tenants love knowing what they will pay. But on a 10 year office lease, I would be dumb to not include some sort of proper protection against inflation now. Even though I can and do pass through OPEX to tenants, I still have to protect against those increases in expenses I can't pass on like capital improvements, repairs, construction, etc.", "replies": [{"id": "gx1a9ly", "text": "With an office property if you can get 4-5% annual increases compounded in addition to pass through OPEX and proportionate share of tax increases if it were me I would make that deal. You could be shooting yourself in the foot with CPI, I\u2019m not at all convinced it\u2019s reported accurately. Capital Improvement and maintenance and repair are typically a landlord expense which are factored into the base rent unless it\u2019s a single tenant office building and you can make a NNN deal. I remember seeing old office leases that had CPI where the clause was fixed percentage or CPI whichever is higher but most attorneys would probably push their client not to agree to that. Like you said tenant want to know what their expenses are going to be. You also should try to figure out what your competitors are doing in your market. At the end of the day office market is tough today in most markets and many tenants are negotiating on their top couple properties to see where they can make the best deal. You can ask for whatever you want but if the deal isn\u2019t in line with competing deals you\u2019re going to have a tough time getting spaces leased.\n\nEdit- Another option is give them a five year lease with option to renew at fair market value. But that just invites additional confusion on how fair market value is determined. And if you have debt on the property and/or you\u2019re providing tenant improvements that you\u2019re going to want to amortize over the term of the lease you\u2019re probably better off with the 10 year deal.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "gx0yd04", "text": "This would protect you in the case that the CPI is 1-2% for the next few years? What do you honestly think the true inflation rate will be?", "replies": [{"id": "gx0yz8k", "text": "Considering the cost of many services and construction has gone up 10% easily in my area despite CPI 12 month change only be less than 1% in some recent months in past year, I'd like to better protect against that. At the same time, I don't want to just make rent increases 10% fixed, because even if tenants went for that, it isn't fair if prices of things really aren't rising 10%. Just want to protect against if they do, and if they don't tenants pay lower.\n\nProblem is, CPI has proven not so accurate lately in helping to protect against what has happened the past year and what I think will continue to happen. This doesn't have to do with just the pandemic, I would be looking to better protect against inflation even if that wasn't a factor.\n\nEssentially, since we don't know what the price of things really will do, I would prefer a better index of measuring the actual price increases rather than CPI.", "replies": [{"id": "gx11bsi", "text": "I guarantee you that tenants would fight tooth and nail against rental increases more than 3-5%. Saying \u201cit\u2019s in the contract\u201d will only get you so far. If you include a % rental increase clause at that magnitude, you\u2019ll spend so much time fighting tenants that you\u2019ll wish you stuck to a more conventional % increase.", "replies": [{"id": "gx12aft", "text": "I'm only trying to get more than 3-5% if actual inflation in this country goes up more than 5%. It isn't about me trying to just get more money for myself it's to protect against losing money should hyper inflation occur which has increased in possibility as time goes on based on the current state of the economy and country.\n\nSo, the clauses are worded in a way that normally their increase each year is only 2%, that's all I have been asking for each year, not even 3-5. BUT, if actual inflation is more than 2% (which it easily is now) and especially if actual inflation goes to 10% or something higher in a few years, I want protection against that. A tenant who would sign a lease stating this and then argue it down the line, is not a tenant I would want in first place. If they don't see the fairness is me only do 2% increases unless actual inflation goes up more than that, I don't want them.\n\nI'm not even doing clauses like that for short leases like 1-3 years. I'm talking about 5-10 year or even some longer leases I do. If the tenant wants a 10 year lease, they have to agree to some sort of CPI clause or the deal is literally too risky to take on.", "replies": [{"id": "gx13mwp", "text": "Think about it from the tenant\u2019s POV. A tenant looks for stability and real estate costs shouldn\u2019t be wildly fluctuating for them. There will always be another landlord\u2019s location offering the standard rent increases which you will be competing against\n\nAny potential tenant worth their salt will have a broker who will catch this x% above CPI clause. I think incorporating this clause would tank any lease agreement\n\nEdit: someone else mentioned NNN leases which will avoid the sticker shock from these rental increases. Probably better to go down that route", "replies": [{"id": "gx151so", "text": "This is part of the risk assessment. As much as I hate to \"turn down\" business, I don't consider CRE a short term investment. While I might be giving up money now, by turning down a tenant now, I stand to gain more in the long run by waiting for a tenant who accepts a CPI clause, which all have done who have entered my building in past 3 years, or even just rent the space out in 5 years when market rents are higher.\n\nIt's hard for a lot of people to see, and not the case for every market, but sometimes if you leave a space vacant for 5 years from now and do a lease then for 5 years, you'll end up with more money than if you did a lease today for 10 years. That's how crazy inflation makes things and how much the concept of compounding works in interest rates, base rent increases, etc.\n\nI would rather give up income right now, to end up with more money in the long term by making smart, risk management based, decisions with potential deals.", "replies": [{"id": "gx17k2s", "text": "I agree that I\u2019d rather leave a place vacant than take a lowball offer. But I think you\u2019re vastly overestimating the number of people who would accept a lease agreement with highly variable rent increases. NNN is the more conventional way to pass costs onto the tenant", "replies": [{"id": "gx181v0", "text": "Yeah, part of making an adjustment will be seeing how much tenants in my market are willing to take but trying to find something that works for everyone is better than what a lot of people are commenting, and that is to just go with fixed increases to make life easy. Would rather make life \"difficult\" if you even want to call it that to make oodles of more money and protect against not being able to pay for things when hyper inflation happens.", "replies": [], "depth": 10}], "depth": 9}, {"id": "gx2eku8", "text": "Leaving the space vacant for 5 years is extreme. Have you considered selling the office building and purchasing single tenant NNN leased retail property?", "replies": [{"id": "gx2ftmf", "text": "That example was hypothetical, but I have turned down deals in the past because leaving the space vacant for a while allowed it to be rented later on at a much better market rate.", "replies": [{"id": "gx2iyic", "text": "Again I don\u2019t know what market you\u2019re in. I\u2019m in the NY market and due to Covid the office market is struggling. What you\u2019re describing works in a rising market but in a declining market you want to get the space rented at the best rent you can as fast as you can. \n\nYou may be better off keeping the leases shorter 3-5 years with renewal options. Problem with options is they\u2019re one sided. If it\u2019s a good deal tenant will exercise the option if not they will renegotiate. \n\nIf you have anticipated major capital improvements in the next couple years might be better off doing them now and financing at low interest rate. Construction costs are only going to rise. That would help hedge against inflating construction costs. \n\nI don\u2019t see how even using the CPI Index helps because I\u2019m not convinced it\u2019s being reported accurately.", "replies": [{"id": "gx2kf2w", "text": "Agreed, and that's a great point thinking outside the box with capital expenditures now. I also agree options are a no go because of being one-sided. A tenant requiring options and/or refusing to sign a lease with at least some sort of CPI type protection are the two things that have caused me to walk away from otherwise perfect deals. So far, it has worked out in the long run.", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "gx1a8r6", "text": "&gt;At the same time, I don't want to just make rent increases 10% fixed, because even if tenants went for that, it isn't fair if prices of things really aren't rising 10%. Just want to protect against if they do, and if they don't tenants pay lower.\n\nThere's a funny thing about being the landlord: You can always say \"*I don't need that Lamborghini this year\"* and magically....when you do that...they no longer have to send you the money for that Lamborghini.\n\n*^(As the landlord, you can always refuse the increase.)*", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gx0udap", "text": "Why don\u2019t you think CPI reflects reality? The government has people checking the prices of literally everything across the country on a monthly basis to calculate it, they like go into stores and check unit prices for everything from Cheerios to sex toys", "replies": [{"id": "gx0wali", "text": "This is how it should work. But look at the 12-month % change numbers from 2019 to 2020. It's less than 1% some months. I don't know any Landlord whose building expenses and service expenses went up only 1% over that same time period. So if I want to make a capital improvement, and the price of building something went up 10%, 1% isn't even close to keep up. The whole point of a CPI clause is to protect against that very thing.", "replies": [{"id": "gx0xdbv", "text": "Total real estate costs of services represents a small sliver of consumer purchases. CPI reflects things like food, clothing, and medical to a much larger degree. Those items haven't changed as dramatically in value (yet...)", "replies": [{"id": "gx0zpis", "text": "That's exactly the point for my post, trying to find a better way to more accurately track or index real estate related services/costs, since the very definition of CPI is more about consumer things rather than commercial real estate.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gx0z4pp", "text": "Should look at CPI less energy, oil prices collapsed which dragged down aggregate CPI. And construction materials and labor are included but make up a small portion of the aggregate basket of goods consumed", "replies": [{"id": "gx1458t", "text": "&gt;construction materials and labor are included but make up a small portion of the aggregate basket of goods consumed\n\nThis is part of the problem why CPI as a measure of rent increases is starting not to work for CRE. Construction and labor are a major part of the CRE world so I wish there was an alternate metric that better measured CRE world. Like a \"CRE Price Index\" would be perfect, lol", "replies": [{"id": "gx17ge2", "text": "Yea but you wouldn\u2019t be pushing capital items through to tenants so it shouldn\u2019t matter... I\u2019ve only seen capital able to get pushed through as cam on a lease if it reduces occupancy costs and candidly I don\u2019t think I\u2019ve ever actually triggered that clause in my career", "replies": [{"id": "gx18dy2", "text": "It does matter if I can't pay for those capital items because the price of them increased 30% over 5 years yet my rental income only increased 3%. Then the building is toast and everyone leaves because it will be run like shit, and I'm left with 0 tenants in the long run. It's all about thinking in the bigger picture here, not just the short term and how capital expenses don't get passed on.", "replies": [{"id": "gx21coj", "text": "Damn dude....I've been on Reddit for a few years and truly, I can't recall a time when an OP spent *more* time refuting the advice he asked for.\n\nWhy are you even here?", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "gx1ak2u", "text": "I'm thinking (based on pump prices) that fuel costs are rising:\n\n[WTI Crude Oil Prices - 10 Year Daily Chart | MacroTrends](https://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=&amp;cad=rja&amp;uact=8&amp;ved=2ahUKEwjgktqD7LLwAhWWu54KHUioDJsQFjAAegQIBRAD&amp;url=https%3A%2F%2Fwww.macrotrends.net%2F2516%2Fwti-crude-oil-prices-10-year-daily-chart&amp;usg=AOvVaw0bWWsYL1cO2ui39LPeQhKB)", "replies": [{"id": "gx1pg9x", "text": "They definitely are, just waiting for that to translate into some meaningful office absorption and multi fundamental improvements in Houston... rest of Texas is on fire right now feels like Houston is slowly but surely starting to improve", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gx0xapf", "text": "I believe it does not include things like construction costs &amp; services that might be representative of maintaining or replacing commercial real estate. Perhaps CPI is not the correct metric in that is does not represent the reality of inflation incurred by CRE.\n\nFor example, latest press release states March index was up 2.6% y/o/y.  That way under-represents the inflation I am seeing in construction material &amp; skilled labor. Granted that would just be one or two baskets if it was included.", "replies": [{"id": "gx108d9", "text": "This is exactly what I am thinking and trying to figure out with this post. I know CPI is not the best measure now and likely in the future of what is happening with inflation, but I haven't found another metric that can accurately be used.\n\nI'm trying to balance protecting against what you said with construction and labor, but also be fair to tenants at the same time. I can't just make the lease say CPI + 20% because no one would go for that and it isn't fair if prices aren't actually going up 20% yet.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gx0yrtq", "text": "We do CPI or 3.5%, whichever is greater. We only do this on renewal periods. Initial term is always 3.5%.", "replies": [{"id": "gx0zx62", "text": "This is what I do now, but my concern is that CPI itself isn't the best measure of what is starting to happen with actual inflation. So even if CPI is listed as, let's say 5%, but services I use in real estate go up 10% that year, now what? That's what I am trying to figure out better protection against.", "replies": [{"id": "gx1aue1", "text": "(Charge more).\n\nYou sure are spending an inordinate amount of time debating the advice given, that *you* requested.\n\nThere's a good reason God gave us 2 ears, 2 eyes...", "replies": [{"id": "gx1c3cf", "text": "Guess you didn't read the title of the post like many others. My question was \"Better alternative to CPI for annual increase clauses?\" not \"Should I use a CPI clause or go with fixed increases?\" or \"What do you do for annual increases?\" The answer above someone gave is an answer to the 2nd or 3rd question.\n\nBut, why wouldn't I still explain the thought process behind not simply going fixed or using CPI? Maybe someone else learns from the discussion why CPI itself is not going to best protect against hyper inflation when it happens.", "replies": [{"id": "gx1c9e5", "text": "It wasn't unclear to anyone.\n\nThere are very few landlords who are equally unclear about what CPI can and can't do.", "replies": [{"id": "gx1cmjq", "text": "My bad then, I just assumed so since a lot of comments were solely about how I should just charge fixed increases rather than use CPI at all, or how CPI is accurate. I've already decided CPI is not accurate and fixed increases only are not an option, I just want to know if anyone has alternative index they use rather than CPI.\n\nBut, I'll gladly read and discuss those other comments anyway.", "replies": [{"id": "gx1cta5", "text": "&gt;I just want to know if anyone has alternative index they use rather than CPI.\n\nMany do / did.\n\nThey posted their answers.", "replies": [], "depth": 7}, {"id": "gx7vsn6", "text": "Unless you\u2019re dealing with very unsophisticated/unrepresented tenants, you are going to lose the deal if you screw around with anything other than industry standard increases. \n\nRight now office in most places is a buyers market, and landlords aren\u2019t able to dictate terms.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gx0z1ul", "text": "Seems like you're concerned about your CAM costs increasing. If you can, go Absolute NNN. Offer rent reductions in exchange for ANNN and see if the tenant bites.\n\nTo help with this tenant conversation, I've set up ANNN leases based upon a benchmark of previous annual expenses. At the end of the year, the tenant and I had a standard way of reconciling depending on how over I was in CAM costs. Tenants paid X up front in monthly installments. For X to Y, the tenant paid 100% the overage. From Y to Z, the tenant paid 50%. After that, it's on me.\n\nI'd stick with CPI for rent increases. It's more structured than anything else and makes for easy communication with accounts, attorneys, mediators, and judges. You may want to consider \"X% + CPI\". It guarantees rent increases during low inflation years which help keep rental incomes up to par when the CPI is still playing catch up.", "replies": [{"id": "gx13q66", "text": "Already have NNN, and even with CPI clause for base rent increases, the problem we have hit in past few years is CPI goes up, let's say 2% in a 12 month period, but construction and labor expenses have gone up 10%.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gx12syq", "text": "My leases all have a 4% annual floor, no negative rent (in case of deflation).  Some have a minimum floor of 5%.  No one has ever objected to those numbers.\n\nI also have \"*or CPI, whichever is higher*\", and I split anything above 10%.\n\nUsing anything other than the \"approved\" govt. CPI formula would set off alarm bells in most people, so, I use the standard ones available.\n\nCPI was changed during Reagan's administration under Greenspan's auspices to reflect the changes people made when confronted with price increases...such as switching from steak to hamburger...the argument was...they still got their protein, just paid less for it so...\"*why didn't CPI recognize that?*\"\n\nAnother argument that was made under Bush and Clinton was....*\"if we're paying 70% the cost of our last computer, but it does 7 times more...why aren't we accounting for that?\"*.\n\nValid arguments but, one area we don't account for well / accurately is housing:\n\n[https://slate.com/business/2014/02/housing-inflation-the-cpi-is-a-disaster.html](https://slate.com/business/2014/02/housing-inflation-the-cpi-is-a-disaster.html)\n\n***\"How Does the BLS Calculate Inflation for Owner-Occupied Housing Now?***  *It completely ignores issues about the sale price of houses and prevailing mortgage rates and instead \u201cimputes\u201d rental value. Which is to say the question the BLS seeks to answer about your condo is not \u201chow much would it cost someone else to buy your condo\u201d but \u201chow much money are you saving by living in your condo rather than renting an identical one.\u201d*\n\nSo, a device designed to inform about rising costs, informs only about savings \"imputed\", not in fact.\n\nThe CPI is far from accurate, and is designed to give you \"*comfort*\" not facts.\n\nSome prefer the national CPI. Some prefer the ones specific to their city.\n\n[https://www.bls.gov/regions/subjects/consumer-price-indexes.htm](https://www.bls.gov/regions/subjects/consumer-price-indexes.htm)", "replies": [{"id": "gx13gf6", "text": "&gt;The CPI is far from accurate, and is designed to give you \"comfort\" not facts.\n\nExactly what I want to protect against especially now. I didn't realize they also publish CPI per state/city. I knew they did for major areas like LA, SF, NY, etc. I'll look at that and see if it is more accurate but what I have discovered, just like you say, is CPI in the first place is not very good way to measure for protection against CRE related price increases.", "replies": [{"id": "gx1b0pn", "text": "&gt;CPI in the first place is not very good way to measure for protection against CRE related price increases.\n\nAnd the price of a new 747 has no relationship to a used SUV.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gx13mf7", "text": "3-5% or $25-50-75/mo increase is normal and safe.  It's also not too much to scare off existing Tenants.", "replies": [], "depth": 1}, {"id": "gx1ol57", "text": "I'd say just to throw in a fixed p.a. rental escalation clause, and an NNN lease. For longer-term leases make a rent renegotiation clause at, say, year 5. This clause should help you bring the rent back to market level (or close to it), in case market rents have been exceeding official cpi rates. An example is a 5-year lease with an extension option of 5 years with the market-rent clause prior to extension.\n\nIn the end, if you're scared of \"other types of inflation\", or asset-price inflation, then the fact you're owning real estate is a hedge in itself, since you can sell that yield-suppressed asset or refinance it in a few years. \n\n\n\nA lot of it depends on the volume of your transactions and the asset classes you're in. If you do value-add deals and you're dependent on exit cap rates then you need to look at what large institutionals are looking for. They wouldn't like non-mainstream rental escalation clauses. E.g. index the lease to the SP500, haha. Plus no tenant will sign that.\n\nRethink your anger I'd say, because my opinion is it's irrational given the game you're in is a winning game.", "replies": [], "depth": 1}, {"id": "gx21xvp", "text": "s&amp;p500 index, last 10 years is like 10%-11% /year inflation compounded on average. cpi is like 2% lol", "replies": [], "depth": 1}, {"id": "gx2kxuw", "text": "Just do a market deal structure and make sure you have the ability to amortize capital back into opex. \n\nIf you\u2019re that worried about funding future capital requirements, either drop the base rate and put it on the tenant to pay as part of their cam (unlikely as it is), or raise your base rate by however % you\u2019re worried about. \n\nKISS", "replies": [], "depth": 1}, {"id": "gx2pt0y", "text": "So is this a NNN lease? To be honest there are no \u201crules\u201d as to what the standard NNN lease is or what constitutes OPEX, it\u2019s all negotiable, but there is general consensus among most geographic markets. Your lease terms (base rent, base rent increases, concessions, etc) should be driven by the market supply/demand dynamics that set said terms for your property type in your specific market. Base rent increases are in theory driven by the historical trends i.e setting a 3% annual increase is due to the historical trend and fact that average new lease rates actually achieved at competitive properties in your market have been increasing 3% for the past year. If your market is constrained, you could ask for (and hopefully achieve!) 4% or 5%. But if no other owners of comparable properties in your market are asking 4-5% you are unlikely to get a tenant to agree to said increase. You can predict inflation for ownership costs however you want (they could very well be justified) and ask for 5%+ in base rent increases all day, but if comparable properties are offering better terms, your prospects will pass on your space for better terms 100% of the time. What your solution will most likely be is to be very specific in your \u201cLandlord Obligations/Repairs\u201d section of your lease. The less you include as your obligation the more you can pass thru to the tenant and the more you can bill back to the tenant at the end of year during reconciliations. You should talk to an experienced property manager if you don\u2019t have one and get their opinion of expected repair items you\u2019d foresee in the future. Then get with an experienced attorney and make sure those items are not your obligation in the lease and that the tenant takes the space as-is. This avoids all the crystal ball gazing-future predictions you\u2019re trying to do with inflation. Hopefully this helps!", "replies": [{"id": "gx2t8ax", "text": "Yes, NNN and good thought to maybe go the route of better firming up what can be passed on rather than protecting for inflation on the base rent level.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gx2uyzk", "text": "Try PCE index instead", "replies": [{"id": "gx2xvct", "text": "Definitely will look at PCE, thanks.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gx2x73b", "text": "I have been using % bumps in leases since 2009. There are a few benefits for this:\n\n1) The Landlord and Tenant both know exactly how much the rent is going to increase at each interval.\n\n2) You don't have to spend time trying to figure out which index to use and what the figure is.\n\n3) An appraiser will use defined % increases when evaluating your property....they will not use CPI because it is an unknown figure at the time.", "replies": [{"id": "gxec4kc", "text": "Agreed!% bumps are much better. \n\nMakes a huge big difference in salability and valuation.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gx2xs2b", "text": "Not sure where you are at, but no way CPI flies in the Bay Area CA,\n\n10% bumps every 5 for nationals..  3% annual bumps on average for most others.", "replies": [], "depth": 1}]