A market rent is not just any old rent, it is one that has been established in today’s property market and it reflects an agreement between the parties that indicates true market conditions.
Rents can be compared by property type and location. Special and unique properties will raise challenges because you will have little to compare to. Market intelligence is really important if you are to negotiate on any rentals.
Now, in simple terms we all know that landlords want the highest rent and the tenants want the lowest rent. If the parties compromise for the current market conditions, then an agreement is likely.
In a property with multiple tenants, one market rent can have an impact on other tenants soon to have a similar market rent review. So there is an argument to be made that setting a market rental is a special process; the wrong rental can pull back the value of the property. That is why property valuers are sometimes brought in to arbitrate the rental agreement. But, be warned of the cost of the process and the reasons to do it.
In these times of slower business and restrictive finance, it is still better for landlords and tenants to reach a workable market rent themselves that allows occupancy to continue and vacancies to be avoided.
Tenant facts and costs
Most tenants will prefer to remain in occupancy, rather than spend unnecessary money in relocation to another building; some extra things however may ‘tip the scales’ and frustrate negotiations on rentals and leases.
The most common problem is with landlords that do not maintain a property physically and yet expect tenants to remain in occupancy paying solid and aggressive rents. This attitude will drive tenants away from the property at option time; we see the problem frequently. Who loses? The landlord does.
Good commercial and retail leasing experts know how to condition the parties to the market and the leasing possibilities. Local market evidence will help you in most circumstances.
If you are going into battle on a rental review to market, make sure that you have all your facts and that those facts have been correctly gathered and validated to the property type. Here are some ideas with that:
- A market rent is precisely that. It is not something that has been struck by other review processes such as fixed %, or fixed amount, or CPI index. Ask questions about the comparable rental and know how it was struck. You can only compare ‘market’ to ‘market’.
- Inspect the properties that you have the rental detail on. It is likely that they will need to be assessed for comparable improvements, services, and amenities. There will also be some location factors and property ages to compare.
- Every tenancy that is ‘comparable’ should be viewed to ensure that the tenancy is truly similar in location, use, configuration, and improvements.
- Ask questions about any incentives that may have been provided to a tenant in setting a ‘market rental’, as this will require an adjustment of the provided rental from a ‘face rent’ to an ‘effective rent’. Only then can it be compared property to property.
- The dates of reviews will have relevance to the final figures. A rent established last year, may be irrelevant this year. Get this information from the property managers or landlords of the ‘comparable properties’.
On a final note, any market rental matter that is going to arbitration will usually incur a fee for the experts to get involved. It is interesting to note that many rental arbitrations result in ‘compromise or middle ground’ decisions. The only person that makes money is the ‘arbitrator’. It could be that the landlord loses more in fees for the arbitrator than they gain in extra rent. It should be noted that most arbitrated rents are final and fixed; if you are going to put a rental submission to the ‘arbitrator’ make sure that all your information is completely relevant and correct.
Common sense is perhaps the best process to implement in any market review. As a leasing manager or property manager, you can be that person to bring the parties together in an agreement.