Caps and Floors regulate the amount that rent can change by through scheduled Rent Reviews. These are found in your contract and may impact your IFRS 16 reporting balances. This article will explain how the Cap & Floor functionality works in Nomos One.
How to add a Cap or Floor to your Rent Reviews
Adding a cap or floor to an Agreement can be done on the Other page of the Agreement Wizard.
You can create Cap & Floors for all three types of Rent Reviews:
- Market Rent Reviews
- CPI Rent Reviews
- Fixed Rent Reviews - note that adding a floor will override the increase amount entered when scheduling the Fixed Rent Reviews on the Events page of the Agreement creation process.
Please note: Adding a cap or floor to a rent review of a certain type will apply that cap/floor to all rent reviews of that same type in the Agreement. You are unable to set up caps and floors to apply only to certain rent reviews in an Agreement, but not others of the same type. For example, if an Agreement has annual CPI rent reviews for a term of 10 years, you cannot set up a floor of 3% on the first 5 CPI rent reviews, and a floor of 5% on the next 5 CPI rent reviews.
Adding a Floor
The “floor” is the lowest amount that rent must be increased by through a rent review.
To add in a rent review floor:
- Click “Add new Floor ”.
- Select the rent review type.
- For the “change” field, select the percentage option (%).
- Record the rate. Skip the “floor base” field - this is a legacy feature.
- Click “Add”.
A floor is recorded using the principle that 100% is the current rent amount. If your contract states that rent cannot decrease below what it currently is through a rent review, you would enter “100” in the “rate” field. If your contract states that rent must increase by 3% of current rent through a rent review, you would enter “103” in the “rate” field, as shown in the screenshot above.
Adding a Cap
The “cap” is the highest amount that rent can be increased by through a rent review.
To add in a rent review cap:
- Click “Add new Cap”.
- Select the rent review type.
- For the “change” field, select the percentage option (%).
- Record the rate. Skip the “cap base” field - this is a legacy feature.
- Click “Add”.
A cap is recorded using the principle that 100% is the current rent amount. If your contract states that rent cannot increase by more than 20% of what it currently is through a rent review, you would enter “120” in the “rate” field, as shown in the screenshot above.
Impact of Adding in Cap and Floors
Adding in a cap or floor will create a reminder when you complete a rent review on the Agreement Timeline, noting that there is an applicable cap or floor:
Depending on the rent review type selected, and the rate entered, the recorded cap and/or floor may affect IFRS 16 balances for the Agreement. To find out more about the default treatment of Rent Reviews, and how Cap & Floors can impact this default treatment, check out this article.
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