Adjusting the lease rent for inflation
26-03-2015
At the start of the new calendar year, the base lease rent rates are adjusted for inflation at shopping centres .As the financing of commercial real estate is usually offered in euros, banks require that the lease rent rates also be set in that currency.
This is meant to prevent the risk of the investor becoming insolvent due to the unfavourable PLN/EUR exchange rate. The rates of lease rent denominated in euros are adjusted for inflation in most cases using the inflaion indices published by EUROSTAT, the European Union's statistical office.
Polish law does not impose any specific method or rules for adjusting monetary amounts for inflation. Therefore, the parties to the lease contract can define these at their discretion. Although there are no legal obstacles to the lease rent denominated in euros being adjusted, for instance, based on the inflation index published by the Polish Central Statistical Office (GUS), two indices, namely HICP and MUICP, are commonly employed for premises located in shopping centres.
HICP, the Harmonized Index of Consumer Prices, is compiled by each European Union member state. MUICP is calculated within the European Economic and Monetary Union and, consequently, tends to depict the inflation in the countries of the EU having euros as their legal tender. Both HICP and MUICP refer to the annual average inflation rate and not to the rate computed year to year. Thus, they demonstrate in a balanced manner the shifts in the inflation rate levels over a period of 12 months.
Which of the two indices is more advantageous to the landlord? It suffices to take a look at statistical data published by EUROSTAT. If we take the year 2005 as the base year, with a value of 100 when computing the inflation rate, the inflation rate in the month of January 2013 will be reported at 118.77 according to HICP, whereas MUICP will assume the value of only 115.73. Following transposition of the aforementioned data onto the practice of operation of a shopping centre, one can assume that if a given investor had entered into a lease contract in the year 2005 and denominated the lease rent in euros, by January 2013 that lease rent would have risen by 18.77% (according to HICP) or 15.73% (according to MUICP) as a result of EUROSTAT adjustment for inflation.
Hence, it is worthwhile incorporating into the lease contract a HICP-based inflation-adjustment clause. This index assumes higher values than the competitive MUICP index and, in doing so, offers the investor more advantageous matching of the lease rent rates with the current purchasing power and market reality.
