Definition
A Reappraisal Lease (or Revaluation Lease) is an agreement where the rent of a lease periodically adjusts based on the appraised value of the leased property. Typically, at predetermined intervals, an independent appraiser evaluates the current market value of the property, and the rent is adjusted accordingly. This is to ensure that the rent remains consistent with current market trends over the course of the lease term.
Examples
Example 1: Commercial Property
An office space in downtown Los Angeles has a reappraisal lease with a term of 10 years and a reappraisal clause every 3 years. An independent appraiser reassesses the property’s fair market value in the third and sixth years of the lease. If the market value increases, the rent will rise accordingly in the fourth and seventh years; if it remains static or decreases, the rent may also adjust downwards or stay the same.
Example 2: Strip Mall Storefront
A store in a strip mall has a reappraisal lease for 15 years with revaluations every 5 years. Given the rapidly developing neighborhood, this clause ensures the rent paid by the tenant keeps pace with the increasing property values and market rental rates, benefiting the landlord with higher income while maintaining fair market rent for the tenant.
Frequently Asked Questions
What is the main advantage of a reappraisal lease for landlords?
The main advantage for landlords is the ability to adjust rent to reflect current market conditions, potentially resulting in higher rental income as property values rise.
How often do reappraisals occur in a revaluation lease?
The frequency of reappraisals depends on the terms specified in the lease agreement, usually ranging from every few years to every decade.
Who conducts the property appraisal in a reappraisal lease?
An independent third-party appraiser, often agreed upon by both the landlord and the tenant, conducts the property appraisal to ensure unbiased and accurate valuation.
Can reappraisal leases decrease rents?
Yes, if the market value of the property decreases at the time of reappraisal, the rent can be adjusted downwards in line with market trends.
Are reappraisal cases subject to legal disputes?
While lease agreements aim to clearly define reappraisal processes, disputes can arise primarily over valuation figures. These cases often require negotiation or arbitration to resolve any discrepancies.
Related Terms
Market Rent
Market Rent refers to the rental amount that a property can command in the current lease market. It is determined by factors such as location, condition, and overall demand and supply.
Lease Agreement
A Lease Agreement is a contractual arrangement where one party (lessee) pays rent to the other (lessor) for the use of an asset, such as real property.
Appraisal
Appraisal is the professional assessment or valuation of a property’s worth conducted typically by a qualified appraiser.
Rent Adjustment
Rent Adjustment involves changing the rent amount in accordance with predefined clauses in a lease agreement which may be based on indices, cost changes, or property reappraisal.
Online Resources
- Appraisal Institute - Offers resources and standards on real estate appraisal practices.
- Building Owners and Managers Association (BOMA) - Provides commercial property owners and managers with industry knowledge and support.
- National Association of Realtors (NAR) - Provides resources, research, and educational tools related to real estate matters.
References
- Fisher, J.D., & Lind, K. (2004). “Real Estate Market Valuation: Methods and Trends.”
- Appraisal Institute (2013). “The Appraisal of Real Estate,” 14th Edition.
Suggested Books for Further Studies
- “Real Estate Appraisal: From Value to Worth” by Greg K. Milner
- “The Income Approach to Real Estate Valuation” by Jeffrey Fisher and Robert Martin
