CRE glossary
Fair market value (FMV)
Fair market value (FMV) is the market-based rent for a defined commercial space at a defined date, determined by appraisal, broker opinion of value, or comparable transactions. FMV is most commonly used in renewal options (rent resets to FMV at the renewal date) and ground leases (periodic resets to current land FMV × a yield rate).
FMV revaluation is the most contested clause in any renewal option. Without precise methodology, FMV becomes whatever the landlord wants. Tenant-friendly drafting requires specific comparable transactions, defined geographic scope, defined property type criteria, and a process for resolving disputes (typically three-appraiser arbitration or last-best-offer).
Three common methodologies. (1) Three appraisers: each side hires an appraiser; if they disagree, they jointly hire a third whose number is binding. Most rigorous and most expensive. (2) Broker opinion of value: less formal; faster; cheaper; more dispute-prone. (3) Comparable transactions: parties agree on a defined comp set in advance; rent is set to the average of those comps. Most predictable.
FMV is also embedded in damages clauses (landlord's lost rent calculation in a default scenario), buyout provisions, and termination rights. Tenants should negotiate the methodology once at LOI and reuse the same definition throughout the lease.
Example
- Renewal option triggers FMV
- Year 7 of a 7-year lease, entering Year 8
- Each side appraises
- Tenant: $62/SF; Landlord: $74/SF
- Joint third appraiser
- $67/SF (binding)
- Year 8 rent
- $67/SF, 3% escalation thereafter
Broker perspective
Never accept 'fair market value as determined by landlord's reasonable judgment.' That's not a methodology, it's a license to charge whatever. Push for three-appraiser arbitration with each side picking an appraiser, the third jointly selected, decision binding. Or specific comp methodology with named comparable buildings. Without methodology, the renewal option is worthless.
Frequently asked
People also ask
Who pays for the FMV appraisal?
Usually split between the parties. Three-appraiser structures: each pays for their own; the third is split.
How long does FMV determination take?
30–90 days for three-appraiser arbitration. Negotiate this window, too short and you can't get good comps; too long and it pushes into uncomfortable timing.
Can I lock in renewal rent without FMV?
Yes, defined-rent renewal options set the rent in the lease. Less flexibility but more certainty. Negotiate at LOI based on tenant's risk tolerance.
What if FMV is much higher than current rent?
Tenant has the option to walk if the renewal isn't economical. The renewal is an option, not an obligation. Make sure the option exercise window gives time to evaluate FMV before committing.
Related terms
Renewal option
Tenant's contractual right to extend the lease at predefined terms, usually exercised 9–12 months before expiration.
Base rent
The headline rent before pass-through expenses, usually quoted in $/SF/year and the starting point for every comp.
Ground lease
Long-term lease (50–99 years) of just the land, tenant builds and owns the building on top.
Letter of intent (LOI)
A non-binding outline of the major business terms, rent, term, TI, options, that becomes the basis for the binding lease.
See fair market value (fmv) extracted from a real lease.
Drop a 60-page lease, get a 38-field abstract in 90 seconds, every value cited back to the source page.