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CPI Indexes in Lucernex

Many of our customers have leases where payments are CPI-indexed. This means that there are regular escalations to rent payments that are calculated based upon a percentage increase of one of several possible government-maintained Consumer Price Index. Under FASB guidance, CPI increases are variable rent and should not impact ASC 842 schedules. This means that the CPI escalation must be tied to a separate expense schedule that is not tied to an ASC 842 schedule. Under IASB and GASB guidance, the CPI increase is incorporated into IFRS 16 and GASB 87 schedules more promptly.

ClosedHow Lucernex Calculates CPI-Indexed Rent

When a CPI adjustment is made, two values are pulled from the associated CPI table:

  • The base CPI index, which is from the month and year of the expense setup if there has been no ASC 842 re-measurement done; or from the month and year of the ASC 842 re-measurement if that's been done.

  • The current CPI index, which is from the month and year of the retro date of the CPI adjustment being made

Then the ratio of the two values is calculated. The CPI increase is calculated from this ratio, based on the base rent as of the retro date and the ratio calculated in the previous step.

Finally, the ratio in the previous step is multiplied against the CPI Multiplier, if there is one entered at the expense-setup level.

A CPI increase will never be below 0, even if the current CPI index is lower than the base CPI index. This way, the total CPI-indexed rent will never be lower than the fixed base rent. However, as the CPI index fluctuates up or down, the amount of the CPI expense above base rent may either increase or decrease.

If there are catch-up payments due, they will be calculated by taking the difference between the new and previous CPI-increase schedule amounts.

ClosedFrequently Asked Questions About CPI-Indexed Rent in Lucernex

Note:

If you have questions about CPI-Indexed Rent that you'd like to have included in this FAQ, please reach out to your Lucernex representative.

  • Q: There are four indexes that are loaded for every firm. Do I have to do anything to maintain them?

    A: No. The four indexes—two Consumer Price Indexes, one Producer Price Indexes from the US BLS, and one Retail Price Index from the UK ONS—that are pre-loaded by Lucernex are also updated every few days. This process adds both new month index values and any updated values from previous months as they become available. You will not have to upload or maintain any data into the solution for these indexes.

  • Q: The indexes maintained by Lucernex are labeled by a rather obscure Series ID. How do I find out what that Series ID corresponds to?

    A: The indexes Lucernex maintains are from the Top Picks list from the US BLS and the UK ONS, as listed on their websites, and there are longer descriptions of the parameter set that go into the Series ID. See for example, https://data. bls. gov/cgi-bin/surveymost?bls for the Top Picks or use https://data. bls. gov/cgi-bin/srgate. As a user-friendly tool, we will add a CPI Notes to the Expense Setup page so that you can annotate your chosen index with comments. This CPI Notes will be especially useful if you upload your own series data.

  • Q: The pre-loaded indexes are driven by a particular base year. For example, CUUR0000SA0 is the CPI index for All Urban Consumers—not seasonally adjusted, all items—with a base year of 1982-1984. What if I want to use a different base year?

    A: The Base Year is the year where the index takes the value 100. The month that this occurs can vary. If you would like to use a different base year than the one in the provided tables, you can use the provider of the price index data to generate a new table with your desired base year. This can then be uploaded into your system as either a firm-level or contract-level price index table. You would then select this table from the CPI Index rather than the one provided by Lucernex.

    Note:

    In at least the cumulative model for CPI-indexed leases, it is a simple exercise in algebra to show that for a given index, the base year doesn’t matter. Since the rent increase is based on a ratio of CPI indexes for two different year-month combinations, and each CPI value is in fact a ratio of current prices to prices in the base year, then in the ratio of ratios, the value of the index in the base year cancels in the calculation.

  • Q: What if the index we want to use is not one of the ones Lucernex provides to all firms?

    A: Lucernex provides the option of loading your own index, either in the UI record-by-record or by an import template spreadsheet. You can do this either at the firm level or at the individual contract level. Contract-level indexes always have the index name “Contract Specific”, but you can use the CPI Notes to add additional information about the index.

    Important!

    If you use only a handful of CPI indexes, you should load these indexes at the firm level, making them available for all real estate contracts. Contract-level indexes are best used for exception cases or if the majority of lease contracts have unique indexes driving CPI-increases.

  • Q: What if the index we want to use is not available from the US BLS or UK ONS?

    A: The ability to create or upload data for an index is independent of the source. For example, if there is a national consumer price index for a country other than US, UK, or the EU, you can simply fetch the appropriate data from that government’s official consumer price index body. Then, populate the import spreadsheet template with that data, and it will be treated like any other index.

ClosedAssociate an Expense Setup Record with a CPI Index

To associate an expense setup record with a CPI index:

  1. Navigate to Contract > Payment Info > Recurring Expenses.

    Use the links in the Navigation Pane on the leftmost side of the page.

  2. Select the expense setup record you want to configure from the Contract Expense Setup List at the top of the page.

    The expense setup's data populates on the page.

  3. Select the CPI Index this expense setup should be associated with from the CPI Index field.

    You can view information about a CPI index by selecting an index from the field and then clicking the View A small gray button with a magnifying glass on it. .

  4. Click Save Changes.

    This displays in the Actions menu on the right side of the page.

    The page refreshes. Your changes are saved.

ClosedManage CPI Escalation Rules

The Escalation Rules section of the Recurring Expenses page contains all fields related to escalations.

To manage your escalation rules:

  1. Navigate to Contract > Payment Info > Recurring Expenses.

    Use the links in the Navigation Pane on the leftmost side of the page.

  2. Select the expense setup record you want to edit from the Expense Setup List at the top of the page.

  3. Scroll down to the Escalation Rules heading.

  4. Do one of the following:

    • Enter your escalation ceiling amount in the Amount Increase Cap field.

    • Enter your escalation ceiling percentage in the Percent Increase Cap field.

      These fields cap both CPI and non-CPI escalations.

  5. Enter your CPI index multiplier in the CPI Multiplier field.

    Often in rent agreements, the CPI is based on a specified multiplier times the ratio of CPI indexes at the time of the retro payment and at the time of the CPI retro payment expense setup. This means, for example, that if the CPI index rate is listed as 2. 34% and the multiplier is entered as 0. 5, the applied CPI index rate would be 1. 17%. With a multiplier of 2, the CPI index rate would be 4. 68%.

    The CPI Index Multiplier follows these rules:

    • By default, the value of the CPI Index Multiplier is 1.

    • Any value greater than 0 is allowed.

    • If a value of 0 or less is entered, the system returns an error message that reads, The value of the multiplier should be a number greater than zero, with 1 giving the nominal value.

  6. Click Save Changes.

    This displays in the Actions menu on the right side of the page.

    The page refreshes. Your changes are saved.

ClosedCreate a Retro Payment Based on a CPI Adjustment

The retroactive payments functionality is used to make changes to the expense schedule retroactively and create catch-up payments . This is our recommended path for making a manual adjustment to a schedule for CPI (Consumer Price Index) changes because index data are usually populated retroactively, and landlords usually notify lessees of a change in rent after the date the change should become effective.

Important!

If you create a retro payment based upon a CPI increase, you will need to remeasure your IFRS schedule or remeasure your GASB schedule. CPI increases do not impact ASC 842 schedules.

To create a retro payment based on a CPI adjustment:

  1. Navigate to Contract > Payment Info > Recurring Expenses.

    Use the links in the Navigation Pane on the leftmost side of the page.

  2. Select the expense setup record you want to create a retro payment for from the Contract Expense Setup List table.

  3. Click Retro Payment.

    This displays in the Actions menu on the right side of the page.

    The Retro-Payment Setup window opens.

  4. Enter the date that the change takes (or took) effect in the Retro Date field.

    You can also click Calendar A small button with a picture of a calendar on it. to open the Date Picker and select the appropriate date.

    Important!

    The Retro Date is the date the CPI-indexed increase should take effect, and the CPI index data is fetched according to this date.

    The Retro Date must occur prior to the New Effective Date. In a retro payment, the adjustment is a date in the past, with an adjustment to expense schedules being made after the date has passed. This is why a catch-up payment is needed between the retro date and the date the new expense schedules take effect.

  5. Enter the date that the new schedule will begin in the New Effective Date field.

    You can also click Calendar A small button with a picture of a calendar on it. to open the Date Picker and select the appropriate date.

  6. Select the Stop Payment on New Effective Date?check box if you want to stop all payments on the listed expense.

  7. Select the CPI-index Adjustment check box.

  8. Do one of the following:

    • If you want to use CPI index data loaded into Lucernex to calculate your retro payment:

      Important!

      If you are going to create a retro payment based upon a CPI adjustment, you must first follow the Associate an Expense Setup Record with a CPI Index procedures above.

      1. Select the Use Index Data for Increase check box.

        The New End Date and the New Payment Amount fields automatically populate. Several CPI fields appear in the right column of the window. These information in these fields include the index name assigned to the expense setup, the begin date of the CPI index, the base payment amount for the expense setup, the base CPI, and the retro CPI.

      2. Proceed to step 10.

    • If you want to manually specify your CPI index adjustment:

      Note:

      A good use case for when this method would be used is when the landlord has sent a letter where the rate increase is specified—either an amount or a percentage—and you have:

      1. Validated that this is the right increase outside the system,

      2. You haven’t uploaded the index relevant to the contract, or

      3. You want to override the amount that would have been automatically calculated based on the index.

      In this case, the CPI increase can be added manually without the system calculating it for you.

      1. Enter the following dates in their respective fields:

        • New End Date

        • Posting Date

        • Due Date

          You can also click Calendar A small button with a picture of a calendar on it. to open the Date Picker and select the appropriate date.

        Note:

        The Percent Increase Cap will only populate if you have populated the Percent Increase Cap on the expense setup record.

      2. Select whether this revised payment will be charged as an amount or as a percentage from the New Amount / Percent Increase field.

      3. Enter the new payment amount in the New Payment Amount field.

        Important!

        Do not enter your catch-up payment amount in this field. The system will calculate your catch-up payment automatically. The amount that should be entered in this field is the new recurring payment amount.

      4. Proceed to Step 10.

  9. Select or clear the following check boxes according to your preferences:

    • Send Email?: Select this check box to send yourself a confirmation email once the retro payment has been created.

    • Use posting date for vendor allocation?: Select this check box if your catch-up payments need to be allocated according to the current vendor allocations. If the catch-up payment needs to be split between the current and previous vendor allocations, clear the check box.

    • Mark Retro Payments as One-Time Payments?: Select this check box if you would like this retro payment to be marked as a one-time payment.

    • Create Retro Payment as One Lump Sum?: Select this check box if you would like to create the retro payment as a lump sum payment.

      If this check box is not selected, the catch-up amount will be distributed in monthly payments evenly between the retro date and the new effective date.

  10. Enter a description of the payment in the Payment Description field.

  11. Enter a remit message in the Remit Message field.

  12. To preview a summary of the changes that will be made once the retroactive payment is created:

    1. Click Preview Payment.

      A Preview window opens.

    2. Click the link above the OK.

      A second Preview window opens.

    3. Click Cancel to exit the window.

      The second Preview window closes.

    4. Click OK.

      The first Preview window closes.

  13. Click Create Payment.

    A Success dialog box opens, confirming that the retroactive payments were created.

    Note:

    If you used the method specified in the first bullet of step 9, you can see your CPI retro payment schedule on the Recurring Expenses page. To view the CPI retro payment schedule, scroll down to the Expense Schedule / Escalations section. The Is CPI?check box will be selected in the Is CPI?column of the CPI retro payment schedule.

ClosedDelete a CPI Expense Schedule

To delete a CPI expense schedule:

  1. Navigate to Contract > Payment Info > Recurring Expenses.

    Use the links in the Navigation Pane on the leftmost side of the page.

  2. Select the expense setup whose schedule you want to delete from the Contract Expense Setup List.

    The expense setup data populates on the page.

  3. Scroll down to the Expense Schedule / Escalations section of the page.

  4. Click Delete in the Actions column of the record.

    A warning message appears. The system warns you that the Recalc?flag will not be triggered for ASC 840 and ASC 842 schedules if you delete a CPI expense schedule.

    Note:

    IFRS 16 schedules associated with the CPI expense schedule will have their Recalc?flag set to Yes if you delete their CPI expense schedule.

  5. Click Continue.

    The CPI expense schedule is deleted.

Add Firm-Level CPI Indexes via Import

Manage Your CPI Indexes at the Firm Level

Manage Your CPI Indexes at the Contract Level