1. Using Lease Accounting
  2. Create Payment Increase Agreements

Create Payment Increase Agreements

If you have selected the Payment Increase Applicable option in the Overview tab, you can create the payment increase agreement in the Payment Increase Agreement tab.

Rent increases automatically increase base rent by a fixed percentage or by an amount proportional to the index change for the remainder of the lease term. Fixed increases raise rental costs, while index increases protect property owners against inflation by raising the rent every year in proportion to hikes in consumer price indexes.

Apart from rents, other payments like parking and maintenance can also increase or decrease year on year. This change in rents is also called Escalations, especially if you estimate and agree upon earlier.

Rents or other payments can increase in varieties of methods:

  • As a fixed percentage

  • As a fixed amount

  • As a percentage that's linked to an Index movement like Wholesale Price Index (WPI) or Consumer Price Index (CPI), and such

  • Lower of a combination of the above methods

  • Higher of a combination of the above methods

Definitions

  • Rent Increase: Rent increase is an industry-wide accepted terminology to impart the understanding that any payment on a lease changes automatically with an earlier provided known percent increase or decrease or the change coming from an Index. Though it is called rent increase, you can subject any payment to a payment increase.

  • Rent Increase Index: A Rent Increase index captures index numbers with corresponding periods or dates. For example, a WPI Index might capture the index number 100 for Jan-21, 103 for Feb-21, 105 for Mar-21, and so on. The index numbers are real-life-like numbers with a source in WPI or CPI or Currency fluctuations or Gold Price Index. Lease Accounting calculates a change percentage from the index numbers provided by you or from a web service.

  • Assessment Cycle: The assessment cycle is the frequency with which you calculate the payment changes. For example, you want to assess payments for payment changes yearly or semiannually. The assessment can be Annual and Semiannual.

  • Payment Basis Type: Generally, the payment basis is the payment amount itself. It is the basis on which you apply the payment change percentage. For example, you want to apply a payment percent of 5% on 75% of the payment amount applicable for the payment period.

  • First Assessment Date: This is the first assessment date on the lease. This date can't be earlier than the lease start date and later than the lease end date.

  • Rent Increase Agreement Template (RI Agreement Template): You create rent increase agreements at the business unit level. Lease Accounting defines the rent increase agreement for other payments such as Maintenance, Service, and such. Lease Accounting selects these agreements on individual leases. You can override certain parts of the agreements at the lease level, while you can override other parts of the agreement at the payment level.

  • Assessment in Years: Lease Accounting assesses the payment increase/decrease per the number of years if the assessment cycle frequency is Yearly. For example, you can assess the rent increase once in 2 years.

  • Compound Basis: You would generally choose a compound basis for calculation when the assessment is based on the previous year. Lease Accounting refers to basis as 'Compound,' when the payment basis is dependent on the previous year's base payment +/- payment increase. During compounding of basis, the rent increase is for the current assessment cycle is a sum of previous rent increase and previous basis.

Create Payment Increase Agreement

  1. Click New (+) to display the Payment Increase Agreement page.

  2. The following fields are available as part of creating payment increase agreement:

    Field

    Description

    Agreement Template Name

    Select the agreement template.

    Agreement Name

    Enter the agreement name.

    Supplier

    Select the supplier.

    Default Relation Type

    Select the default relation type.

    Your choice is Fixed Increase. You can either enter the fixed percentage or fixed amount as the increase.

    Basis Adjustment Factor

    Enter the basis adjustment factor, if you have entered the fixed increase percentage.

    Fixed Increase Percentage

    Enter the fixed increase percentage, if you haven't entered the fixed increase amount.

    First Assessment Date

    Select the first date of assessment.

    Termination Date

    Select the termination date.

    Assessment Frequency

    Select the frequency of the assessment. Your choices are annual and semiannual.

    Currency

    Select the currency of the agreement.

    Assess in Years

    Enter the years of assessment for the agreement.

    Payment Purpose

    Select the payment purpose.

    Your choices are as follows:
    • Base Rent
    • Cleaning
    • Depreciation
    • Insurance
    • Operating Expense
    • Rent
    • Percentage
    • Allowance
    • Purchase

    You can add more values as the payment purpose.

    Fixed Increase Amount

    Enter the fixed increase amount, if you haven't entered the fixed increase percentage.

  3. Click Save and Close.

Payment Increase Agreements Tab:

You can view or add the following payment information in the Overview section:

Field

Description

Agreement Template Name

You can view the agreement template name.

Agreement Number

You can view the agreement number.

Agreement Name

Retain or change the agreement name.

Basis Adjustment Factor

Retain or change the basis adjustment factor, if you have entered fixed increase percentage.

Fixed Increase Percentage

Retain or change the fixed increase percentage, if you haven't entered the fixed increase amount.

First Assessment Date

You can view the first assessment date.

Termination Date

Retain or change the termination date.

Assessment Frequency

You can view the assessment frequency.

Currency

You can view the currency.

Assess in Years

You can view the assessment in years.

Payment Purpose

Retain or change the payment purpose.

Fixed Increase Amount

Retain or change the fixed increase amount, if you haven't entered the fixed increase percentage.

Click Generate Payment Increase from the Actions menu to generate the payment increase schedules.

Process for Generation of Payment Increase:

  • You must define the payment increase agreement template.

  • You can create agreements on leases using these templates.

  • You can also define an agreement without using templates. Each agreement is for a unique combination of supplier and currency.

  • Lease Accounting associates all the payments with the same purpose, currency, and supplier as the agreement.

  • You can make the payment increases applicable on the Lease Overview tab for the selected lease. The Payment Increase Agreement tab is visible when you save the lease.

  • Lease Accounting generates the assessment periods with the first assessment date and termination date as the start and end dates of these assessment periods. Lease Accounting generates each assessment period based on the assessment cycle of the agreement.

  • Lease Accounting includes all the payments that are part of an assessment period for payment increase calculations.

  • In the lease activation process, the Generate Payment Increase feature generates the payment increase schedules.

  • When you generate the schedules, Lease Accounting calculates and displays all the final payments on the Payments tab.

  • On lease activation, Lease Accounting automatically finalizes all the assessments before the lease amortization start date. When Lease Accounting finalizes an assessment, any changes to payment and payment increase variables don't impact the already generated increases for that assessment period.

  • After lease activation, Lease Accounting later finalizes the assessments during the amendments process. For example, if the ACD is 01-Jan-21, then Lease Accounting automatically finalizes all the assessment periods before the ACD when you finalize the amendment.

  • Lease Accounting ties the payment increases to user-built indexes like CPI Index, Gold Price Index, and so on. These indexes are of the fixed or rolling types of indexes.

  • The Process Index-based Assessments program finalizes and recalculates the payment increases based on indexes. The program looks at any finalized index values on the assessment date and recalculates based on the index movement.

  • You can also base your payment increases by choosing to perform payment increases if the index value is missing. There can be missing indexes at the time of lease activation or on the assessment date.

  • Lease Accounting bases the payment increase changes on the index known as 'Contingent' increases. For ASC842, contingent increases don't alter the ROU or Lease Liability balances. Lease Accounting expenses off the contingent increases as and when you know or derive them.

  • For other types of payment increase changes, you have an option to choose term payment increases as 'Contingent' or 'Noncontingent' increases. Lease Accounting accounts for them accordingly.