A market rent review in commercial property can be a real challenge to negotiate or set especially if the property is unique or special. Finding comparable rentals is the first challenge, setting the negotiation underway and achieving a result without the delays of arbitration is the next challenge.
So to help you as a property manager or landlord with your next market rent review here are some ideas and concepts to explore.
- Always read the lease before you start a market review. Give particular attention to the rent review clause and look for the matters of review process and associated critical dates. Doing things the right way and issuing notices to the tenant and landlord correctly by the critical dates is important to the market rent review process. Time is of the essence in many cases.
- Inspect the property and the tenancy to get a current update and perspective on the presentation and functionality of the premises. Look for enhancements or challenges to occupancy. Look for anything that adds to or detracts from the current rent levels.
- Ensure that you have an up to date survey of the tenancy area and size of premises. Ensure that the tenant is not encroaching or operating outside the lease or premises boundary. Is the area of the premises correct or have there been any amendments to the lease that need to be considered in this review that were not in the last review?
- Check that the tenant is complying with all terms and conditions of the lease. Ask about matters of default and recent rent payments. Get a copy of the latest rent invoice so you know exactly what the tenant is paying for the premises today.
- Review the permitted use of the premises in the lease as this will have relevance for comparable rents and premises that you want to use as market evidence.
- Get details of the current rent and understand if it is calculated on a gross, net, or gross with a base year basis. If outgoings are impacting the rent and turning it into a gross rent of any type, then you should identify the outgoings value so they can be removed from the gross rent amount. That simple process allows you to set and compare net rents with net rents. It makes the comparable rent situation all that more easy to calculate and negotiate.
- Look at the last time a rent review was struck for your subject premises and ascertain on what basis it was done. Was it CPI, Market, Fixed Increase, or Fixed Amount? Were any comparable rents used at that time and if so where did they come from? Look at those premises again now to see what changes the comparable properties may have gone through.
- If the tenant contributes towards outgoings for the premises and they do so under the terms of the lease, check that the charges and payments are correct and up to date. Look for matters of dispute or arrears.
- Get details of the last outgoings reconciliation for the property and the premises. Ensure that the reconciliation has been correctly carried out and that no outstanding matters were left out of the process and analysis.
- Find premises in the general precinct that can be considered comparable. Get details of the rental paid in each case and then inspect the comparable premises. It is important to understand that the premises are located in similar circumstances to your subject property. You cannot use a comparable rent in your market without knowing that it is truly comparable.
- Your analysis of comparable properties and rents will require you to know how those rents were established. If they were not set by the market rent review process, or they were not created by a genuine new lease without a lease incentive, then they are not directly comparable. If you have to act on or use a market comparable rent that was established with the assistance of a lease incentive (for example a rent free period) then you will have to quantify the value of that incentive and take it from the rent achieved. A true market rent is an effective rent without a lease incentive to boost its value.
- Market rent review negotiations are best initiated in writing to comply with the terms of the lease and the critical dates, then negotiated face to face with the tenant.
- Both parties to the lease (landlord and tenant) should have a set negotiation range to work within and achieve some form of an agreement. This helps the parties reach common settlement rather than waste precious time and money in moving through the process of rental arbitration and dispute. Many times you see in the arbitration process that a property valuer will set a final rental figure in the middle of the parties set demands; the cost of that arbitration will largely take up any advantage of the higher rental paid. There are of course some other reasons to consider the value in disputing and arbitrating market rent; an arbitrated higher rent may improve other rents in nearby premises in the same property, and hence the overall property value.
So these are the main issues to consider in handling a market rent in a commercial or retail investment property. Gather the facts before you start and then negotiate the rent review within the terms and dates of the lease.