What is Better for a Commercial Lease Rent Increase – Flat Rate Increases or CPI?

When it comes to commercial leases, it's very common for one to have a method for how the rent will increase as time passes. Two types of increases are usually used:

• Flat rate increase

• Consumer Price Index (CPI)

Most commercial real estate investors find it hard to understand which one is better. With that in mind, we wanted to take a better look at both and give you an answer to which one is worthwhile for you.

What Are the Advantages and Disadvantages of Flat Rate Increases

As you can already guess, a flat rate increase is a more straightforward method. A flat rate is used to calculate the increase in the rent, so you always know what to expect. That’s also the main benefit of this type of rent increase. You have a set percentage for how much the rent will increase with each rent review, so it’s much easier to prepare in advance. You will know exactly how much your revenues need to increase to cover the rent increase. 

Unfortunately, there is also a downside to this seemingly excellent method. You can never account for the unpredictability of the market. For example, when a recession hits and the market either stagnates or falls, your rent increase rate will still remain the same. Naturally, if the market goes the other way and rent prices skyrocket, your rate will stay the same, so you will essentially be spending less compared to your overall revenue. 

What Are the Advantages and Disadvantages of CPI

Consumer Price Index, or CPI, is a metric that determines how much prices change over time. Alternatively, it’s also used to determine inflation rates over time. 

Naturally, when it comes to commercial real estate, CPI is very useful for calculating rent increase from year to year. Instead of using an arbitrary percentage like the previously calculated flat rate, a landlord can use CPI to determine how much the rent should increase as other prices and inflation rise or fall over time. 

That's the main advantage of CPI over a flat rate – it accounts for the unpredictability of the entire market. As prices go up, the rent goes up accordingly. Similarly, as prices go down, the rent follows suit. 

The downside of this method is that it doesn’t account for any increase in the value of the property. This can be a downside for both the landlord and the tenant, it all depends on which direction the value goes.

Which Is Ultimately Better?

We don't like to pass judgment if there is no need. We especially don't want to tell you which one is better, as you now have all the necessary information that will help you determine this on your own. Depending on your current situation, either a flat rate or a CPI rent increase can be of benefit for you.

So, it’s up to you determine the answer to this question, but if you require some help, you can always reach us a info@cbicommercial.com