Market rent reviews are often a mystery to many tenants and their trusted advisors (Rasalan has been speaking recently with accountants, bankers, commercial and asset finance brokers, equipment finance brokers, insurance brokers, lawyers, etc). When not addressed properly by the tenant, they can be a source of serious unexpected financial stress leading to lengthy disputes between them and their landlord. In the worst case scenario, a poorly managed market rent review can be responsible for the ultimate demise of the tenant’s business.
Rasalan understands that tenants are often too busy managing their businesses, looking to increase revenue and reduce costs they’re aware of. Market rent reviews are not well understood and Rasalan’s provision of genuinely independent advice can help tenants get the right information and leverage to properly manage this aspect (i.e. market rent) of their costs, which can adversely affect tenants for years to come.
To remedy this lack of understanding about market rent reviews, we’re going back to basics, unpacking what a market rent review is from start to finish, and how tenants - and their trusted advisors - can best ensure they’re equipped with the required knowledge to make an informed decision by the time their next market rent review is due.
What is a market rent?
In simple terms, a market rent can be described as the likely rent a landlord can expect to receive from a tenant for their property, if it were marketed for lease at that point in time, along with an incentive, typically both based on recent, relevant, market comparables.
Rasalan has a proprietary database used to track true market comparables, coupled with the focus on taking the time and making the effort to understand the true context behind each transaction.
The term, market rent, assumes that neither the landlord nor the tenant is under any extraordinary pressure to agree to the lease, otherwise known as an arm's length transaction. The concept of the market rent is particularly important at the start of the lease, and also during any market rent reviews that occur during the entirety of a tenant’s lease at a specific location.
For many industrial tenants, the market rent is negotiated on a “net” basis, with the rent consisting of two components – the base rent, and the outgoings (often landlord expenses covered by the tenant). The outgoings can typically be further broken down into two components - statutory and operational expenses for the tenancy.
Many industrial leases also include some form of an “incentive”, being an inducement provided by the landlord used to encourage the tenant to lease their premises. This can take many forms, including early access, a rent-free period, a rental abatement, or some form of landlord contribution.
Whilst Rasalan currently exclusively works on behalf of factory and warehouse tenants, the concept of the market rent - and subsequently, a market rent review, is relevant across all asset classes, industries, and geographical locations where a landlord and tenant relationship exists.
The example discussed in the next section shows what happens when a retail tenant fails to include a market rent review in a long-term lease, leaving them paying more rent for longer than they should have been. We’ll discuss rent reviews (including what a market rent review is) in greater detail, in our next article.
A well-considered lease is critical to a business’ success - the market rent is one part of this
LPC (Australia & New Zealand) Director, Adrian Gerber, has spent over 20 years negotiating leases and managing portfolios exclusively for tenants.
Adrian says a market rent review is too often treated as a formality rather than a genuine point of negotiation.
"A market rent isn't a fixed number waiting to be discovered," he says. "It's the rent a willing but not anxious tenant would agree to pay a willing but not anxious landlord. Both sides need to actually be under no unusual pressure for that definition to hold — however, in practice, tenants rarely feel that way going into a review."
"Your rental expense is your landlord's revenue," he says.
"Real estate is their business. Their goal is a risk-free, escalating rent with capital growth and no obligations attached. A tenant's goal should be rent that's aligned with how the space is actually used and how the business is performing. Those two goals sit in tension, and the review process is where that tension gets worked out — for better or worse."
Adrian points to a recent example: a Melbourne retailer who signed a 10-year lease at the top of the market. With no mid-term review built in, the rent stayed fixed while market conditions fell. By the time the lease expired, the tenant had accumulated significant arrears and was paying close to double the market rent. "A mid-term review at year five would have reset that rent to market," Adrian says.
"Instead, he ended up with a business that wasn't sellable, purely because the review mechanism wasn't there when he needed it."
Understanding what a market rent actually is, and how it’s determined is the first step toward making sure you’re not paying more than you need.
Rasalan is Sydney’s only valuation firm working exclusively for industrial tenants - providing market rent review advice, backed by our proprietary lease database. If you or your clients have an industrial lease in metro Sydney, we’ll make sure you’re not paying more than you have to.
Stay tuned for part two!
Market rent reviews are often a mystery to many tenants and their trusted advisors (Rasalan has been speaking recently with accountants, bankers, commercial and asset finance brokers, equipment finance brokers, insurance brokers, lawyers, etc). When not addressed properly by the tenant, they can be a source of serious unexpected financial stress leading to lengthy disputes between them and their landlord. In the worst case scenario, a poorly managed market rent review can be responsible for the ultimate demise of the tenant’s business.
Rasalan understands that tenants are often too busy managing their businesses, looking to increase revenue and reduce costs they’re aware of. Market rent reviews are not well understood and Rasalan’s provision of genuinely independent advice can help tenants get the right information and leverage to properly manage this aspect (i.e. market rent) of their costs, which can adversely affect tenants for years to come.
To remedy this lack of understanding about market rent reviews, we’re going back to basics, unpacking what a market rent review is from start to finish, and how tenants - and their trusted advisors - can best ensure they’re equipped with the required knowledge to make an informed decision by the time their next market rent review is due.
What is a market rent?
In simple terms, a market rent can be described as the likely rent a landlord can expect to receive from a tenant for their property, if it were marketed for lease at that point in time, along with an incentive, typically both based on recent, relevant, market comparables.
Rasalan has a proprietary database used to track true market comparables, coupled with the focus on taking the time and making the effort to understand the true context behind each transaction.
The term, market rent, assumes that neither the landlord nor the tenant is under any extraordinary pressure to agree to the lease, otherwise known as an arm's length transaction. The concept of the market rent is particularly important at the start of the lease, and also during any market rent reviews that occur during the entirety of a tenant’s lease at a specific location.
For many industrial tenants, the market rent is negotiated on a “net” basis, with the rent consisting of two components – the base rent, and the outgoings (often landlord expenses covered by the tenant). The outgoings can typically be further broken down into two components - statutory and operational expenses for the tenancy.
Many industrial leases also include some form of an “incentive”, being an inducement provided by the landlord used to encourage the tenant to lease their premises. This can take many forms, including early access, a rent-free period, a rental abatement, or some form of landlord contribution.
Whilst Rasalan currently exclusively works on behalf of factory and warehouse tenants, the concept of the market rent - and subsequently, a market rent review, is relevant across all asset classes, industries, and geographical locations where a landlord and tenant relationship exists.
The example discussed in the next section shows what happens when a retail tenant fails to include a market rent review in a long-term lease, leaving them paying more rent for longer than they should have been. We’ll discuss rent reviews (including what a market rent review is) in greater detail, in our next article.
A well-considered lease is critical to a business’ success - the market rent is one part of this
LPC (Australia & New Zealand) Director, Adrian Gerber, has spent over 20 years negotiating leases and managing portfolios exclusively for tenants.
Adrian says a market rent review is too often treated as a formality rather than a genuine point of negotiation.
"A market rent isn't a fixed number waiting to be discovered," he says. "It's the rent a willing but not anxious tenant would agree to pay a willing but not anxious landlord. Both sides need to actually be under no unusual pressure for that definition to hold — however, in practice, tenants rarely feel that way going into a review."
"Your rental expense is your landlord's revenue," he says.
"Real estate is their business. Their goal is a risk-free, escalating rent with capital growth and no obligations attached. A tenant's goal should be rent that's aligned with how the space is actually used and how the business is performing. Those two goals sit in tension, and the review process is where that tension gets worked out — for better or worse."
Adrian points to a recent example: a Melbourne retailer who signed a 10-year lease at the top of the market. With no mid-term review built in, the rent stayed fixed while market conditions fell. By the time the lease expired, the tenant had accumulated significant arrears and was paying close to double the market rent. "A mid-term review at year five would have reset that rent to market," Adrian says.
"Instead, he ended up with a business that wasn't sellable, purely because the review mechanism wasn't there when he needed it."
Understanding what a market rent actually is, and how it’s determined is the first step toward making sure you’re not paying more than you need.
Rasalan is Sydney’s only valuation firm working exclusively for industrial tenants - providing market rent review advice, backed by our proprietary lease database. If you or your clients have an industrial lease in metro Sydney, we’ll make sure you’re not paying more than you have to.
Stay tuned for part two!
