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When can a commercial property owner raise rent?

On Behalf of | Jan 31, 2024 | Commercial Real Estate |

Commercial property owners in California often find themselves at the crossroads of managing their investments and ensuring a fair return.

One key aspect of this process is understanding when and how to increase lease rent. This decision should follow specific guidelines to maintain a balance between profitability and tenant relationships.

Understanding lease terms

Before deciding it is time for a lease increase, it is necessary to have a solid grasp of the lease terms. The lease agreement between the property owner and tenant outlines the initial rent amount, the duration of the lease and any provisions for future increases. Most commercial leases in California have fixed-term agreements. They typically range from one to five years.

Automatic increase clauses

Many commercial leases include automatic increase clauses. These specify the conditions under which owners can raise rent. These clauses often tie rent adjustments to the consumer price index or other economic indicators. Property owners can trigger these adjustments annually or at predetermined intervals.

Substantial property improvements

Another circumstance that warrants a rent increase is when the property undergoes substantial improvements or renovations that directly benefit the tenant. If the property owner invests in enhancements that enhance the overall value or functionality of the space, a reasonable rent increase may be justifiable.

Market-based adjustments

Property owners may consider adjusting lease rent to align with current market rates, especially for those who own multi-family dwellings or apartments. Conducting a comparative analysis of similar properties in the area can provide valuable insights into the prevailing rental trends.

Effective communication with tenants is key when proposing lease increases. Be transparent about the reasons behind the adjustment and open to discussing terms with tenants. Negotiation can lead to mutually beneficial agreements and maintain positive landlord-tenant relationships.