Engage a specialist Commercial Manager or suffer the loss!
The rental return from your commercial property is the very essence of what determines your assets’ value.
The contract that governs that return is your Lease. Leases are for a fixed term, and in the case of commercial leases, this term is often very long. During the term of your Lease, things change. Inflation occurs, the CPI Index rises, wars happen, supply constraints arise, and the cost of living may increase. While other business owners may be able to increase their prices without notice, as a landlord you do not have that luxury under the Lease. You may be facing increased operating costs and increased interest rates on your investment loan… and yet, the opportunity to increase your rent to cover these costs usually only occurs once a year.
While standard rent reviews may be (and should be) ‘baked in’ to your Lease annually, there is only one type of rent review that will give you the freedom to quality check your return on investment rate. That is the Market Rent Review
The below case study serves as a testament to the role an expert Commercial Asset Manager can play in ensuring critical Market Reviews are carried out correctly.
A CASE STUDY
Facing the Numbers: The Weight of Financial Loss
RWC Western Sydney regularly shares insightful tips on our Asset Management services with our database, aiming to help Landlords understand their obligations and the value of an experienced team. Our outreach efforts led a multi-property Landlord to our doorstep, seeking our expertise and knowledge.
THE ANXIOUS LANDLORD
In this case, the Landlord had entrusted management of their Commercial and Retail portfolio to a Residential Agency – a decision that resulted in a substantial financial setback. The Tenant exercised their option to renew for an additional five-year term, triggering a Market Review. Unfortunately, the Landlords existing agent failed to serve the notice within the required timeframe. Consequently, the Tenant argued that there should be no increase from the existing rent.
Let us explain the gravity of this situation. The Landlord had proactively taken steps by personally engaging a valuer to conduct a market valuation well in advance of the deadline. The valuation results, which were shared with the Agency, showed a variance of 95% from the existing passing rental. Ouch! Clearly the oversight was a substantial financial set back, further exacerbated if you factor in the annual increases on this loss of income across the five-year option period. The Landlord, unaware of the true extent of their losses, found themselves increasingly questioning the service they were receiving from their existing Agent.
PROTECTING INTERESTS AND BUILDING CONFIDENCE
After multiple consultations with our office, we devised a strategy to address the owner’s concerns, resulting in our appointment as the new managing agent for this premises. At the same time, we facilitated a connection between the landlord and a solicitor to pursue a claim for the financial losses they had incurred previously.
Following our appointment, the Tenant exercised their option to renew the further five-year option, which led us to initiate our own market review. Our opinion and research showed a whopping variance of 70% on the existing rental. Anticipating a potential dispute arising from our projected increase, we engaged a valuer to perform a comprehensive market review. The Valuers’ rental appraisal exceeded ours by a 110%!
We promptly served the tenant with formal notice, adhering to the requirements under the lease. Our expectation was that the tenant, faced with the substantial rent increase, would dispute it, and initiate negotiations. As expected, the tenant presented us with their own valuation report, proposing a rental rate variance of 35%, a figure notably below the assessments of both the Valuer and our own. Our review of the valuer’s opinion, the market context, and the lease, determined in our opinion that the valuer had failed to adhere to the leases methodology in determining the rent. The report relied on gross rents, overlooked the concept of the highest and best use, calculated rent on a net effective basis (rather than a gross face basis), and heavily considered rentals that were 3-5 years old.
We exhausted all avenues with the negotiations with both the Landlord and Tenants offers being revised, however eventually, we decided that it would be in the Landlords best interest to lodge with the Australian Property Institute (API) for an independent Valuer’s determination. With this process, both parties had the opportunity to make submissions evidencing their argument.
RELIEF AND SATISFACTION
The Independent Valuer’s determination resulted in a variance of 65%, a substantial increase compared to the existing rental! The binding determination was immediately applied, and the Tenant back charged in accordance with the lease. The Landlord was very impressed and was thankful for our support, guidance and opinions in achieving this outcome. In response, the Landlord entrusted the remainder of their portfolio to our office.
For more information regarding this case study or our asset management services, please don’t hesitate to get in touch with our team.