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Change Your Leases!! CPI Revisions: Los Angeles and Riverside Areas Part Company in January 2018.

CPI:  Los Angeles-Anaheim-Riverside 3.5% [annual];

January, Los IMG_7337.JPGAngeles: .8%;

January, Riverside:     .9% 

In January 2018, the Bureau of Labor Statistics ("BLS") introduced a new geographic area sample for the Consumer Price Index (CPI). As part of the new sample, Los Angeles and Riverside areas are split into two separate indices.

The first index for the Inland Empire was published yesterday (for January 2018). Additional information on the BLS revisions is available at:

https://www.bls.gov/opub/mlr/2016/article/the-2018-revision-of-the-CPI-geographic-sample.htm

Thus, the current Los Angeles-Riverside-Orange County statistical area is broken into the Los Angeles-Long Beach-Anaheim area and the Riverside-San Bernardino-Ontario area.

The CPI is a measure for the average costs of consumer goods and services and is used to identify changes in the cost of living. It is way behind the real cost of doing business, and it keeps changing for political reasons. But the CPI geographic area sample is an index of CPI data for specific geographic areas. The geographic areas, called Core-Based Statistical Areas, are designated for survey based upon economic and social integration to an urban core. Economic surveys subsequently generate unique CPI data for each CBSA listed in the geographic area sample.

The Inland Empire's first Consumer Price Index is now published and it reports an inflation rate in excess of the Los Angeles-Long Beach-Anaheim area.

CPI-riverside-jan-2018-9percent-table-header.jpg

CPI-riverside-jan-2018-9percent.jpg

Starting with January data, the Inland Empire will get a cost-of-living snapshot every two months. Los Angeles and Orange Counties will get their own CPI monthly.

No History: The BLS' Inland Empire CPI has no history. From December to January, that CPI rose .9%, a point above the .8% in L.A. and Anaheim, and about twice the 0.5% percent increase for U.S. cities. The reason? Gasoline prices, up 4.7% in January vs. a one-month rise of 5% in L.A.-O.C.

But moderate housing costs in Riverside and San Bernardino counties tempered the CPI measure. Housing expenses in January increased 0.1% vs. up 0.6% in L.A.-O.C. Inland Empire rents fell 0.3% vs. a jump of 0.4% in L.A.-O.C.

If you are leasing spaces and use a lease calling for the outdated "CPI" (Los Angeles, Anaheim, Riverside ) and your community is in these areas, you have some immediate decisions to make.

Let's examine a simple CPI escalator.

SAMPLE CONSUMER PRICE INDEX RENT ESCALATOR

(Floor, No Ceiling, Floating Cap)

"On each anniversary date of this Agreement, your rent will be adjusted in accordance with the same percentage as the increase or decrease in the Consumer Price Index ('CPI') annual change (All Urban Consumers for Los Angeles, Anaheim, Riverside [1982-84=100]), plus one (1) percent, with a minimum increase of a total of up to three and one-half (3.5) percent. Anniversary date CPI increases will not exceed the previous year's percentage change plus 2% of the previous year's rent. This calculation will occur each anniversary date. If CPI is discontinued or modified, a fair substitute index or calculation to achieve the same result as if not discontinued or modified will be applied."

Some CPI clauses allow for the use of a substitute index. E.g., "[I]f CPI is discontinued or modified, a fair substitute index or calculation to achieve the same result as if not discontinued or modified will be applied." Or "[I]f for any reason the CPI ceases to be published, management will use the most similar alternative index that is available. If the formula by which the CPI was calculated during 1982 - 1984 is changed, management may, at its option, use a formula which approximates the calculation of the CPI before the change in the formula."

Thus in such cases, you may be counselled in Ontario, to use the Riverside Index. In Covina, the Los Angeles index is used.

Absent clear language, management must decide how to interpret the clause and what index to use. You can ask residents to execute an amendment to clarify the new index, or announce a new policy to implement the change in CPI. Or consider using an average, or lesser of the two. In all, this is a matter for consultation with your legal counselor.

Practically speaking, the difference between CPI for Los Angeles and Riverside may remain small. Put differently, the expectant gain from the higher index could be wiped out quickly by defense costs of a legal dispute. Even without legal entanglement, such action may engender ill will, resentment, and bring on retaliatory claims with each new alleged exposure and opportunity. If the park owner uses the lesser sum and publicizes that decision, the value of the good will may far exceed the cost. On the other hand, if the precedent set is important because a 25 year term remains, other factors may weigh heavily in the analysis of the management team.

In sum, this is a matter for you and your lawyer to discuss. One thing for sure. Your documents should be updated immediately to state the CPI index you decide to apply, because the old index does not exist any longer. You do not need claims that your rents cannot be increased at all because "there is no such formula."

Terry R. Dowdall

Dowdall Law Offices, A.P.C.

Read further:

"Inland Empire gets its own Consumer Price Index, and the trend isn't pretty," by Jonathan Lansner. https://www.redlandsdailyfacts.com/2018/02/14/inland-empire-gets-its-own-consumer-price-index-and-the-trend-isnt-pretty/

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