The importance of full CPI-adjustment of lease?
Hi,
I'm interested in hearing your thoughts on the importance of CPI-adjustment of rent, and how much a cap on adjustment will impact the value of the property.
Imagine two identical office properties (1 and 2). WAULT of 25 years and NOI of 100m. Rent is adjusted with CPI for property 1 (say 2 %), while property 2 is adjusted with 80 % of CPI (1.6 %). Assuming a simple world without TI's, capex, etc. it can be proven that:
Value (property 1) = NOI / (Discount rate - CPI)
Value (property 2) = NOI / (Discount rate - 0.8xCPI)
Discount rate = 7 %
Value (property 1) = 100 / 5.0 % = 2,000
Value (property 2) = 100 / 5.4 % = ~1,850
My impression is that investors tend to close their eyes a bit and ignore caps on rent-adjustment, but in this case property 1 should be valued at cap rate 5.0 % and property 2 at cap rate 5.4 %. I know it's a simplified case with long duration but what are your thoughts? How much will a cap like this impact the value of the property?
Best regards,
Bodacious
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