What is a Reset Clause in A Commercial Real Estate Lease?

Posted on August 20, 2020

Reset clauses are typically used in long-term ground leases to provide landowners with a mechanism for capturing increases in the market value of the land they lease to a tenant for a period that can be as long as 99 years. In other words, they enable investors to lock in periodic rent increases at predetermined rates based on the land’s fair market value at any given point. Those rates may be fixed over the life of the lease or they may be based on an existing metric, such as the consumer price index (CPI).

For tenants, however, reset clauses can be troublesome due to the future uncertainty they create. A tenant may not know today the economic environment and financial pressures they will face 20 years from now nor will they know if they will be able to abide by rent increases that far down the round. To avoid these challenges, landowner should ensure that lease agreements include specific language that provides explicit details about what exactly will be valued in the future for purposes of determining rent increases. For example, will future valuations be based on just the land or will it also include the structures the tenant added as improvements to the land? Will it recognize the value of the lease or should it be valued based on a vacant building?

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.