The AIR CRE Option To Extend Addendum has been a staple of California leasing transactions for decades.  AIR CRE recently made a number of important changes to further improve the addendum, particularly to the process for determining Fair Market Value (FMV).

Below is a summary of key aspects of the new procedure to determine FMV:

Timing: FMV determination process begins on the later of (a) Lessee’s exercise of the option, or (b) 6 months prior to the Option Term.

30-Day Negotiation Period: During this initial 30-day period, Lessor and Lessee attempt to agree on the FMV.

Submitted Values: If the parties are unable to agree during the Negotiation Period, within 15 days, each party submits its determination of FMV.  If a party fails to timely provide a Submitted Value, then the other Party’s Submitted Value is the FMV.

Advocate Arbitrator: Within 15 days after both Parties have exchanged Submitted Values, each party selects an Advocate Arbitrator.  If a Party fails to timely designate its Advocate Arbitrator, then the other Party’s Submitted Value is the FMV.

Neutral Arbitrator: Within 15 days after selection of the Advocate Arbitrators, the Advocate Arbitrators select a Neutral Arbitrator as the 3^rd arbitrator.

FMV Decision: The 3 arbitrators issue two determinations (based on majority vote): (1) the Arbitrators’ Market Value; and (2) which Party’s Submitted Value is closer to the Arbitrators’ Market Value.  The FMV which Lessor and Lessee use for the Option Term will not be the Arbitrators’ Market Value.  It will be the Party’s Submitted Value that is closer to the Arbitrators’ Market Value. Note: The Arbitrators are required to select one Party’s Submitted Value for the FMV, and cannot select a compromise amount.

Rental Floor: The Base Rent during the Option Term cannot be less than the Base Rent when the prior term expires.

FMV Factors: The instructions for determining FMV include the following:

• Lease renewals/extensions do not qualify as comparable transactions;
• FMV to be reduced for Alterations and improvements made and paid for by Lessee (in excess of improvement allowances or abated rent in lieu of improvement allowances, etc.); and
• FMV is not reduced for any real estate broker commission savings by Lessor.