‘Face’ and ‘effective’ rent reviews: What’s the difference? (+ VIDEO)
Commercial market conditions are wildly variable, so it’s no wonder landlords lock in market reviews to help safeguard their investment against lagging rents.
Nonetheless, it’s essential for a tenant to make sure that any proposed commercial rent review is fair and commercially viable before entering into an agreement.
How often is a commercial rent review carried out?
It really depends on your lease.
Because rent reviews are quite expensive to conduct, they are usually carried out in the middle of a long-term lease. But they may also be carried out when a tenant exercises an option to renew.
Face and effective rent
The rent review process can trip up tenants and cause issues if not entirely understood. This can be particularly problematic when it comes to differentiating between ‘face’ and ‘effective’ rent.
Face rent is a rent figure that disregards incentives such as rent-free periods, rent reductions (a.k.a rent abatements) and fit-out contributions.
Effective rent is when the market value of your rent accounts for any incentives provided to the tenant. Under an ‘effective’ market review, a tenant’s rent would be lower than it would be under a ‘face’ market review.
Which path to take?
At Tenant CS we generally advise our clients to undertake an effective market review when exercising their option or weighing-up market alternatives. This way, the analysis considers tenant incentives, ensuring that the rent is not subject to false inflation.
What are the problems when it comes to market rent reviews?
Negotiating lease terms is not always straightforward – the devil really is in the detail.
Tenants are often unaware of the difference between ‘face’ and ‘effective’ rents. And landlords often only give tenants a short time frame (as little as 21 days) to respond to their offer.
What’s more, landlords also tend to favour ‘face’ market rent reviews. This is because ‘effective’ reviews may require an incentive to persuade the tenant to exercise their option. They can also result in a lower rental outcome for the landlord.
Get in touch with Tenant CS
Luckily, whether you are negotiating a new lease, exercising an option or undertaking a mid-lease rent review, appointing a tenant representation specialist can save you thousands of dollars and protect your interests.