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  1. #1

    Default Rent Review Tips & Techniques

    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.

  2. #2

    Default

    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.
    Last edited by Wezz; 10-06-2006 at 08:35 AM.

  3. #3
    Join Date
    Jun 2005
    Location
    Nelson NZ
    Posts
    3,864

    Default

    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.

  4. #4
    Join Date
    Sep 2004
    Location
    Hastings
    Posts
    14,879

    Default

    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.

  5. #5

    Default

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

    Cheers - Pete.
    "Measure Twice - Cut Once"

  6. #6
    Join Date
    Jan 2005
    Location
    Auckland
    Posts
    1,530

    Default

    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
    Gimme $20k. You will receive some well packaged generic advice that will put you on the road to riches beyond your wildest dreams ...yeah right!

  7. #7

    Default

    Quote Originally Posted by Julian View Post
    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.

    Quote Originally Posted by Julian View Post
    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.
    Last edited by Wezz; 02-05-2008 at 03:53 PM. Reason: Incorrect Info
    "Measure Twice - Cut Once"

  8. #8
    Join Date
    Sep 2004
    Location
    Hastings
    Posts
    14,879

    Default

    Quote Originally Posted by Julian View Post
    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.

  9. #9
    Join Date
    Jan 2005
    Location
    Auckland
    Posts
    1,530

    Default

    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
    Gimme $20k. You will receive some well packaged generic advice that will put you on the road to riches beyond your wildest dreams ...yeah right!

  10. #10
    Join Date
    Sep 2006
    Location
    Christchurch
    Posts
    892

    Default

    Quote Originally Posted by Wezz View Post
    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.


 

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