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In the Real Estate Management industry, escalation generally refers to the terms in a lease that cause a tenant's rent or other charges to increase from year to year. Many commercial leases (retail, office, and industrial) are set up so the rent amounts increase regularly based on an index such as the Consumer Price Index (CPI), Porters' Wage, or a user-defined index.
The CPI or a user defined index relates to standard percent escalation.
The CPI measures the general increase in consumer prices (inflation) at the city, state, regional, and national levels. For example, suppose that the index for January, 2017 is 169.24 and the index for January, 2018 is 178.38. Inflation for 2017 is the percent increase between the two indices, which is 5.4%. The CPI is published monthly by the U.S. government with a three-month lag time. However, for most metropolitan areas, the regional index is published every six months.
A user defined index is based on some other criteria. For example, the comparative increase in the operating costs of a specific building could determine the increase in rent. Another example is an index based on money rates such as prime or treasury notes.
The Porters' Wage is a special index that has been used historically in the metropolitan area of New York. This index is based on the Porters' Union Wage contract, which consists of base rates and fringe benefits that are renegotiated periodically by the union. Leases set up for a building can relate to the sum of a specific combination of these rates. The comparative increase in this sum from year to year, which is expressed as a rate per square foot, determines the increase in rent. Note the following:
You must use a method outside the Real Estate Management system to calculate the sum of the base and fringe rates and to establish an index that reflects this amount for each year.
Because each building may relate to a unique combination, more than one Porters' Wage index may have to be maintained.
Though this index is becoming obsolete, many older leases still include this term.
Regardless of the index, escalation is the term JD Edwards World uses to describe the process that automatically generates the related increase in rent. This chapter is an overview of the escalation process.
The following table identifies and illustrates the steps and terms involved in the calculation for standard percent escalation. A detailed explanation of this information follows the table.
| STEP | TERMS | SAMPLE CALCULATION |
|---|---|---|
| 1 | Current index | 472.810 |
| 2 | Base index | 462.200 |
| 2 | Gross percent escalation | 0.023 |
| 3 | Lease factor | x 0.900 |
| 3 | Factored percent escalation | 0.021 |
| 4 | Minimum percent (optional) | > 0.015 |
| 4 | Maximum percent (optional) | > 0.020 |
| 4 | Adjusted percent escalation | 0.020 |
| 5 | Base rent | $ 2,000.00 |
| 5 | Gross escalated rent | $ 2,040.00 |
| 5 | Maximum rent (optional) | < 2,100.00 |
| 5 | Net escalated rent | $ 2,040.00 |
| 5 | Net annual rent adjustment | $ 40.00 |
| 5 | Periodic adjustment amount | $ 3.33 |
Note:
Unless otherwise stated, the setup information used in the following steps is supplied from the Tenant Escalation Master file (F15016) and updated from the Escalation Information screen.The current index is the value related to one or more index periods defined for an escalation index. This information is kept in the Escalation Index Master file (F1550) and updated from the Escalation Indices screen. In the sample calculation, the current index is 472.810.
The system can use the following methods to determine this value: direct, calculation, and override.
The system selects the value defined for the period that is just prior to the next escalation period to be generated. This is controlled by the Next Period Start Month, Next Period Start Year, and Escalation Computation Method fields. The method of computation must be D.
The system selects the values defined for the periods that occur within a specified length of time. It then adds the values and divides that total by the number of index periods involved. This average is controlled by the Escalation Period Length and Computation Method fields. The method of computation must be C.
The system selects the value defined for the period that is specified in the processing options for the Escalation Billing Generation program.
Compare the current index with a base index and calculate the gross percent escalation. Because escalation is dependent on the percentage of change in an index rather than the actual gross change, the system uses the following formula:
(Current index - base index) / base index
In the sample calculation, the base index is 462.200. The gross change is 10.610, but the gross percent change is 2.30%. Because the system expresses the percentage as a decimal fraction, the number 0.023 represents the percentage.
You can use either the original index or last index as the base. The original index is the initial calculation for the lease, and the last index is the most recent calculation. This is controlled by the Original or Last field and the Escalation Basis Override field. The value is supplied from either the Base Index or Last Index field.
Multiply the gross percent by an adjustment factor to calculate the factored percent escalation. This percentage is controlled by the Base Escalation Reduction (Lease Factor) field. In the sample calculation, the escalation is based on 90% of the CPI, so the lease factor is 0.90. Therefore, the factored percent is 0.021.
Compare the factored percent with minimum and maximum limits to calculate the adjusted percent escalation. This adjusted percent escalation is the percentage the rent is increased. Note the following:
This is controlled by the Escalation Period Length, Minimum Per Year, and Maximum Per Year fields.
The period length must be 12 for the escalation index.
If the factored percent is equal to or greater than the minimum and equal to or less than the maximum, the system uses the factored percent as the adjusted percent. However, if it is less than the minimum, the minimum percent is used. If it is greater than the maximum, the maximum percent is used.
In the sample calculation, the factored percent of 0.021 is greater than the maximum percent of 0.020, so the system uses 0.020 as the adjusted percent.
Use the adjusted percent to calculate the periodic adjustment amount. This step involves the following intermediate calculations:
To calculate the gross escalated rent, the system uses the following formula:
Base rent amount X (1 + adjusted percent)
In a similar way to step 2 in the calculation, you can use either the original rent or last rent as the base. This amount is supplied from either the Base (Original) Escalation Amount or Last Escalation Amount field. In the sample calculation, the base rent is multiplied by 1.020 for a result of $2,040.00.
The gross escalated rent is compared with the maximum rent, and the smaller amount becomes the net escalated rent. The system can use either one of the following fields to determine the maximum rent.
Maximum Escalated Rent.
Maximum Per Lease. The system uses the percentage from this field in the following formula to calculate the maximum rent:
Base rent amount X maximum percent
In the sample calculation, the gross rent is less than the maximum rent, so $2,040.00 becomes the net escalated rent.
To calculate the net annual rent adjustment, the system subtracts the base rent amount from the net escalated rent. In the sample calculation, the difference is $40.00.
To calculate the periodic adjustment, the system divides the net annual adjustment by the number of periods per year as specified by the billing frequency code. If the billing frequency is monthly in the sample calculation, the net annual adjustment is divided by 12 to result in $3.33 as the periodic adjustment.
The system uses this amount to adjust the recurring billings and to calculate any catch-up billings.
When escalation is based on the Porters' Wage index, the calculation has some differences from the standard percent escalation. The calculation involves the following steps:
Determine the current index.
Compare the current index with a base index and calculate the gross escalation or gross percent escalation. The calculation is controlled by the PW Computation field.
If the field contains 1 or ¢, the calculation is the following:
Current index - base index
If the field contains 2 or %, the calculation is the following:
(Current index - base index) / base index
Calculate the factored escalation. This is also controlled by the PW Computation field.
If the field contains 1 or ¢, the calculation is the following:
Gross escalation X Porter Wage factor
If the field contains 2 or %, the calculation is the following:
Gross percent escalation X Porter Wage factor X 100
The result of this step is the amount of escalation per square foot.
Multiply the quantity from the Porter Wage Square Feet field in the Tenant Escalation Master file by the rate from step 3, and then add the base rent. The result is the gross escalated rent.
Compare the gross escalated rent with the maximum rent, and the smaller amount becomes the net escalated rent.
Subtract the base rent amount from the net escalated rent to calculate the net annual rent adjustment.
Divide the net annual adjustment by the number of periods per year as specified by the billing frequency code to calculate the periodic adjustment. The system uses this amount to adjust the recurring billings and to calculate any catch-up billings.
When you use the Porters' Wage index, note the following:
The Porter Wage Factor and Computation fields in the Tenant Escalation Master file are required. If these two fields are used, the system automatically bypasses the Minimum Per Year, Maximum Per Year, and Base Escalation Reduction Factor (Lease Factor) fields, which relate to standard percent escalation.
For step 2, the Porter Wage Computation field controls whether the system uses the actual gross change or percent of change in the Porters' Wage rates.
The system uses the periodic adjustment amount to update the Recurring Billing Master file (F1502) with the estimated information. In the process, the old bill code lines related to the estimated rent for escalation are suspended as of the day prior to the beginning date of the new billing. Such a line is identified by the bill code contained in the B.R. Code field of the Tenant Escalation Master file.
A catch-up billing for escalation is normally the amounts that should have been billed for past periods (the periodic adjustment amounts) minus the estimated escalation that was actually billed for those periods. It also includes any escalation amounts that were not billed in the prior year.
The past periods include all periods between points B and C on the time line in the following illustration:
The segment AB is the period length.
Point B is the current next month and year.
Point C is one of the following:
The latter of the G/L date (generation date) and the last billing date for the estimated escalation. In this case, the start date for recurring billing is one month after the G/L date.
The latter of the last billing date for the estimated escalation and the period prior to the start date for recurring billing. This condition is used only if the start date is specified in the processing options for the Escalation Billing Generation program.
Note the following:
An estimated billing is the periodic adjustment amount for the past year that continues to be billed in the current year until a new escalation is generated.
The estimated amounts that are actually billed are retrieved directly from the A/R Account Ledger file (F0311).
A catch-up billing can include any escalation billings that were not billed in the prior year.
The system uses the B.R. Code (Billing Receipt Code) field in the Tenant Escalation Master file to identify the accounts for catch-up billings. The G/L Offset field identifies the accounts for the estimated recurring billings, which the system deducts when calculating the catch-up billings.
If you specify that catch-up billings be included in the generation and none are created, the system places an "empty" transaction in the Tenant/Lease Billings Detail file. This indicates to the system that a batch for escalation billings does exist and ensures that the escalation information is updated during the posting process. In this case, however, transactions with a zero amount are not actually placed in the A/R Account Ledger and G/L Account Ledger (F0911) files.
This example relates to the following escalation information:
| Item | Description |
|---|---|
| Next month and year | January, 2018 |
| Period length | 12 |
| Net annual rent adjustment | $1,800 |
| Billing frequency | Monthly |
| Periodic adjustment | $150 |
| Estimated billing for escalation | $100 per month |
April 1, 2018 is both the G/L date and the start date for recurring billing. The first three months of 2018 were billed at $100 per month, so the calculation for the catch-up amount is as follows:
(3 X $150) - (3 X $100) = $150
Before you begin the escalation process, set up the following information:
Real Estate Management constants
Facility, tenant, and lease information
Escalation indices, billing frequencies, and other user defined codes
General accounting and accounts receivable constants
Object and subsidiary accounts in the G/L chart of accounts
Bill codes with their automatic accounting instructions (AAIs)
The escalation process involves the following tasks:
Set up the escalation indices.
Set up the escalation information.
Generate the escalation billings.
Review, post, and print the invoices.
For more information about the basic operations related to invoices, see Chapter 16, "Manual Billing Process" in this guide. Note that you cannot use the escalation process for A/P vouchers.
This screen lets you set up tables for an index by calendar year. Within such a table, you can specify the monthly values for the index. The system uses periodic changes in these values to adjust (escalate) the amounts for recurring billing. This information is kept in the Escalation Index Master file.
This report is a list of the calendar years and related monthly values set up for an Escalation index. You can use it to review the information that exists in the Escalation Index Master file.
This screen lets you quantify the tenant's lease information as it relates to escalation. This information is kept in the Tenant/Lease Master file (F1501) and Tenant Escalation Master file.
Escalation Information Listing
This report, which is similar to the Escalation section on the Lease Master Listing, provides the billing setup for the leases that use escalation. If you run the report and review the information before you generate invoices, you can save time and billing errors. It is based on the Tenant Escalation Master file.
This report is a management tool to help schedule the generation of escalation billings. It is based on the Tenant Escalation Master file.
This program lets you generate a batch of billings related to escalation. It is based on the Tenant Escalation Master file, and the system places the calculations in the Escalation Billing Register (Calculation Details) file (F1548). The system uses the calculations to create both estimated recurring billings and catch-up billings. Note the following:
When you run either the Post Invoices or the Escalation Update W/O Post program, the system updates the Recurring Billing Master file with the estimated information for recurring billings.
The processing options for the Escalation Billing Generation program let you create catch-up billings for past billing periods. These transactions are placed in the Tenant/Lease Billings Detail file (F1511).
Escalation Calculation Register
This report is a list of the calculation details for a batch of escalation billings. It lets you review this information for accuracy prior to posting the batch. The report is based on the Escalation Billing Register (Calculation Details) file. You do not access it from a menu, but the system can print it automatically when you run the Escalation Billing Generation program.
After you have created the billings, the process is similar to the process for manual billings. For more information about the following programs, see the related chapters in Part III, "Manual Billing" in this guide.
Escalation Billing Journal Review
This screen, which is the first level of detail in the review process, lets you review and approve batches of transactions for posting. Except for the title, the screen is identical to the Manual Billing Journal Review screen. In fact, all the screens in the journal review process for escalation are identical to the ones for manual billings. They display and update information in the Batch Control Records file (F0011) and the Tenant/Lease Billings Detail file.
Note the following:
Processing option 1 must be set to generation type 4 to review batches of catch-up billings for escalation. Type 1 lets you review recurring billings.
The Manual Review Reqd field in the Tenant Escalation Master file controls whether a manual review is required for a billing after it has been generated. This requirement is also controlled by the Manual Rev Reqd field in the fold area of the Billings Detail Modifications screen, which is the third level in the review process.
From the Billings Detail Modifications screen, you can access the Extended Invoice Text screen to set up and work with free-form text for a billing.
The system initially assigns a status of Error to all batches of invoices in the Tenant/Lease Billings Detail file. When you run Print Billing Edit/Register for a batch, the system verifies the invoices against other system information and changes the status of the batch to either Pending or Approved. The status to which it changes depends on how the Manager Approval of Input field is set in the General Constants file (F0009). If an error exists or if a manual review is required for a document, the batch retains a status of Error.
The system also prints a report that can include a list of the transactions, total amounts, errors, and warnings. A processing option for the Escalation Billing Generation program controls whether the system automatically runs the Print Billing Edit/Register program at the time of the generation.
For escalation invoices in the Real Estate Management system, the version of the post program does the following:
Runs a DREAM Writer version of G/L Transaction Generation (P15199), which creates the A/R and G/L transactions. At this time, it also marks the documents as posted in the Tenant/Lease Billings Detail file.
Selects unposted invoices from the G/L Account Ledger file.
Verifies the information in each transaction.
Posts the transactions to the G/L Account Balances file (F0902).
Marks the transactions as posted in the following files: G/L Account Ledger, A/R Account Ledger, and Batch Control Records. The posted codes in the three files are P, D, and D, respectively.
Creates and posts the automatic offsets to accounts receivable.
Updates the Recurring Billing Master file with the estimated information for recurring billings.
You must set up the Batch Type Selection processing option for tenant A/R invoices (batch type 2).
Note:
With escalation, you cannot process tenant A/P vouchers, which are batch type / (forward slash).Escalation Update without Post
This program, which is based on the Escalation Billing Register (Calculation Details) file, updates the Tenant Escalation Master file. The processing options control whether the Recurring Billings Master file is also updated.
When you run Post Invoices, the system automatically runs the DREAM Writer version 001 of Escalation Update without Post. However, it may be necessary to run different versions of the update for some tenants. For example, you may want to combine the escalation and base rent amounts into one new recurring billing line or override the bill code for base rent that exists in the Tenant Escalation Master file. In this case, you can choose the program directly from the menu and run it separately.
You use the Print Invoices program to print an invoice that includes information created during the escalation process.
This report is a list of the billing details for escalation that have been either posted to the general ledger with the Post Invoices program or processed with the Escalation Update W/O Post program. The report is based on the Escalation Billing Register (Calculation Details) file.