Real Estate Investor · Greenville, SC · Member since 2013 · 28 posts · 4 votes
Hello,
I'm interested in touching base with investors that have been through the option period with a CVS, or similar, where the lease states that the new rent (in the option periods) will be based on Fair Market Value. This seems to have significant risk and weight on the assessment process. Especially because, from my analysis, the leases are often 'front loaded' and they tenant is paying a higher than fair market value for the first X years of the lease. Additionally, in talking with numerous assessors, they do not agree on the methodology to be used in calculating FMV.
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
Hi Ed! I've done dozens of CVS deals, and unfortunately, they have the upper hand when it comes to negotiating the lease. I haven't seen them remove that language, but does the form you are working off of have the risk go both ways, or there is a floor on the rent? Often in retail leases you'll see a 3% increase per year or a 10% increase per term, but the market could grow exponentially quicker than that, which we have actually seen in recent years. It also could crash like we've seen earlier in the 2000s. If you think of it this way, though, it's not really so bad...If the rent stated in the lease wasn't FMV and they chose to not accept the option or renegotiate at that point, you're re-leasing it to someone else, presumably at or close to FMV, but you also have to rebuild or fit out the property and likely give a free-rent period, so even if you got a few dollars over market value, you still take a hit. CVS is a really strong tenant, so keeping them there at market rent isn't the worst thing in the world, and it means you have had a secure, paying tenant for the whole initial term. Also, a lot of national and international retail tenants have similar provisions. Mom and Pop tenants you can get away with a lot more, but the risk is so much greater. Like I said, I haven't seen too much movement in that area as far as negotiating the provision, but if you have a good attorney, you can certainly give it a shot! Happy to answer any other questions if you want to PM or email me. Best of luck!