A lease agreement wherein the rental rate is periodically adjusted based on a specific economic indicator is a strategy employed to maintain the real value of lease payments over the term of the agreement. These indicators, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI), reflect fluctuations in the overall cost of living or production costs, respectively. For example, a commercial lease may stipulate that the annual rent will increase by the same percentage as the CPI increase, protecting the lessor from inflation.
The principal advantage of this type of lease is its ability to mitigate the impact of inflation on rental income. This provides stability for lessors, ensuring a consistent return on investment relative to the prevailing economic conditions. Historically, these arrangements have been favored in long-term leases, where the potential for significant inflationary erosion of fixed rental rates is higher. This approach also allows lessees to benefit from potentially lower initial rental rates, with adjustments occurring over time based on the chosen economic benchmark. However, lessees also bear the risk of increased rental payments if the chosen index rises.
