QUALITY OF TENANTS

Some lessees may be able to negotiate a low rent because of their status. For example, a government department, an anchor tenant in a shopping centre or a large institution. This factor is known as the micro micro factor and is an important variable in investment value that is often overlooked or glossed over by valuation commentators. There is good argument for using the "credit worthiness" of each tenant (as determined by financial rating agencies) and using this rating to determine the appropriate capitalization rate against each tenant.

The importance of this factor is also shown by the success of banks and government departments leaseback auctions that when analyzed, show very low capitalization rates, regardless of location. That is, the analysis shows that location is not as important as the quality of the tenant. In many cases leases to quality tenants are not "out of line" where it is expected that the premises would most likely been leased to such a tenant.

EXAMPLE

An anchor tenant in a shopping centre or where it is the norm to rent commercial buildings to such tenants (for example, in Canberra). In these cases, the rents are market rents.

See net income