MANAGEMENT - LEASES

Under the market rent concept the market rent of the investment property is that rent obtainable under the willing lessor willing lessee theory and subject to average, typical or normal management. That is, the valuer assumes that the property manager is an average or normal manager. He/she is sometimes referred to as an "indifferent" manager. If the property manager is above normal or better than a normal manager the property may experience:

• above market rents
• below average outgoings
• a less than normal vacancy rate.

This applies particularly to a property who success is highly dependent upon the skills and reputation of the manager such as a hotel or restaurant.

EXAMPLE

An above average manager of a shopping centre may be able to obtain better rents from the shops in the centre than could an average manager. In such a case, the valuer will have to reduce the rents to market rents or in other words, to those rents an average property manager would have obtained.

Similarly, if the management is below average, the existing rents will have to be increased to the level that an average manager would obtain. Of course if the centre has been “run down” there should be extra allowance for promotion and the leasing up period to normal occupancy.

Management is a critical factor for restaurants, service stations, hotels, motels, and small shops. However, the higher income may not be from above average management but rather, longer working hours or the help of a family's "free" labour. The valuer will have to make necessary adjustments when forecasting the expected future net income from such properties.