Rent Review Tips & Techniques

[Wezz]

Hello

In the residential property forum, there is a "tips" post for residential property investors. I thought that was a great idea.

As a commercial property investor, I'm interested in the techniques that people have used, to increase commercial rents at rent review time, (apart from just getting a standard market rental valuation done and then negotiating with the tenant).

After all, as commercial property investors, it's our job to "farm" our tenants and to make sure the rents are at, at least true market value.

During times like now, there's not too much problem getting a rent increase due to market forces, however, that will all change in time to come.

What tips and techniques can you share, that have worked for you, when trying to obtain a rent increase?

Your input can help us all and I'm looking forward to hearing from anyone that has something to share in this area.

Cheers - Pete.

[Wezz]

One that's worked well for me is:

Firstly, I find out what the true market rental is for the particular property that is coming up for rent review, so I know roughly what dollar amount the square meter rental rate should be.

I then meet with the tenant and say something like, "instead of me getting a market valuation done, I'm happy for a 5% (for example) rental increase. If you're not happy with that, I'm happy to get a market rental valuation done, but if the market rental says that the rent should go up 12% (for example), then I will be likely to seek that 12% increase".

Of course, being an investor, I will always know what the current market rental is likely to be, before I use this technique, therefore, not shooting myself in the foot by obtaining a rent increase that is less than where it should actually be.

Pete.

[Glenn]

I must admit I am not very consistant with my reviews.
For some of them we just get the valuation and that is that. Of course for most tenancies the tenant pays for the valuation also. However for some I have used published market statistics and this has worked well. Baileys used to publish these and put them out as a newsletter to all and sundry. I note that they seem to have stopped this. I wonder why. Does anyone have thoughts or knowledge on why ?
Then for the small baby industrial tenancies the tenants just love cracking open a beer sharing it with me (bribery) and we have a chat about it. Funny how those tenants that seem to be growing are the ones that bring up the most poor stories.
It really is horrible reverting to a human state when faced with free beer and nibbles.

[Perry]

Does anyone use the CPI as a minimum annual increase
in their lease documentation? Together with a ratchet
clause. I do. While not the be all & end all, tenants at
least have a good idea what's likely to be their future
rental cost and can budget for it.

[Wezz]

Hi Perry - Thanks for your input. It's valuable advice.

Cheers - Pete.

[Julian]

Wezz,
What's wrong with getting a registered valuer to determine the market rate and going from there. It is fair to both parties. If I get into negotiations I may concede one thing provided I get something else in return ie the valuer says the rent should go up by $30k, but if the tenant is willing to do xyz I might agree to only put it up by $20k. The things that might appeal to me could be: to extend the current term of the lease, to add PGs to the lease, to refurbish the property, etc. Also, if the increase is huge I may agree to stagger the increases ie if the rent reviews are 3-yearly and the increase is $30k I might say $10k now, $10k in a year, and $10k the year after that. I get my property up to market rent (albeit slowly) and the tenant gets more manageable increases.

You don't want to cripple your tenant, but you have a duty to your shareholders and to your lenders to act prudently. You shouldn't expect to subsidise your tenant by giving them a discounted rent.

Remember, your banks won't lend you money at 7% if the market rate is 10%. Similarly if your borrowing costs rise but the market rent doesn't you can't expect your tenant to subsidise your business. What I am saying is that you should be firm but fair.

Glenn,
I know the tenant is often responsible for paying for the valuer for insurance purposes, but I have yet to see a lease where the tenant pays for the valuer at rent review time - unless they are getting their own valuer because they are contesting the findings of your valuer.

Julian

[Wezz]

Wezz,
What's wrong with getting a registered valuer to determine the market rate and going from there.

Hi Julian - I find absolutely nothing wrong with that.

However, if the increase is a small one, I've found it not to be such a great technique. Especially if the landlord has a very good idea of what the market rent currently is/should be.

For example I recently went through a review with a small tenancy, where the rent only increased $2000 per annum.

As per my ADLS lease with the tenant, he would have paid my rental valuation and if he contested it, he'd be up for the cost of another independent rental valuation for himself, from yet another valuer.

but I have yet to see a lease where the tenant pays for the valuer at rent review time

I'm not sure what Deed of Lease you use but this is a standard clause which you'll find on page 4 of the ADLS Fourth Edition 2002 Deed of Lease, under the 'OUTGOINGS' heading, clause 5. I'm pretty sure this also appears in the earlier ADLS leases as well.

For the $30k per annum rental increase example that you mention, I 100% agree with your advice.

Also, thanks for your wisdom on negotiating. This is the sort of information I was hoping that this post would stimulate.

Cheers Julian.

Does anyone else have any 'Rent Review Tips and Techniques' they wish to share?

Pete.

[Perry]

What's wrong with getting a registered valuer to determine the market rate and going from there. It is fair to both parties. If I get into negotiations I may concede one thing provided I get something else in return ie the valuer says the rent should go up by $30k, but if the tenant is willing to do xyz I might agree to only put it up by $20k. The things that might appeal to me could be: to extend the current term of the lease, to add PGs to the lease, to refurbish the property, etc. Also, if the increase is huge I may agree to stagger the increases ie if the rent reviews are 3-yearly and the increase is $30k I might say $10k now, $10k in a year, and $10k the year after that. I get my property up to market rent (albeit slowly) and the tenant gets more manageable increases.

You don't want to cripple your tenant, but you have a duty to your shareholders and to your lenders to act prudently. You shouldn't expect to subsidise your tenant by giving them a discounted rent.

Remember, your banks won't lend you money at 7% if the market rate is 10%. Similarly if your borrowing costs rise but the market rent doesn't you can't expect your tenant to subsidise your business. What I am saying is that you should be firm but fair.

Julian

I do wonder some at your scenario. Is it a case
of mismatched comparisons? E.g. the "market
rent" does not always align itself with finance
costs. There are just so many other considerations.
One of which might be how people often confuse
ROI with ROV.

It peeves me when people 'trumpet' that their
investment is now (on paper) worth $x and charges
must go up to reflect that [return-on-value]. They
seem to completely overlook that their original
investment was actually x, y or 10% of the historical
cost valuation, or the like.

I suspect it's something that PIs and LLs would
be ever-troubled to quantify in a consistent way.
I know that when faced with certain tenant-related
and rent-related enigmas, there is rarely a simple
or straight-forward, formulaic answer.

E.g. the costs of changing tenants versus staying
with the same one. (The devil one knows vs . . . . )

When cashflow is neutral (and perilously close to
negative) and times are tough and money is tight,
PIs have been known to compromise. When cashflow
if positive and the LVR is 0:100, the options expand
in a head-spinning way. A 75% vacancy is manageable
in such circumstances. Not so when the numbers
either side of the colon are way different. Been
there, experienced that.

The number of times that I have acted in contradiction
to my espoused comments is scary and I'll deny I ever
said that! Oh for the simple life.

[Julian]

Perry,
We're on the same wavelength, but I explained myself poorly. Agree that the cost of losing a tenant has to be factored in.
Julian

[Xav]

I'm not sure what Deed of Lease you use but this is a standard clause which you'll find on page 4 of the ADLS Fourth Edition 2002 Deed of Lease, under the 'OUTGOINGS' heading, clause 5. I'm pretty sure this also appears in the earlier ADLS leases as well.

That only applies to insurance related valuations, not rent reviews.

[Wezz]

Woops - Thanks Xav

Cheers - Pete.

[charley6]

This has worked well for me twice. After both parties have got their respective valuations and we are still apart and the next step is arbitration that no one wants.I have suggested that if the new rent is accepted then I will skip the next rent review and not seek increase for four years.Try it.

Ian

[Julian]

charley6
Four years is a long time to go without a review. If you have both had valuations done, rather than arbitration I find suggesting that both parties meet in the middle is the best course of action. It is pretty much where arbitration usually ends up anyway.
Julian

[charley6]

Yes, but I got my full increase,and it took six months to get that far, so in 18mths to the next review the time frame would have been too short and and probably not worth the cost to both parties, but in 3.5 years different story.Thats just me.It has worked twice different properties.