Fair market rent is not a new term. In fact, it’s a rather old term in the real estate industry – and it’s also a very difficult number to get everyone to agree upon. The various factors that make up fair market value are not universally agreed upon by all commercial real estate agents, landlords, or even real estate lawyers.
However, having a general understanding of what fair market value is can help you avoid paying too much on a lease or being scammed by an unethical landlord.
What is fair market rent?
Fair market value is the price that landlords charge for leasing the space in a shopping center. Generally, the term fair market value is used in leases to determine what the renewal rent will be on a tenant who has options in the lease.
This creates a major problem in determining what the rent should be on the renewal and generally leads, to major renegotiation of the option rentals. A better approach for landlords and tenants alike would be renewal rentals that increase incrementally on an annual basis.
What are the determining factors for fair market value?
The determining factors for fair market rent most often include the following factors:
- Competitive rent
- Market changes
- New competition
- Changes in the makeup of the shopping centers
- Tenant mix
While these are the factors that landlords most often use to establish a fair market rent price, they aren’t comprehensive and they can change depending on one party’s definition of fair market value.
What should I do if the property is above fair market value?
Determine whether or not the location will create above-market volume estimates. If you’re confident that it could be a boon to your business, then go forward. If the location does not have the ability to produce additional sales, then higher market value cannot be justified.
In the case that an above-market price cannot be justified, you may want to speak to the landlord and find out how they have determined fair market rent for the property. You can also work with a commercial real estate broker to attempt price negotiation.
What can drive a property’s value up or down?
The properties market value will be driven down by the loss of tenants in the shopping center that have not been replaced by the creation of major competition within the market and by changes in the demographic makeup of the market.
Additionally, if the market value of nearby properties changes due to more high-value tenants, the property that you’re considering leasing is also likely to draw similar clients. Increased value can benefit your business, even if you’re spending more than you originally planned.
Do you have more questions about fair market value or are you worried that you may have been quoted above-market value? The retail team at Trout Daniel & Associates can help. Give Rene Daniel a call today at 410-435-4004, shoot him an email at email@example.com or fill out the contact form.