economic rent
164) Economic Rent vs. Contract Rent
11/25/07
Dear Henry,
I have an assignment to appraise a retail unit based on the Income approach. The owner leases the space to a deli with the kitchen equipment in place, owned by the landlord. The lease rate is over double that of the market rates due to the equipment being included. Essentially it is a turn-key operation for the leasee. But, I have no lease comps for this type of deal in my area, and it is NOT a common practice in the subject's market.
I believe that the overage or excess rent is not justified - the leasee's cost to outright buy or lease the FF&E (Furniture, Fixtures & Equipment might be lower than the overage rental fees they are paying, on a year to year lease. On top of it all, the owner wants the overage capitalized.
How would you approach this type of assignment?
Dave C dc70@email.com
Dear Dave,
I would split the rent into rent for the equipment and rent for the store.
Then I would only consider the rent for the store for the income approach used to value the real estate. You can value the income stream generated by the equipment, but it should not be ascribed to the value of the real property.
Keep in mind that the contract rent is not the rent used in the income approach. It is the economic rent which you must estimate based on other similar rents. It sounds like you are being asked to use the contract rent.
If your client does not accept this plan in your Scope of Work discussion, you should pass on this assignment.
H2
I have an assignment to appraise a retail unit based on the Income approach. The owner leases the space to a deli with the kitchen equipment in place, owned by the landlord. The lease rate is over double that of the market rates due to the equipment being included. Essentially it is a turn-key operation for the leasee. But, I have no lease comps for this type of deal in my area, and it is NOT a common practice in the subject's market.
I believe that the overage or excess rent is not justified - the leasee's cost to outright buy or lease the FF&E (Furniture, Fixtures & Equipment might be lower than the overage rental fees they are paying, on a year to year lease. On top of it all, the owner wants the overage capitalized.
How would you approach this type of assignment?
Dave C dc70@email.com
Dear Dave,
I would split the rent into rent for the equipment and rent for the store.
Then I would only consider the rent for the store for the income approach used to value the real estate. You can value the income stream generated by the equipment, but it should not be ascribed to the value of the real property.
Keep in mind that the contract rent is not the rent used in the income approach. It is the economic rent which you must estimate based on other similar rents. It sounds like you are being asked to use the contract rent.
If your client does not accept this plan in your Scope of Work discussion, you should pass on this assignment.
H2