What Is a Reappraisal Lease?
A reappraisal lease is a leasing arrangement where the rental level is periodically reviewed by independent appraisers. This setup ensures that rental values remain aligned with the current market conditions, benefiting both the property owner and the tenant over time.
How Does a Reappraisal Lease Work?
In a reappraisal lease, the property’s value is assessed periodically—usually by professional and independent appraisers. Both the lessor (landlord) and lessee (tenant) may select an appraiser to ensure fair valuation. If the chosen appraisers cannot agree on the property value, a third appraiser may be selected to make the final determination.
Example
Consider a reappraisal lease spanning 20 years: A notable supermarket chain, Big Buy Foods, agrees to an annual rent equating to 9% of the property’s value. To keep the rental terms fair and reflective of current market conditions, the property’s value undergoes reappraisal every 5 years. This periodic reassessment helps maintain a balance ensuring the rent remains competitive and consistent with the real estate market trends.
Advantages of a Reappraisal Lease
- Fair Rental Value: Regular appraisals ensure that the rental value stays competitive in the market, offering fairness to both the landlord and tenant.
- Market Alignment: Periodic reassessment helps adjust the rental value in line with market fluctuations ensuring the lease remains commercially viable.
- Transparency: Having independent appraisers make periodic evaluations fosters greater trust between landlords and tenants, ensuring unbiased rental adjustments.
Frequently Asked Questions
Q1: Who typically bears the cost of the appraisals in a reappraisal lease? A: Often, the cost is shared equally between the landlord and the tenant. However, the agreement terms may vary.
Q2: Are there any risks involved with reappraisal leases? A: Tenants face the possibility of increased rent if the property’s value goes up significantly, while landlords might see reduced rent during a market downturn.
Q3: How often should the property be reappraised? A: Reappraisal frequency can vary. However, commonly in contracts, it’s every 3, 5, or 10 years depending on the lease duration and market volatility.
For landlords and tenants prioritizing fairness and market-responsive rental agreements, a reappraisal lease is a strategically sound option. Such agreements continuously adapt to market conditions, benefiting both parties involved in commercial real estate transactions.
Related Terms: Gross Lease, Net Lease, Triple Net Lease, Operating Expense Lease, Full Service Gross Lease.
