Understanding Retail Ground Lease Rent Adjustments

Dunkin donuts, Mcdonald’s, and Starbucks are a few examples of companies that maintain retail ground leases with property landowners. These types of leases allow more convenience companies to remain in prime commercial areas where their visibility is higher—opting to keep these leases from anywhere to 50 to 99-year terms. Most of these ground leases make adjustments on rent every three years based on the initial agreements in their leases.

There are several options to determine the fair market rent for a retail ground lease; let us look at the best ways. Let us look at different ways to determine fair market rent through reappraisal clauses, fixed adjustment, and the consumer price index.

Reappraisal Clauses

Every fair market rent encounters several renewals called appraisals. In the New York and California courts, there are two approaches used to determine retail ground leases. The “New York Rule” uses restrictions in the existing lease and the “California Rule,” a standard appraisal in the fair market value at its best and highest use. This appraisal is not limited by existing improvements or restrictions unless stated in the lease.

There are also reappraisal clauses that bring the retail ground rent back to the market. These reappraisals are usually conducted every ten years and for some, as long as 20 years. The variations of this clause include the reappraising of the value of the land but allowing the land lease rate to remain fixed. Or reappraising either but not lowering the existing rent and allowing the lessor the reappraisal clause option.

Fixed Adjustments

In cases with fixed adjustments, the lease sets a percentage increase of 1% to 4%. These adjustments provide both the tenant and the landlord a set amount of the rent after the rent review date. The tenant will know how much revenue is needed to keep up with the lease. The landlord, on the other hand, has assurance on the income the property will be generating.

Maintaining fixed adjustment also lessens the possibility of disputes on rent increase between the tenant and the landlord. They are also more favorable for tenants renting commercial properties that are becoming high and higher in demand as the years go by. On the downside, though, if the market is going down, a fixed rent remains as it is, which can become a burden for long-term leases.

Based on CPI

Another way to determine the fair market rent for retail ground leases is based on the CPI or consumer price index generated by the Bureau of Labor Statistics. These measures the prices paid by the urban consumers for a representative basket of goods and services.

Such adjustments in rentals are based upon the percentage change reflected by the CPI for the following two-year period. This measure is another way that landlords can increase; for example, if the CPI increases by 5%, then the rent also goes up by 5% and so forth.

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