NET
INCOME – COMMERCIAL LEASES
THE
LEGAL ENVIRONMENT
The
legal environment is the most important environment affecting the
valuer because it is the most powerful. That is, the courts are the
final arbiter of whether or not a valuation is correct. This argument
applies equally as well to the determination of market rents. The
following are important legal factors and terms that affect the rents
analyzed under commercial lease agreements:
See:
assignment
base
(date) year
BUILDING
RULES & REGULATIONS
Commercial
leases may have a set of rules and regulations attached to the lease
to the lease and to include a provision that these may be varied by
the lessor from time to time.
CPI
INCREASE
The
valuer should determine which CPI index is referred to in the lease
document.
DEMOLITION
CLAUSE
This
clause usually allows the lessor after providing 6 or 12 months
notice, to cancel or surrender a lease for the purpose of
redeveloping the premises. Such a clause is often hidden at the end
of the lease.
DESCRIPTION
OF THE PREMISES
The
front page of the lease contains a description of the premises. It is
either the whole or part of the land described in the Certificate of
Title. Often an expanded definition is included within the
Interpretation section of the lease.
EFFECTIVE
RENT
Effective
rent is the annual
rental equivalent of a lease agreement after taking into
account benefits such as rent free periods, improvements to the
building for the benefit of the lessee and free fitouts. For complex
leases this can be calculated by using discounted cash flow (DCF).
EXTERIORS
AND FACADES
Where
the roof and exteriors are under the control of the landlord he/she
has a duty to ensure such parts are kept In good condition so as not
to any cause loss and damage to the tenant. It is necessary to
accurately define what Is being leased so that both parties know
exactly what their responsibilities are. For example, the foyers and
plant rooms are usually excluded from the net lettable area.
See
face rent
FIRST
RIGHT OF REFUSAL
The
"first right of refusal" or an option for the lessee to
extend the tenancy is more common than an "option to purchase".
It probably does not confer any significant rights on the lessee. It
should clearly state the new method for determining rent otherwise it
may be void for uncertainty. Under the typical option agreement, the
terms of the new lease will be the same as those in the old lease but
will have a new rent and base date.
See
gross building area
GROSS
INCOME
The
total income being received by the owner before actual outgoings. It
includes income derived from the resale of electricity and naming
rights.
GROSS
RENTAL INCOME
This
item includes all rent received for office, retail, basement and
other areas, retail rent and carparking fees. It also includes a
notional market rent for the owner occupied areas.
See
imputed rent
See
incentives
INCREASE
IN OUTGOINGS
The
two most important methods of catering for outgoings are by way of a
modified gross, net or double net lease or a lease with a CPI rent
review clause. The option may or may not update the base rent for
calculation purposes. If not updated, the lessee is liable to a much
higher share of outgoings than if a new base date had been agreed to.
INTERPRETATION
AND DEFINITIONS SECTION
Full
definition and description of the premises is usually found under
this heading and includes fixtures, fittings, furnishings, plant,
machinery and equipment of the lessor. The problem is to determine
what belongs to the lessee and the lessor. Common areas and foyers
are usually defined but check whether that includes stairways,
corridors etc. If not, they are part of the net lettable area.
See
net lettable area
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