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Commercial leases: navigating rent increases

There is no doubt that commercial property around Anaheim is hot and likely to become hotter. This is good news for property owners, but difficult for renters. When the lease comes up for renewal, it can be a time of great stress for both.

Given that property values are expected to keep rising, lease terms have to be written with even greater care than ever before. Mediation and arbitration procedures that are well defined are a good component for a lease that is in the best interests of both parties.

Commercial real estate on the rise

Nearly all observers of the market have seen rents rise considerably in Anaheim and around the Los Angeles area. This is part of a nationwide trend that most observers see continuing well into the future. It is the major push behind significant development in the area as well.

Because of this, owners of commercial real estate are likely to demand short-term leases for their clients. If the value of real estate is likely to be much higher next year, no one wants to be boxed in for a long time.

Renters, on the other hand, always favor long-term contracts. These help them to plan built-out and customization necessary to make the space work. Predictability is also important for any business plan, and the possibility of a much higher rent in coming years is not good.

Mediation and arbitration as a solution

Both parties want a successful lease with few headaches. One solution which may achieve this can be a regular rent increase based on market rates with well defined mediation and arbitration.

When properly defined, suitable rent increases can be included as part of a long-term lease. The procedure for arbitration can be binding, but it has to be well defined in the original contract.

Issues with arbitration

The goal is always to define fair market rent, but this term needs to be well defined. For example, if a tenant improves the fixtures and condition of the property, is the rent based on the unimproved state or the investment put into it?

It is also important to spell out what comparable rents should be used to determine fair market value for a space. The space next door may seem similar, but does it have the same parking or other access? Is it more or less desirable for some reason?

Work it through

Well defined long-term contracts with market based rent increases are indeed in everyone’s interest. But they must be written carefully.

It’s important to have an attorney experienced in commercial real estate developing the terms and conditions for a successful contract that benefits everyone. Rising values do put pressure on the market, but a good long-term partnership is still in everyone’s interests.

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