How to Do a Market Rent Review in Commercial Property

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Get all the facts when doing a Market Rent Review

In commercial and retail property, the market rent review can be quite challenging.  There are many variables that can apply to the review process.  As a property manager or leasing manager, it is important that you gather all the correct facts in preparation for the market rent review process.

So, exactly what is a market review?  It is the establishment of a rental taking into consideration similar rentals with similar properties in the same general location.  Unfortunately, this process can be difficult and slow given that many other properties are not directly comparable.  In some cases, your particular property may be so unique that you will need to look well beyond the local area for comparisons and market rental evidence.

As part of the process of gathering information, keep your notes regards findings and assumptions.  When it comes to a rental dispute, these notes and findings will be supportive of your rental choices.

So here are some ideas to incorporate into the market rental review process:

  1. Review the lease document fully before you start the process.  Understand all the terms and conditions of the lease document with particular care in identifying critical dates connected to the review.  Some of these critical dates will need to be satisfied and adhered to as you negotiate between the landlord and the tenant.  Time can be of the essence when it comes to responses and notices in the review process.
  2. After you have reviewed the lease document, visit the property and inspect the premises internally and externally.  Take many photographs as evidence of the existing conditions of occupancy.  As you move through the review process, these photographs will help you identify and match the tenancy to other relevant properties.
  3. When you look through the tenancy, understand the premises as supplied to the tenant by the landlord.  You cannot take into account any factors or improvements of occupancy provided by the tenant within their own fitout.  The rent review applies to the premises as supplied to the tenant by the landlord at the commencement of lease.  Go back to the lease negotiation file for information in this regard.
  4. If the tenant occupies space within a large building, it is possible that you will have other market rental evidence within the single property.  This will be of great assistance if that is the case.
  5. Any rental evidence that you are given or find in and from other properties, should be qualified to understand that the rental is truly on the basis of market evidence.  There is no point in using rental information that was generated from review methods other than the market process.
  6. Other situations of market rental evidence may be biased or skewed due to the impact of lease incentives negotiated between of the landlord and the tenant in particular buildings.  If any lease incentives were provided in those comparable transactions, the value of the incentive should be removed from the calculation so you can truly understand the effective rental in each particular case.
  7. Inspect the premises located in other properties that you believe are comparable.  Take into account the factors of occupancy, services and amenities, property access, lease terms and conditions, permitted use, and length of lease in each case.  Property managers will usually share information to assist you in your market rent review.  A reciprocal process of information should apply at a later stage when they need help with their property.

This list can be expanded subject to the factors of property type, lease terms and conditions, property age, and market evidence.  Expect that the process of review will take time so start the activity early.

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Author: John Highman

Commercial Real Estate Broker, Coach, Speaker, Author, Broadcaster.