EXPOSURE DRAFT - ASSESSING RENT AND RENT DETERMINATIONS

Transcription

1 EXPOSURE DRAFT - ASSESSING RENT AND RENT DETERMINATIONS Warning. Exposure Drafts do not have any formal standing until such time as they are adopted by the National Councils of PINZ as being suitable for use by Members. They must not be relied upon, reproduced or used by any Member or any other party for any reason whatsoever. Reliance should be given to currently adopted/ approved/ sanctioned Practice Standards, Guidance Notes and Technical Information Papers only. Members and the general public are warned that Draft Practice Standards, Guidance Notes and Technical Information Papers may be at various stages of the rigorous development and review process discussed within this TIP and that they may change or be amended during this development process. Therefore only current PS, GN and TIPs contained within the Australia and New Zealand Valuation and Property Standards manual should be used. Reference Exposure Draft Assessing Rent and Rent Determinations Effective 30 th May 2017 Review Owner National Manager Professional Standards Australian Property Institute 6 Campion Street Deakin ACT 2600 Telephone: Website: national@api.org.au Level 3, Gleneagles House 69 The Terrace Wellington Telephone: Website: national@property.org.nz

2 Contents Technical Information Papers... 3 Assessing Rent and Rent Determinations Introduction Purpose Scope of this TIP International Valuation Standards Instructions Written Instructions Use to which the Advice is to be put Basis of rent to be Assessed Supporting Documentation Instructions Specific to Rental Determinations Definitions Primacy of Lease Definitions Common Terms Assessing Rent Basis of Rent under an Existing Lease Basis of Rental for Vacant Premises (Where no Lease Exists) Market Rent Reviews Comparable Evidence Calculating Effective Rent Best Method of Comparison GST Rental Submissions Code of Professional Conduct (Advocacy v Expert) Rental Determinations Reporting Effective Date Exposure Draft - Assessing Rent and Rent Determinations Page 2 of 17

3 Technical Information Papers The principal objective of a Technical Information Paper (TIP) is to reduce diversity of practice by identifying commonly accepted processes and procedures and discussing their use. A TIP is designed to be of assistance to property professionals and informed users alike. A TIP will do one or more of the following: A TIP does not: provide information on the characteristics of different types of asset that are relevant to the advice, provide information on appropriate practices and their application, provide information that is helpful to property professionals in exercising the judgements they are required to make in specific situations. provide training or instruction, direct that a particular approach or method should or should not be used in any specific situation. The contents of a TIP are not intended to be mandatory. Responsibility for choosing the most appropriate approach is the responsibility of the property professional based on the facts of each task. Whilst TIPs are not mandatory, it is likely they will serve as a comparative measure of the level of performance of a Member. They are an integral part of Professional Practice. The reader should understand that legislation may change and whilst this TIP is accurate and relevant at the time it was completed, relevant referred reading and legislation should be investigated at the time of relying on this TIP. Exposure Draft - Assessing Rent and Rent Determinations Page 3 of 17

4 Assessing Rent and Rent Determinations 1.0 Introduction 1.1 Purpose The purpose of this Technical Information Paper ( TIP ) is to provide information, commentary and advice to Members assessing rent. 1.2 Scope of this TIP This TIP applies to Members assessing the rent of premises held under an actual lease or vacant premises and preparing a report thereon. This TIP should be read in conjunction with other TIPs and/or practice standards which are either over-arching or directly applicable to the issues involved. TIPs are intended to embody recognised good practice and therefore may (although this should not be assumed) provide some professional support if properly applied. While they are not mandatory, it is likely that they will serve as a comparative measure of the level of performance of a Member. Where recommendations are made for specific professional tasks, these are intended to represent acceptable practice, i.e. recommendations that in the opinion of the API meet practice accepted by peer professional opinion as competent professional practice. Although Members are not required to follow the recommendations contained in the TIP, they should take into account the following points. When an allegation of professional negligence is made against a Member, a court or tribunal will almost always take account of the contents of any relevant TIP published by the API in deciding whether or not the Member acted to a standard as required by law. In the opinion of the API, a member conforming to the practices recommended in this TIP should have at least a partial defence to an allegation of negligence if they have followed those practices. However, Members have the responsibility of deciding when it is inappropriate to follow TIP. It is for each Member to decide on the appropriate procedure to follow in any professional task. However, where Members do not comply with the practice recommended in this TIP, they should do so only for good reason. In the event of a legal dispute, a court or tribunal may require them to explain why they decided not to adopt the recommended practice. 1.3 International Valuation Standards This TIP has been produced having regard to the publication International Valuation Standards as issued by the International Valuation Standards Council. Exposure Draft - Assessing Rent and Rent Determinations Page 4 of 17

5 2.0 Instructions 2.1 Written Instructions The most important thing about any rental advice is the instructions. A Member must obtain or confirm in writing all instructions and variations of instructions from the client or the client s representatives. The instructions should clearly detail the scope of the reporting required, the basis of rent to be assessed and the use to which the advice is to be put. The instructions must also detail in writing the basis of fees. 2.2 Use to which the Advice is to be put Instructions for the assessment of rental could be used for: Assessing a rent to be used in a market value assessment; Understanding the factors relevant to the assessment of rent to assist the client in negotiating a particular rental outcome; Providing a submission to a determining Valuer; or Setting or determining a rental under a tenancy arrangement whether as an expert or if appropriately qualified as an arbitrator as may be required under the lease terms and conditions. 2.3 Basis of rent to be Assessed The rent may be market rent or some other basis other than market rent. This must be clearly detailed in the instructions. 2.4 Supporting Documentation All relevant information in the possession, knowledge or control of the instructing party relevant to the assessment of rent should be provided to the Member by the instructing party, or alternatively the Member can request from the instructing party all such relevant information as required by the Member for the Member to take into consideration in assessing rent. This information includes the following which may be relevant. This list is not exhaustive. Documents relating to the specific agreement include but are not limited to: Original lease documentation preferably, duly executed including leases, deeds of variation and assignments. Where other than executed documentation is provided the status of the documentation provided should be clearly detailed in the report; Copy of the lease plan including all licence areas; Copies of all collateral agreements together with a statement from the client confirming the lease, lease plan and collateral agreements provided comprise the whole of the agreement between the parties; Details of the current rent being paid; Details of the current outgoings being paid by the tenant; Sufficient details of historic outgoings and budgeted outgoings to enable a full appreciation of gross rent that would be considered by the hypothetical parties negotiating the rental under the lease arrangement; Exposure Draft - Assessing Rent and Rent Determinations Page 5 of 17

6 All correspondence between the parties relating to the review (Care is needed when making a rental determination not to take into account Without Prejudice offers; Comprehensive details of any incentives provided to the tenant; Details of the fitout or other fixtures, fittings and chattels to be taken into consideration or to be disregarded; In the case of specialised property sufficient details of the tenant s business to assist in understanding the business potential of the property under average competent management. (Note: It should not simply be assumed, that the particular tenant is an average competent operator ); Details of timing of payments by the tenant in accordance with the existing documentation and details of any arrears; Asbestos Register; Identification of matters to be kept confidential and not disclosed in detail in the report; Contact details to arrange inspection of the tenancy; and Other general matters such as building plans, current town planning certificate, certificate of occupancy, contaminated land search, environmental report, flood search, resuming authority search, pest certificate. Members should never take it upon themselves to endorse or accept the reliability and / or truthfulness of information provided including supporting documentation. There are two situations that may be treated differently: 1. Where the person providing the instructions and the information and supporting documentation is the person to rely on the report it is still appropriate to consider whether the information and supporting documentation is reasonable in the circumstances. Reliance by the Member on documentation provided by the instructing party is not of itself an endorsement or acceptance of the reliability and/or truthfulness of the supporting documentation so provided. The report should also be clear that the report must be held confidential to that instructing party and no reliance placed on the report by any other party. 2. In circumstances where the person providing the supporting documentation is other than the person who is to rely on the report, the Member should make such reasonable enquiries to satisfy herself / himself as to the accuracy of the documentation or information provided. To the extent that it requires qualification or other warning or reference to an assumption, the report should clearly state and more specifically, Members should draw to the attention of the person relying on the advice, any perceived inadequacies relating to supporting documentation provided or requested. Where appropriate it is also important to recommend the party relying on the report to seek third party verification such as independent consultant reports. Any reluctance on the part of an instructing party, client or client s agent to provide supporting documentation, as requested, should be considered by Members as potentially suspicious and potentially give rise to a decision whether to proceed or continue with any instructions. Documents relating to Evidence include but are not limited to: Exposure Draft - Assessing Rent and Rent Determinations Page 6 of 17

7 Copy of tenancy schedule of the building; Details of other recent rental negotiations by the instructing client specifically including details of outgoings and incentives paid to enable the Effective Rent to be calculated. Copies of leases and amendments or relevant lease transactions including all supporting documentation to verify the agreement. 2.5 Instructions Specific to Rental Determinations Full Disclosure Full disclosure of all relevant information by the parties is critical to the assessment of rent and, in particular, determinations. Where a Member suspects that information provided by a party, or the parties to a dispute is false, incomplete and/or misleading, the Member should advise the parties and, if not resolved, the Member may decide to delay proceedings or ultimately may decline the instructions. If the member ultimately accepts the instruction, then the basis of instructions must be agreed in writing with the instructing party and should include the necessary assumptions and limitations on use of the report. The report should be appropriately qualified. This may include detailing how any variations in the information provided could affect the results reported. Members should, if concerned, seek legal or other advice on any issues of concern. Ambiguity/Different Interpretation It is possible that during the course of undertaking a determination a material matter arises which is ambiguous, or in which the parties prior to the determination, differ on interpretation of the lease. In these circumstance a procedure, agreed at the time of instructions needs to be established. The procedure should initially give the parties the opportunity to resolve the ambiguity/dispute and provide amended instructions in writing. If the parties are unable to resolve the ambiguity/different interpretation, it is likely legal advice will be required. There are a number of options. If the lease provides a dispute resolution process that process must be followed. Alternatively, the parties may directly engage a person to attempt to resolve the further dispute or the determining Valuer may engage the person to provide advice directly to the Valuer. In the event that the advice is relied on by the determining Valuer, the cost of that advice is to be paid by the parties to the dispute. The determining Valuer ought however to set the specific question that needs to be addressed and resolved. Any such delay must also result in an agreed extension of any time frames set as part of the determination. Exchange of submissions A lease or legislation such as retail legislation may require an exchange of submissions and response submissions. It is recommended, where not contrary to instructions or the lease, that submissions are exchanged. This approach increases transparency. Unless agreement is reached as to how to proceed, a Member may decline to proceed with his/her instructions. Set the Time Frame As the basis of the instructions, the determining Valuer must, having regard to the time frames set under the lease, establish the time frames for the provision of information/submissions and when the determination will be completed. It is often the case that one or both of the parties to the lease delay in confirming the instructions or providing the required information/submission. The time frames when set should have the flexibility to cater for reasonable delays due to actions or inactions of the parties to the dispute. Exposure Draft - Assessing Rent and Rent Determinations Page 7 of 17

8 Hold Harmless Provisions A rental determination will rarely leave both parties to a dispute happy with the result. Often one or both parties to the dispute will feel aggrieved. This can lead to unwarranted challenges against the Valuer. The API recommends that Valuers seek an indemnity from both parties to the dispute prior to a determining Valuer accepting an instruction. (See for example the Risk Management Module in the Members section of the API website). This does not absolve the determining Valuer from maintaining appropriate professional indemnity insurance and membership of the Limited Liability Scheme. Indemnities are not valid against fraud and the approach does not guarantee action will not be taken against the determining Valuer but may provide additional protection particularly against any future claims. Members are strongly recommended to seek legal advice as to how best to word the indemnity. Members can refer to the following API resources for guidance when preparing or accepting instructions and setting terms of engagement. Rental Determination Disclaimer (Sample Retainers Rental Determination Retainer) is at: Appointment of Valuer firm to provide valuation services (Sample Retainers Private Client Retainer) is at: Definitions 3.1 Primacy of Lease Definitions In assessing or independently determining the rent of premises held under the terms of an actual lease, the definition of terms contained within that lease have primacy, unless contrary to law and/or legislation. 3.2 Common Terms The Common Terms detailed below sets out the common usage of the terms. Some, as identified, have been sourced by the International Valuation Standards (IVS) Glossary of Terms. There is nothing to prevent a person drafting a lease to use any of the terms but provide a different definition. Further the common terms referred to below are not exhaustive of any other terms which might be included within a lease as a description of a particular rent in that lease. Advocate A person who represents the cause or interest of another, particularly to a third deciding party, even if that cause or interest does not necessarily coincide with one s own beliefs, opinions, conclusions or recommendations. (Refer, regarding the difference between experts and advocates, ANZRPTIP1). Effective Rent The actual liability for rent and outgoings after adjustments for any incentives to the face rent are taken into account. Effective Rent and Market Rental Value are synonymous Exposure Draft - Assessing Rent and Rent Determinations Page 8 of 17

9 Equivalent Rent Equivalent refers to the rent being adjusted for the effects of any market rent reviews that will occur in the period of consideration. Face Rent The rent shown on a lease document which may or may not include incentives and may or may not include outgoings. Fair Market Rent The estimated amount for the lease of an asset on the valuation date between identified, knowledgeable and willing parties, that reflects the respective interests of those parties having regard to appropriate lease terms. Gross Rent The rental reserved or derived under lease or tenancy arrangement(s) where there is no further obligation on the tenant to pay any other property costs other than tenancy utilities and cleaning. Incentives Inducements provided by Landlords to attract tenants to lease space. Examples may include but are not limited to rent free periods, provision of fitout by the Landlord, cash incentives, payout of previous leases and other similar inducements. Lease (IVS) An agreement whereby a lessor grants the right to use an asset for an agreed period of time to a lessee in return for payment or a series of payments. Market Rent (IVS) The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. Market Rental Value 1 The sum arrived at after making proper allowance for all collateral advantages and disadvantages ascertained upon proper examination of all the arrangements made between the Lessor and Lessee including the various rights and obligations under the terms of the lease which reflects the net consideration passing to the Lessor from the Lessee under the lease and associated collateral arrangements. (See Effective Rent) Net Rent The rent to the owner free of all outgoings (i.e. gross rent less all outgoings including Land Tax). Outgoings The expenses incurred in generating income. In real estate, these expenses include but are not necessarily limited to statutory outgoings (municipal rates, water and sewer rates, land tax) and 1 McCafferty v Queensland Treasury Corporation [1994] 2 Qd R 538 Ambrose J Exposure Draft - Assessing Rent and Rent Determinations Page 9 of 17

10 operating expenses such as essential service routine repair and maintenance, common area expenses (cleaning and electricity), insurance and management fees. Passing Rent The current rent being paid by the lessee(s) as specified by the terms of the lease(s)/tenancy agreement(s). Profit Rent (Over rent) The amount by which the passing rent is greater than the market rent. Rent Review A periodic review of rental under a lease using a predetermined method. Rental Shortfall The amount by which passing rent is less than the market rent resulting in a Leasehold Interest. 3.0 Assessing Rent 3.1 Basis of Rent under an Existing Lease When assessing the rent of premises held under the terms of an actual lease or the independent determination thereof, members must follow the directions, if any, provided under the lease. A Member must comply with any specific provisions contained in a lease unless: the parties have further agreed to vary that provision and have advised the member in writing of any agreed variations; or the provision is contrary to law. Each Lease wording must be considered individually. There is no compulsion on those drafting leases to adopt typically accepted definitions of terms. However, it is important for Members to note that they need to have a full understanding and consideration of the definitions of terms used and to give those definitions their natural meanings within the context of the Lease being a commercial instrument. However, no two leases are necessarily drafted in the same way and definitions of a similar term may vary dependant on that draftsman. It is quite common to see definitions provided for what otherwise might be commonly accepted terminology. Therefore, whilst it is critical to take into account precedent Great care must be taken when utilising judicial dicta on a differently worded rent review clause. 2 The term judicial dicta is a term indicating judicial reference to particular issues in a judgment from which the reader may obtain some understanding and/or direction of what a particular Court has considered and/or concluded and, why. Market rent is a commonly accepted and understood term although, it to, is often redefined in leases. There are however other terms that have been considered in precedents. For example, some of these concepts are detailed below with reference to precedent however it is the context in which the term is used rather than the term itself that is critical. However if the term is not 2 Alcatel Australia Ltd v Scarcella [2001] NSWSC 154 Stein JA Exposure Draft - Assessing Rent and Rent Determinations Page 10 of 17

11 otherwise defined in the lease then the terminology is to be interpreted in accordance with normally commercial purpose of the clause and having regard to the words natural meanings. What the court is seeking to identify and declare is the intention of the parties to the lease expressed in that clause. Thus, like all points of construction, the meaning of this rent review clause depends on the particular language used interpreted having regard to the context provided by the whole document and the matrix of the material surrounding circumstances. We recognise therefore, that the particular language used will always be of paramount importance. Nonetheless it is proper and only sensible, when construing a rent review clause to have in mind what normally is the commercial purpose of such a clause. 3 Market Rental Value Market Rental Value has been defined in this TIP based on the wording of Ambrose J in McCafferty. The concept was also considered in by the Victorian Court of Appeal 4. The court differentiated between Current Annual Market Rental and Current Annual Market Rental Value. The decision was consistent with McCafferty. Reasonable Rent The expression reasonable rental is not a term of art. It has no fixed or precise meaning. It is of quite different character from market rental a rental which the valuer considers is reasonable having regard to all circumstances which the valuer considers are relevant a rent which was reasonable in the light of all relevant circumstances including particular circumstances of the lease. 5 Distinguishing between Market Rent and Fair Rent In the former case the rent is determined on the basis of the rent the premises would bring on the open market having regard to the rents paid for comparable premises in the same or a comparable area. The test is objective. In the latter case the rent is determined on the basis of the rent which it would be fair for the particular landlord and the particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them from the rent review date Basis of Rental for Vacant Premises (Where no Lease Exists) Members must take care to set out clearly the principal lease terms that are assumed when providing an opinion of market rent of vacant premises. The appropriate lease terms for vacant premises are the usual terms and conditions of leases of similar premises albeit having regard to the most likely use to which the premises will be put. If it is the market norm for lettings to include a payment or concession by one party to the other as an incentive to enter into a lease, and this is reflected in the general level of rents agreed, the market rent should also be expressed on this basis. The nature of the incentive assumed must be stated by the valuer, along with the assumed appropriate lease terms. Those appropriate lease terms to be assumed include, for example, but are not exhaustive, where appropriate, the following elements: permitted use under the lease; 3 Basingstoke and Deane Borough Council v Host Group Ltd [1988] 1 WLR Eureka Funds Management Limited & Anor v Freehills Services Pty Ltd (No 2) [2008] VSCA 156 (11 September 2008) 5 v Robert Bray (Langwarrin) Pty Ltd [1984] VR Ricciardello v Caltex Oil (Australia) Pty Ltd [1991] ANZ Conv R 445 at Exposure Draft - Assessing Rent and Rent Determinations Page 11 of 17

12 date of commencement; term of lease; date of assessment; option(s) for renewal; commencing rental; method and frequency of rent reviews; period to which the rental being assessed is applicable which may be: - a period equivalent to the term of the lease; or - a period equivalent to the unexpired term of the lease; or - a period equivalent to the interval between rent review; or - another period; lessor s and lessee s liability for outgoings; assignment clause and subleasing rights; fitout and fitout costs; treatment of incentives; and make-good provisions. 3.3 Market Rent Reviews Market rent reviews in a lease enable the rental to be varied to reflect changes in the market between the date on which the lease commenced or the rent was last reviewed and the relevant review date subject to the terms and conditions of that lease. The fundamental starting point to any assessment of market rent, at rent review, is therefore the lease. A full understanding of the lease is required before the market rent can be assessed. The agreed rental on review will reflect not only the market influences but also the terms and conditions in the actual lease document. A Member must value for market rent review purposes property in its condition as in accordance with the Lease and at the time of the review. As the cases show: see Ponsford v HMS Aerosols Limited [1979] AC 63, and the cases there referred to; questions have arising in the context of particular rent revision clauses as to whether the revised rent is to be assessed by reference to the demised premises as they were at the commencement of the Lease or as they are at the date of the revision. In any problem of construction, the issue is to be determined by the language of the particular document, absent some provision indicating a contrary intention, I would see demised premises as indicating the demised premises as they are when the valuer comes to make the valuation, I would, with respect agree with what was said by Lord Wilberforce in the Ponsford case (at 73). 7, That is not to say that if the condition of the demised premises is due to a failure of either of the parties to the lease to carry out obligations under the lease, that it should be assumed those 7 Legal and General Life Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR314 at 320E per Mahoney JA Exposure Draft - Assessing Rent and Rent Determinations Page 12 of 17

13 obligations are outstanding. Leases provide other remedies to each party where the other party has failed. The market rent under the lease must have regard to the terms and conditions of the lease. 3.4 Comparable Evidence In assessing market rent the Member should consider the most appropriate evidence in the market place. The circumstances where the lease was entered into are also relevant. There is a hierarchy to weight that is placed on evidence. That priority is: 1. New lease to a new tenant; 2. Where Current Market Rent is agreed between the lessor and lessee at a mid term review or exercise of option specifically, where the rent is to be the Market Rent and, if not agreed, can be set by determination; 3. Where Current Market Rent is set by determination at a mid-term review or exercise of option. In this case the evidence used by the determining valuer may have more relevance; and 4. New lease to a sitting tenant on expiry of an existing lease where the tenant has no right of continuing tenure. In this circumstance consideration must be given as to whether a premium rent was agreed rather than lose the goodwill and benefit of an existing fitout. All evidence is considered in terms of the Spencer Test. The Spencer Test is satisfied if the rental is reflective of the rent that would be obtained, given the hypothetical situation envisaged in the term Market Rent. Where it is apparent or possible the rental included goodwill for instance, if it is not possible to quantify and exclude that goodwill, the evidence should be rejected. A test of whether the evidence reflects market is whether the evidence is consistent with other evidence. To re-iterate Spencer: In order that an article may have an exchange value, there must be pre-supposed a person willing to give the article in exchange for money and another willing to give money in exchange for the article.not by enquiring what price a man desiring to sell could have actually obtained for it on a given day but by enquiring What would a man desiring to buy the land have to pay for it on that day to a vendor willing to sell for a fair price but not desirous to sell 8 [Emphasis Added] Application of Comparable Evidence to be further considered including reference to Methods of Measurement TIP if the basis of comparison is to be based on the area of the premises. Physical Measurement In all instances locational factors and the physical nature of the improvements are of course relevant. Different property uses however can best be compared using a number of different criteria. The Technical Information Paper Methods of Measurement should be considered and the International Property Measurement Standards Coalition (IMPSC). Non Specialised Property Non specialised property is, in general terms, where the business potential of the premises does not have a direct correlation to the premises. The business derives its potential from other than the premises themselves. 8 Spencer v Commonwealth (1907) 5 CLR 418 at 431 Griffith CJ Exposure Draft - Assessing Rent and Rent Determinations Page 13 of 17

14 In many instances the area of the tenancy of non-specialised property is the most appropriate measurement for comparison of the evidence and the subject property. This approach is often the most suitable unit of comparison for office and industrial property although may need to be balanced against the shape of the tenancy. Retail however, like all businesses, is contingent on the business potential of the average competent manager for the particular permitted use. The best unit of comparison may be the area of the premises but that is for the valuer to determine. In some instances the best comparison for retail that considers the business potential may be a lineal measurement of frontage. Variations to be taken into consideration include frontage to depth ratio as well as the normal locational considerations. In regard to retail sufficient details of the tenant s business should be obtained to assist in understanding the business potential of the property under average competent management and whether the business is being operated by an average competent operator. Specialised Property Specialised property envisages property where the design of the property is for a particular use. In many instances any change of use will require capital expenditure to enable the property to be used for that alternate use. Generally the market rent for specialised property is limited to consideration of the current use of the premises and the business potential of the premises for that specific use. The best unit of comparison for specialised property may be units of comparison other than lineal or area measurement. It may simply be based on the business potential itself and supported by a second direct comparison unit. Some of the units of comparison for various specialised uses include: Accommodation hotels and motels are often compared on a number of rooms basis. Backpackers and Boarding Guest Houses can be compared on the number of rooms and the number of beds. Carparks are simply compared on the number of bays although separate consideration may be required for tandem bays, larger disabled bays and small car bays. Child Care Centres may be compared on the number of children for which the centre is licensed however there may be different values for the licensed age of the children. Cinemas may be measured in terms of seating capacity and number and types of auditoriums. There may be variations considered giving consideration to other items such as concession sales areas and other retail. Clubs and taverns may be compared on rent occupancy basis which refers to the commonly used principal allocation of rent as a proportion of gross sales basis having regard to conference facilities, bars, restaurants, auditoriums and gaming facilities. Hospitals, nursing homes and hostels could be compared on area basis but more appropriately on the number of beds balanced against the level of care. Service Stations are often compared on cents per litre of fuel volume. The shop to fuel ratio is also a relevant factor and it may be preferable to use a summation type approach for each component of the service station including fuel, shop, workshop, carwash, tanks and pumps/dispensers and with a separate relevant unit of comparison. Exposure Draft - Assessing Rent and Rent Determinations Page 14 of 17

15 3.5 Calculating Effective Rent Effective Rent is the actual liability for rent and outgoings after adjustments for any incentives to the face rent are taken into account. The incentive should be converted into a periodic equivalent over the term of the lease. Any effective rental should represent the most valid interpretation of the transaction concerned for comparative purposes, which may not necessarily represent market rent. Incentives are common place in leases. They may be detailed in the lease itself or in a collateral agreement. It is important to ensure when assessing rent that all documents/information comprising the agreement are taken into account. Instructing parties should be requested to provide all documents/information relating to the agreement and to provide confirmation in writing that all documents comprising the agreement have been provided. The property industry lacks consistency in calculating the actual value of an incentive. A common mistake is to reduce the incentive simplistically to a percentage over the term. For example a one year rent free in a five year lease is described as a 20% incentive. What is not stated however is when the rent free is provided. For example, if the first year of the lease, the incentive is greater than 20% and, if the last year of the lease, the incentive is less than 20%. The simplest method of calculating the actual value of the incentive is to build a cash flow model comprising 2 components. The first component is the actual cash flow. The Net Present Value of that cash flow is calculated. The second component is to build a cash flow without the incentives. It is then a simple matter of determining, at what initial rent will the Net Present Value without the incentives, equal the Net Present Value with the incentives. Most spreadsheet programs contain a What If function. The discount rate to be used depends on the nature of the cash flows. Non Escalated cash flows can be discounted at an equivalent of the capitalisation rate whereas escalated cash flows should be discounted at an equivalent to the Internal Rate of Return. Monthly cash flows provide a more accurate analysis than annual. The examples below are simplified cash flows to demonstrate the technique. The assumption is annual payments in advance. If the lease provides for monthly cashflows for instance, the calculation would be more accurate if data input was monthly in accordance with the timing detailed in the lease. The two examples demonstrate the difference in the timing of the incentive. Example 1 assumes the annual rent free is for the first year of the lease and Example 2 is for the last year of the lease. Exposure Draft - Assessing Rent and Rent Determinations Page 15 of 17

16 3.6 Best Method of Comparison 3.7 GST The best method of comparison is the gross effective rent unless directed otherwise under the specific lease. For Example Make no reduction for incentives in the subject lease, available to a tenant in the market place or, in any market rental evidence. Members should explicitly state immediately following the rental assessed, the treatment of GST in that assessment. Members should otherwise seek legal and/or other expert advice on GST issues. 4.0 Rental Submissions 4.1 Code of Professional Conduct (Advocacy v Expert) A submission by its very nature is an advocate role whereas the duty in a valuation is to exercise independence and impartiality. It is contrary to the Code of Professional conduct to act as both an advocate and an expert (valuer) in the same matter. A Member must maintain the strictest independence and impartiality when making a valuation and/or where the exercise of objective judgement is required. To purport that an advocate position and a valuation are synonymous either is in breach of the Code of Professional Conduct or at the very least is exposed to potential breach of: Clause 3.1 (a) - adopt the role of advocate in a case where their duty is to exercise independence and impartiality; Clause 3.1 (b) act as an advocate and as an expert in the same matter; and Clause 3.1 (e) allow the performance of their professional duties to be improperly influenced by the needs or preferences of a client or other party. Exposure Draft - Assessing Rent and Rent Determinations Page 16 of 17

17 A Member is entitled to act as a client s advocate, however the advocacy role is subject to proper professional practice, and that role must be declared to all parties. A Member s conduct must remain within the scope of established valuation principles and practice and the law. 5.0 Rental Determinations In the event of a dispute between a lessor and the lessee, a Member may be instructed or appointed to undertake an independent determination of the rental of the premises held under the terms of an actual lease. This appointment may be as an Expert or an Arbitrator. A Member must particularly ensure they are appropriately qualified to carry out any arbitration in the relevant jurisdiction. Commercial Arbitration Acts are enacted in each State, Northern Territory and Australian Capital Territory. Where the appointment is as an Expert, Members must be aware that it is usual, as set out in the lease, that their determination will be final and binding on the parties and that a rental determination will only be set aside by a Court because of a mistake on the face of the contract (lease), and as such the parties will otherwise be bound by the decision of the Member. Where the lease is subject to overarching legislation, for the purposes of interpreting this tenet, that legislation forms part of the contract (lease). For example Retail Leases legislation. 5.1 Reporting The determining valuer should recognise that after the determination the lessor and lessee are left in an ongoing commercial arrangement. Whilst one or both of the parties are likely to feel aggrieved due to the determination the determination should not increase tension between the parties. It is therefore preferable that, unless contrary to the lease, a determination clearly details the matters taken into consideration and states detailed reasons for the determination. Submissions from parties must be demonstrably fully considered. If the determining valuer disagrees or partly disagrees with a submission the reasons should be explicitly stated. Regard needs to be had to any instruction to the determining valuer detailed in the lease. Further regard must be had to any direction in legislation and/or law such as retail lease legislation that exists in each State and Territory of Australia. 6.0 Effective Date This TIP is effective from Day Month Year. Earlier adoption is permitted. The above TIP, ANZVTIP #, replaces the superseded Guidance Note ANZVGN 9 Assessing Rental Value which operated from ### to ###. 1 Australian Property Institute Commercial, Specialised and Determination Work Risk Management Module available on API website Members section. 2 Technical Information Paper Methods of Measurement available on the API website 3 International Property Measurement Standards Coalition website Exposure Draft - Assessing Rent and Rent Determinations Page 17 of 17