The Importance of Rent Reviews

June 22 2022

A lease renewal is a crucial process in any property investor’s journey.
The Importance of Rent Reviews

The rent agreed to for the following term will directly correlate to the value of the property for the next 3-5 year lease period so it’s vital to get this right.

Most commercial leases are structured with an initial term and an option period. When the lease comes up for renewal, the tenant has a 3-6 month notice period in which to inform the landlord of their intention to take up the lease option.

If the tenant advises their intention to renew, the landlord or property manager will present the tenant with a proposed rent cost based on supporting evidence.

When completing a rental assessment for a specialised tenant, we advise obtaining evidence of a lookalike tenant as well as the location assessment. While you won’t always have access to like-for-like tenants within the same suburb, a broader search may be needed to gain this.

Be careful not to pigeonhole yourself into comparable rental evidence within the same suburb because different tenant types have different capacity to achieve certain rent.

If the tenant does not agree with the proposed market rent, the landlord or property manager can engage a valuer to obtain a rental determination assessment. This step is one that landlords often try to avoid, but should be embraced.

An independent rental assessment is an arm’s length review of the current market.

Valuers have access to a database of leasing evidence and relationships with other agents, property managers and industry sources to obtain relevant rental evidence. It does come at a cost, but that cost is split between the landlord and the tenant.

The valuer will determine the market rent and the tenant has the option to accept, dispute or terminate their lease.

In situations where a tenant does not agree to the market rent value or believes they can’t sustain it, a skilled property manager will take this opportunity to incentivise the tenant without comprising the value of your asset.

The cost of losing your tenant will likely outweigh any gains in rent, but there are structures and strategies that can be put in place to satisfy both parties. Rather than reduce the rent below market value, our goal is to protect the value of the property for the next term.

Ask the tenant what you can do to help them reach the market rental rate, now or over time. This could include capital works that you can do to the building or an incentive structure whereby a rental increase is staggered over the term of the lease.

Kollosche Commercial works closely with commercial property owners to maximise the value of your commercial asset. If you are in the commercial retail space or looking for opportunities, reach out to Team Grbcic for a conversation around your goals.

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