David had a good answer for CPI, which normally always is presented as applied to a specific area of the country, since the items that go into CPI do vary from region to region. However, I found David's answer, while being a brainteaser a bit complicated for general usage. I did a spreadsheet with some assumptions of the change in the 10-year note over the past five years. There has been about a 200 basis point swing over this period. I then compared that to a simple CPI clause that would have a floor of 3% in it. (The rent never to be less than a three percent increase over the past year, or CPI, whichever is higher). I found over the past ten years if I calculated correctly I believe that using the 10-year note would not have been the better choice.
I believe that a CPI index with a minimum 3% annual increase remains acceptable in the market. While national credit tenants will not go for this, most other tenants will. The national credit tenant may state that you are allowed to increase the rate by 10% every five years, which is somewhat typical for a credit-tenant, NNN lease. However, for a gross or modified gross lease, you will want the minimum 3% annually for certain. Sometimes if there is a floor the tenant will demand a ceiling as well. I would likely start out by making the ceiling 7% or 8%, with perhaps a 6 % negotiated agreement in the final draft of the lease.
Again, I commend David for stimulating my brain with another alternative. I would personally not be able to use his suggestion effectively without further explanation to the wording of the full clause; and the mechanics on how it would be applied. Even then, I believe it may likely be unacceptable to the common tenant in a lease, no matter how sophisticated he or she may be.
Good luck Rick... Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA) 951 515-5855 Email: robertbaird@NewportCpC.com
Feb 22, 2011