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What is Market Rent?
The concept of “current market rent” is as much a statutory concept as it is an economic concept.
Current market rent is defined as “the rent that a hypothetical lessee, who is willing but not anxious to trade
and who has full knowledge of the market and the options available, would agree with a hypothetical lessor
who is similarly qualified, if the premises were vacant and available for lease on the same terms and
conditions as those set out in the lease document”.
Valuation Method
The main method of determining current market rent for this type of space is to identify new leasings and
reviews of similar space, adjust these rents to an effective rate per square metre (by making allowance for
inducements), then relate those rental rates to the subject property by adjustments for such variables as
location, size, lease term, space quality, building quality and the provision of various services.
This is a very subjective process that often gives rise to quite divergent opinions on current market rent.
Comparable rents are analysed on the basis of total occupancy cost (TOC), with any lessee outgoings then
being deducted from the TOC figure to determine net rent.
Rental Review Process
Most lease documents allow for periodic reviews of the current rental. The process which both lessor and
lessee must follow should be spelled out in the lease. The majority of commercial leases use a standard
ADLS or BOMA format. The general form is as follows:
From a cost perspective it is usually advisable to avoid this last step, as taking a dispute to arbitration can
be relatively expensive. There is also no guarantee that any one party will have a 100% win. Like any
litigation process, it is always a bit of a gamble.
Generally both parties must equally share the cost of the umpire as well as meeting the fees of their own
individual Valuers. It is therefore important to ascertain whether the value of the amount in dispute exceeds
the likely cost of the exercise.
The concept of “current market rent” is as much a statutory concept as it is an economic concept.
Current market rent is defined as “the rent that a hypothetical lessee, who is willing but not anxious to trade
and who has full knowledge of the market and the options available, would agree with a hypothetical lessor
who is similarly qualified, if the premises were vacant and available for lease on the same terms and
conditions as those set out in the lease document”.
Valuation Method
The main method of determining current market rent for this type of space is to identify new leasings and
reviews of similar space, adjust these rents to an effective rate per square metre (by making allowance for
inducements), then relate those rental rates to the subject property by adjustments for such variables as
location, size, lease term, space quality, building quality and the provision of various services.
This is a very subjective process that often gives rise to quite divergent opinions on current market rent.
Comparable rents are analysed on the basis of total occupancy cost (TOC), with any lessee outgoings then
being deducted from the TOC figure to determine net rent.
Rental Review Process
Most lease documents allow for periodic reviews of the current rental. The process which both lessor and
lessee must follow should be spelled out in the lease. The majority of commercial leases use a standard
ADLS or BOMA format. The general form is as follows:
- At a date specified before the rental is due to be reviewed, the Lessor (landlord) gives the Lessee
(tenant) notice of the new rental figure. This increase is usually supported by a valuation from a
Registered Valuer. - If the Lessee disagrees with the figure sought, they can obtain their own independent valuation
advice. - If both Valuers are still at odds with each other, with the written authority of their principals (Lessor &
Lessee), they can meet face to face and try and resolve the difference. This is in effect a form of
Mediation. - If the Valuers are unable to resolve their differences, then in accordance to the process set down in
the lease, they mutually agree to an Umpire and the matter proceeds to arbitration.
From a cost perspective it is usually advisable to avoid this last step, as taking a dispute to arbitration can
be relatively expensive. There is also no guarantee that any one party will have a 100% win. Like any
litigation process, it is always a bit of a gamble.
Generally both parties must equally share the cost of the umpire as well as meeting the fees of their own
individual Valuers. It is therefore important to ascertain whether the value of the amount in dispute exceeds
the likely cost of the exercise.
| Rental Valuations |
 |  |  |  |  |
| Residential Rental Assessments |
The level of residential rentals in any location is a function of supply and demand specific to the particular
location. If there are a shortage of rental properties, rentals are likely to increase and if there are a surplus
they will decrease.
The main determinant of residential rent appears to be the number of bedrooms, followed closely by
condition. Depending on where the property is located the availability of secure on-site parking can be
important.
Professional residential investors tend to be better off to split their investment between two cheaper
properties as opposed to one more expensive property.
location. If there are a shortage of rental properties, rentals are likely to increase and if there are a surplus
they will decrease.
The main determinant of residential rent appears to be the number of bedrooms, followed closely by
condition. Depending on where the property is located the availability of secure on-site parking can be
important.
Professional residential investors tend to be better off to split their investment between two cheaper
properties as opposed to one more expensive property.
| Commercial, Industrial & Retail Rentals |
| PO BOX 9018, Wellington 6141 | phone: (04) 240-0124 | fax: (04) 232-4414 | email: valuer@ vcnz.co.nz Innovation + Experience |
Innovation + Experience |