Increased Rent = Increased Value of Property (Commercial)

Discussion in 'Commercial Property' started by thesuperman, 11th Mar, 2020.

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  1. thesuperman

    thesuperman Well-Known Member

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    In commercial property the higher the rent usually means the higher the value of the commercial property. Let's say you increase the rent during the lease term by an extra 10%. How much extra roughly would this make the property worth? An extra 10% too?

    Let's say that you have a tenant who wishes to make some improvements to your property. They would prefer to buy it so they can do this, but you are not keen on selling. You are thinking about another way of doing it by you paying for the reno cost (I would imagine all the reno would be owned by you then) and increase the rent to cover this (signing a new 10+10 year lease which was already in place). Let's say the reno cost would be $100k. How much would you increase the rent by generally? Has anyone here ever done something like this? If so, please share.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    I am no valuer, but would think it largely irrelevant what the rent is on a residential property, so it will enterly depend on the renovation
     
  3. thesuperman

    thesuperman Well-Known Member

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    Hi Terry, this is regarding commercial property :)
     
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  4. ashish1137

    ashish1137 Well-Known Member

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    The tenant owns the reno.

    Give them an option of staying on same rent if they can pay 3 to 6 months in advance each year for entire year.

    Changeease terms per tenants desire. If they are planning to stay for long, why bother pitching in or selling?

    Give them the comfort that they can renew the lease on their terms.
    Premise reno's are mostly a tenants's responsibility.

    P.S. i do not own a commercial property but researching. :)
    Regards
     
  5. Beano

    Beano Well-Known Member

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    1:Sell them the building
    2: let them do the renovation
    3: drop the rental
    4:split the title
    5:hold the tenant
    6:retain the Lessors interest
    Ps I do own commercial and residential property , lessee and lessors interest.
    Ps a valuer will assist you in setting the sale value.
    PM if you wish to discuss
     
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  6. Christina46

    Christina46 Well-Known Member

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    Ownership of reno depends on what the reno is, who pays and what is articulated in the lease. Even if the reno does belong to the tenant, make good provisions may mean it is best to for them to leave the reno in situ (eg it may cost them more to remove the reno and return the premises to it's original condition).

    Impact of increased rent on value depends on the Cap rate that might be applied. If you've had a recent valuation on the property, it should show what Cap rate was used to determine the value. You could then extrapolate what the additional income might deliver in term of property value. Otherwise your local (commercial) agents should be able to give you some idea.

    With regards to you funding renovations and recouping this back from the tenant. You need to think about what payback period you are happy with. We usually at a 5 year pay back period (ie for a $100,000 reno to be "paid back" in 5 years, rent would increase by $20,000 pa). Who the tenant is, what the renovation is, and market conditions at the time all influence this.
     
  7. Scott No Mates

    Scott No Mates Well-Known Member

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    @thesuperman - you haven't fleshed out the various options. Apart from the magnitude (no-one would offer a 10 year lease for a mere $100k) but I'll run with it as it stands.

    Few businesses now purchase their premises (on the assumption that they can make more profit by deploying those funds in the business than by investing in the property).

    You haven't considered whether the improvements actually are going to add value or whether you see better off granting approval for the tenant to undertake the work.
    • Having an 'A grade' tenant with a quality covenant will produce the uplift in value as investors are prepared to sacrifice yield for a quality tenant (this costs nothing)
    • LL paying for the works in return for an uplift in rent, though this may sound like a win-win, may not be as you can't just use a single measure of value. ROI is also 10% on the additional funds invested. This should result in an increase of the initial yield.
    • The alternative is providing the $100k to the tenant as an incentive payment, a properly structured lease would grant ownership to the Lessor for $1 at the end of the lease or the liability to remove to remain with the tenant (& a few other claw-back provisions on assignment).
    You note that they're locked and loaded on a 10+10 lease, grant consent with a market rent review at option (unless there see other existing market review opportunities), the obligations for restoration lies with the tenant
     

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