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Understanding the Impact of Using Different CPI References in Lease Reviews and How AI-powered Lease Abstraction can mitigate costly mistakes

July 2, 2024

Rent reviews based on the Consumer Price Index (CPI) are common in commercial leases. However, the specific CPI reference and timing can significantly impact the calculated rent adjustments. This blog delves into the differences between the last published CPI and the immediately prior CPI, comparing the impact of using the Sydney-based index versus the average of eight capital cities. It also explores how AI-powered lease abstraction tools can mitigate these costly mistakes but also potentially lead to significant financial benefits.

Understanding the CPI Review Methods: Last Published vs. Immediately Prior

  1. Immediately Prior CPI:
    • This method uses the most recent CPI data available during the review.
    • For example, if a rent review is set for 1 January 2024, the last published CPI would be the data from the quarter ending in December 2023.
  2. Last published CPI:
    • This approach uses the CPI from the quarter, which was last published in the review.
    • For the same 1 January 2024 review, the last published prior CPI would be from the quarter ending in September 2023, as it was available on 30 October 2023.

Impact of Using Sydney-based Index vs. Average of Eight Capital Cities (fourth quarter)

  1. Sydney-based CPI Index:
    • Specific to the economic conditions in Sydney, reflecting local inflation rates.
    • Example data:
      • CPI December 2023: 136.4
      • CPI December 2022: 130.9
      • Annual increase: 4.20168%
    • Rent increase for a $5,000,000 passing rent: $210,084.
  2. Average of 8 Capital Cities CPI Index:
    • Provides a broader measure, averaging the inflation rates across Australia’s major cities.
    • Example data:
      • CPI December 2023: 136.1
      • CPI December 2022: 130.8
      • Annual increase: 4.05198%
    • Rent increase for a $5,000,000 passing rent: $202,600

Financial Impact and Timing

The CPI method and reference index choice in high inflation environments can result in substantial differences. These differences can result in significant changes in capital values for a high-value property, such as an A-grade building with a $5,000,000 passing rent.

Capitalisation Example:

  • Difference in Rent Increase: $279,937.50 (using last published CPI  3rd quarter for Sydney (All Groups) vs. $210,084 (using immediately prior CPI for Sydney 4th quarter).
  • Annual Difference: $69,853.50.
  • Capitalised at 5%: $1,397,070.

Timing Considerations:

Using the last published CPI typically introduces a delay, as the data for the previous quarter might not be available immediately. For example, a review set for 1 January 2024, using the last published CPI, will have to wait until February 2024, as the December quarter data will be released on 29 January 2024.

The Cost of Lease Abstraction Errors

Manual lease abstraction is prone to errors, leading to costly mistakes in rent calculations, such as using the wrong method. These errors can stem from misinterpreting lease terms, overlooking critical details, or using incorrect CPI references. The consequences include undercharging or overcharging rent, which can strain landlord-tenant relationships and potentially lead to legal disputes.

Common Errors in Manual Lease Abstraction:

  • Misidentifying the correct CPI index to use.
  • Incorrectly calculating the timing of the CPI review.
  • Failing to apply the lease terms accurately.

Such errors can result in significant financial discrepancies. For instance, using the wrong CPI data could lead to a loss in capital of $1.4 million, as shown above.

AI-Powered Lease Abstraction: A Solution

Leveraging an AI-powered lease abstraction tool like Accurait can provide immense benefits for mitigating these risks. These tools are designed to automatically extract and interpret lease terms with high accuracy, reducing the likelihood of human error.

Benefits of AI-Powered Lease Abstraction:

  • Accuracy: AI tools can process and understand complex lease documents, ensuring the correct application of terms and conditions.
  • Efficiency: Automates the extraction process, saving time and reducing the workload for property managers.
  • Consistency: Ensures that all leases are reviewed and interpreted uniformly, eliminating discrepancies.

Using an AI-powered lease abstraction tool, property managers and landlords can avoid costly mistakes, ensure accurate rent reviews, and save millions of dollars.

Conclusion

The choice between using the last published CPI and the immediately prior CPI, as well as the selection of the CPI index (Sydney vs. eight capital cities average), can have significant financial implications for landlords and tenants. Manual lease abstraction errors can also exacerbate these issues, leading to costly mistakes. Implementing AI-powered tools like Accurait can help prevent these errors, ensuring accurate and efficient lease management.

Learn more about Accurait by visiting our About Us page or booking a demo to see how it can help you today.