Retrospective Valuation: What is it?

A retrospective valuation, sometimes referred to as a back-dated property valuation, determines the value of the property at a certain point in the past.  A retrospective property valuation report is most frequently used as a basis for determining a property investor's capital gains tax obligations.

For Capital Gains Tax

Property investors must provide a capital gains tax valuation report to the Australian Tax Office (ATO) in order to determine any capital gains they may have realised from the sale of their investment property.

It may be necessary to conduct a back-dated valuation for CGT purposes if you're not sure whether the price in the original sale agreement was an accurate valuation, as your capital gains tax obligations will depend on the property's increase in value from the time it was first purchased or used as an investment property to the time it is being sold.  

Back-Dated Valuation for other situations

However, there are other situations that could potentially compel you to have a back-dated valuation report, such as:

In each of the aforementioned situations it is essential to obtain a valuation based on a date in the past from a qualified, experienced and skilled property valuer, since a retrospective valuation has a substantial impact on a person's tax liability.

How is a Retrospective Valuation carried out by property valuers?

A property valuer will need to conduct both a physical inspection and research and analysis of historical data in order to complete a retrospective property valuation report.

Analysis of data relevant to the Retrospective Date of Valuation

A database with historical market value information accessed by an experienced property valuer can provide the experienced valuer insights about the market conditions at the retrospective date of valuation and the months before that.

Since property prices fluctuate frequently, property valuers typically conduct significant market research throughout this period. The current sale price and the backdated property valuation may both be greatly impacted by these changes.

The following are generally taken into account by a property valuer when conducting the retrospective valuation property report:

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Physical inspection required

The property valuer can gather significant evidence during a physical inspection in order to produce an accurate property valuation. Physical inspections can significantly affect the property's overall value because a property valuer will typically note:

Although it is not always necessary, a physical inspection gives the property valuer a clearer picture of issues that could otherwise be missed.

However, if a required valuation is very far back in time, the current state of the property during the physical inspection might be very much different from its state at the retrospective valuation date. In such cases, the valuer may complement the physical inspection with old photographs, old floorplans, back-dated aerial images and information from the client to arrive at more accurate picture of the property at the retrospective valuation date.  

Why appoint AskTheValuer for your Retrospective Valuation?

The goal is to ensure that you are not paying a cent more in capital gains tax than necessary or getting a cent less than your rightful share in a property settlement. And it will be carried out for you at a reasonable fee.

The valuation will be performed by the independent Principal Valuer @ AskTheValuer, a very experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. For more details about the valuer, go to <About>.

SMSF Property Valuation: a Brief Overview

SMSF property valuation provided by SMSF trustees was required every three years prior to 1 July 2012. This was done on the basis that asset valuations, particularly for real estate, do not change considerably every year and that doing so would be expensive and time-consuming. But since then, the market value of your property must now be reported annually together with supporting evidence.  

The property value must, however, be taken into account by the SMSF trustee on an annual basis. This is crucial for residential property estate in certain areas, that may be going through a period of rapid short-term growth.

Who should conduct the appraisal / valuation?

The trustee's assets may not necessarily need to be valued by a Certified Practising Valuer, despite the fact that this work can be challenging. A real estate agent's appraisal or even the SMSF trustee's could be used to value real estate.

In the case of an ATO review, the evidence used to support the appraisal or SMSF property valuation is what is important, not the person who signed the valuation. A Certified Practising Valuer would undoubtedly provide more support for their valuation, but this does not guarantee that their valuation is accurate. The ATO will examine the content of the valuation report rather than just the letterhead because the scope of the valuation for a Certified Practising Valuer can be something other than market value. <More>

When is an SMSF Valuation important?

The asset's valuation is comparatively insignificant for many SMSF trustees. The fact that an asset is owned by SMSF members remains true regardless of its value; capital growth has no bearing on this.  

However, during some significant occurrences, the asset value affects the fund's tax profile. These significant historical occurrences include:

When valuing a property for an SMSF, both the market value and market rent can be determined; however, if leases are in place, the rent must be at market rental levels.

Why appoint AskTheValuer for your SMSF Valuation?

You will be getting more than a 'standard valuation'. A Hidden Value Property Check-Up will be included as a bonus.  

< Find out how AskTheValuer gives you more than a standard valuation > 

< Find out what's a Hidden Value Property Check-Up >  

The valuation for the SMSF audit will be performed by the independent Principal Valuer @ AskTheValuer, a very experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. For more details about the valuer, go to <About>.

Stamp Duty Valuations: a Brief Overview

Stamp duty valuations may be necessary for property buyers or recipients of property as a gift from a family member, friend, or business partner and the property was not advertised on the open market.

One of the biggest costs associated with buying a property is stamp duty. Yet when they realise how much stamp duty they must pay, many purchasers and investors are in for a rude shock.  

Stamp duty (now called transfer duty), is a tax imposed on the transfer of ownership when buying a property. The market value of the property at the time of transfer, which must be assessed by a Certified Practising Valuer in accordance with legislative requirements of the State Revenue Office, determines the stamp duty amount. <More>

How Much Stamp Duty is Payable?

This will depend on:

Is Stamp Duty Paid on the Purchase Price or the Market Value?

The value of the property indicated in the contract of sale usually determines how much stamp duty you will be required to pay.  But depending on the circumstances, the value could be the assessed value from a stamp duty valuation.  

Stamp duty valuations are not always mandatory whenever stamp duty needs to be paid.  

The selling price stated in the contract of sale is typically accepted by the State Revenue Office as the basis for an assessment of the stamp duty to be paid.  

But let's say the property is sold through negotiation between related parties instead of between unrelated parties (i.e., on the open market). If so, the State Revenue Office must make sure that the stamp duty paid is in line with the property's fair market value.  

It's important to remember that stamp duty must be paid irrespective of whether or not the transfer affects a monetary transaction. In other words, stamp duty is charged even if no money is exchanged between the parties. 

A common example of ownership transfer where no money is exchanged could be when property is placed into a trust.  

The State Revenue Office will usually require stamp duty valuations in the following situations:

Stamp duty valuations must be undertaken by an experienced Certified Practising Valuer in each of the aforementioned situations.

What Methods are Used by Property Valuers to Complete Stamp Duty Valuations?

The stamp duty valuation by the Property Valuer must be based on fair market value and the following:

To assess the fair market value, the property valuer usually uses one (and sometimes two) of the traditional valuation approaches, namely: Sales Comparison, Income Approach and Cost Approach.  

Are Property Valuations Reliable?

A vital component of many different property transactions, including stamp duty is the valuation of property.  

Property valuers are expected to apply due diligence in their valuation and offer information that is as accurate as possible because they are legally responsible for the valuation they provide.  

Property Valuers perform extensive research in the following areas to achieve this:

An appraisal by a real estate agent can assist in determining an estimated selling price, but a real estate agent's appraisal is not legally binding and lacks the depth of information you would get in a property valuation carried out by a certified property valuer.

Why Appoint AskTheValuer to Carry Out a Stamp Duty Valuation for Your Property?

The goal is to ensure that you are not paying a cent more in stamp duty than necessary. And it will be carried out for you at a reasonable fee.

The valuation will be performed by the independent Principal Valuer @ AskTheValuer, a very experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. For more details about the valuer, go to <About>.

Capital Gains Tax Valuation for Properties

A capital gains tax valuation is required by the Australian Tax Office (ATO) to determine any capital gains you may have realised from the sale of your investment property. 

For many tax-related purposes, valuations are necessary. For the purpose of calculating capital gains tax for a property, a valuation is used to determine the cost base. As an investor you can benefit from a higher cost base by doing so. You report less capital gain if your cost base is higher.

Due to all the property jargon used, it can be difficult to understand how to use a capital gains tax property valuation to your advantage.

Capital Gains Tax: What is It?

The difference between the price you paid for a property and the price you received for it when you sold it is referred to as a capital gain or loss.

The ATO states that any profit you make from the sale of your investment property is a capital gain and needs to be reported on your income tax return.

Capital gains tax, or CGT, is the name of the tax you are required to pay on your capital gain.

Tax exemptions on Capital Gains

However, if they fit into one of the CGT exemption and concession categories, the ATO permits property investors to eliminate (or at least drastically decrease) their capital gains tax due.

These consist of:

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What does a property valuation for Capital Gains Tax mean?

Property investors must file a property valuation report to the ATO in order to determine any potential capital gains from the sale of their investment property.  

A capital gains tax valuation report is essentially used to determine if the value of your property has increased or decreased in value.  

While submitting a CGT valuation report may be required by the ATO, doing it accurately can help you avoid paying more tax than is necessary.  

Including all costs associated with acquiring, buying, and selling the property can dramatically raise your cost base and lower the amount of capital gain you must report.  

But so many investors pass up on this opportunity to factor in these costs and lower their profit for tax purposes.

A party may not submit a report or introduce the evidence of a different expert on the same issue without the court's approval if only one expert has been designated by the court to prepare a report or provide evidence on it. A party could still be dissatisfied with the valuation, even after asking questions or attending a conference with a single expert. There may still be a significant point of contention, such as whether the single expert employed the appropriate valuation approach.

What Is the Cost Base of a property?

Keep in mind that a capital gain is equal to the difference between the selling price and the cost base.  

The cost base of the property consists of the purchase price and expenses less any grants, and depreciation:  

Cost base = purchase price plus expenses less (grants plus depreciation)  

You will ultimately reduce the capital gains you declare on your yearly income tax return by increasing expenses to your cost base.

Cost-Base expenses

Example:

For $850,000, Mr & Mrs Smith sells their rental (or investment) property to Baljit who is also an investor.  

The Smiths initially paid $650,000 for the property. Therefore, if the property was assessed for capital gains tax purposes, it would be clear that they had made a $200,000 capital gain.  

However, in order to account for any relevant costs on their cost base, the Smiths order a Capital Gains Tax Valuation from AskTheValuer.  

The following costs were included in their cost base based on the Capital Gains Tax Valuation Report from AskTheValuer:

Stamp duty and incidental costs: $25,500

Renovations: $105,00

Title costs: $1,100

Mr & Mrs Smith’s capital gain after deducting these costs is as follows:

Cost base is $600,000 plus ($25,500, $1,100, and $105,000), for a total of $731,600.

$850,000 minus $731,600 equals capital gain of $118,400.

Given that the Smiths had owned the property for longer than a year, $118,400 multiplied by 50% equals $59,200

In order to represent their capital gain, the Smiths only need to disclose $59,200 (instead of $200,000) on their income tax return.

Sometimes a Retrospective Valuation for Capital Gains Tax is required

Refer <Retrospective Valuation>.

Family Law Valuation: a Brief Overview

When is a Family Law valuation required? There are a lot of crucial aspects to take into account and actions to take when parties attempt to resolve their financial relationship after a separation. One of them is to have the parties' respective property valued. 

Family law courts have the authority to impose any just and equitable orders they see fit. If the Family Court is asked to decide how to divide the parties' marital assets, one thing it must assess is whether to use its discretion to do so. Whether there is a disagreement about the value of the party's important property may determine this.

What If the Parties are at Odds?

The valuation of property can frequently be agreed upon by the parties if a court decides to adjust it between the parties. It is possible to agree on the value of some assets for negotiating purposes, including negotiations during a mediation or dispute resolution process. aluations can be obtained if there is no consensus regarding the value of the property. Parties may agree on a joint valuation in order to determine the value of any property in question. <More>

Family Law Valuation Conditions

It is crucial to understand that any valuation used should be current at the time the parties are attempting to come to a consensus on the division of the property. Orders to complete the parties' financial relationship are based on the value of the property at the time the orders are made. They are not based on the valuation amount that might have been correct when the parties divorced.

It will be required to present the court with proof of a property's value if a case goes to a final hearing and there is no agreement on the value of the property. In order for the valuation to be recognised as evidence before the court, the person presenting it must possess the necessary skills to value the property. 

A Single Expert

This raises the question of whether the parties should each appoint their own valuer or instead, appoint a single expert to prepare a joint valuation. A single expert is a valuer who creates a valuation for the court that can be used as the sole source of value evidence.

A single expert must submit a report that complies with the Family Law Rules when they prepare a valuation that will be used as evidence by a court with Family Law jurisdiction. According to Article 15.5 of the Family Law Rules, the court may, upon request or on its own initiative, order that just one expert witness present their testimony.

Is Expert Evidence Required?

The court may consider the following guidelines when deciding whether to seek expert evidence regarding the value of property.

If the court determines that expert evidence is required, it must then determine whether such evidence should consist of only a single expert's opinion. The court will consider whether the matter belongs within a highly established body of knowledge and whether it is necessary for the court to have a variety of viewpoints when making its decision. In general, the Family Court will only appoint one expert.

The parties may choose to ask questions or seek clarification of the expert's findings after receiving the report of a single expert witness. The parties have 21 days to submit written queries or hold a meeting with the single expert.

A party may not submit a report or introduce the evidence of a different expert on the same issue without the court's approval if only one expert has been designated by the court to prepare a report or provide evidence on it. A party could still be dissatisfied with the valuation, even after asking questions or attending a conference with a single expert. There may still be a significant point of contention, such as whether the single expert employed the appropriate valuation approach.

Why Appoint AskTheValuer to Carry Out a Family Law Valuation for Your Property?

The goal is to ensure that you are not paying a cent more than necessary or getting a cent less than your rightful share in the property settlement. And it will be carried out for you at a reasonable fee in a private and confidential manner.

The Independent Principal Valuer at AskTheValuer who is a very experienced, skillful and knowledgeable professional will perform your family law valuation, either as an independent valuer or a single expert under joint instructions. For more details about the valuer, go to <About>.

How to evaluate a commercial property is an often asked question by commercial real estate agents, potential commercial property buyers or commercial property vendors. The agent requires the commercial property valuation to advise their buyer or vendor client; the buyer requires the same valuation to know that he is not overpaying; and the vendor requires the valuation to know that he is not selling below what the commercial property is worth. 

So, how do you evaluate a commercial property? Although not mandated in the International Valuation Standards (IVS), when two of the three primary methods of valuation used by commercial property valuers are combined, a sound estimate of the value of a commercial property can be evaluated. These two methods are:

When there is little sales data, a commercial property valuation can also use a third method of valuation, that is, the Summation Approach or also known as the Cost Method as a check method to determine the value of the commercial property.

How to Evaluate a Commercial Property - Income Capitalisation Approach

This method bases the property valuation on the projected future rental income plus any recoverable outgoings, and then deducts all unrecoverable outgoings and expenses, including suitable allowances for vacancies, to arrive at the net income from the property. This net maintainable income is a forecast of earnings that are assumed to last in perpetuity and is discounted using an appropriate capitalisation rate (or cap rate) derived from comparable sales evidence.

When addressing the question on how to evaluate a commercial property, when using the income capitalisation method, these two crucial considerations must not be overlooked:

The Income Capitalisation Approach is frequently used as the primary method in a commercial property valuation.

Sales Comparison Approach

Sometimes referred to as a Market Comparison Approach, using this method of commercial property valuation, the value of a commercial property is determined by examining sales data from comparable properties (a.k.a. comps) and comparing those comps with the property being valued.

When assessing the value of commercial real estate using the sales comparison approach, two key considerations are:

The Sales Comparison Approach is frequently used as a secondary method by commercial property valuers when preparing a commercial office valuation.

Cost Method or Summation Approach

This method of commercial property valuation involves the summation of the depreciated replacement cost of improvements (that is, comprising the main commercial building and other ancillary structures and built areas) to the underlying vacant land value to determine the property's value.

This method of commercial property valuation is affected by these three main issues:

<More>

Why appoint AskTheValuer to evaluate your commercial property?

Whatever the purpose, AskTheValuer can provide you with a sound and accurate commercial valuation report. < Find out how AskTheValuer gives you more than a standard valuation >

Retail property valuation is the valuation of retail premises defined by the Retail Leases Act 2003, as a premises that is used entirely or mainly for:

Typical examples of retail properties include:

Although not mandated in the International Valuation Standards (IVS), a retail property valuation usually combines two of the three primary methods of valuation used by retail property valuers to obtain a sound estimate of the value. These two methods are:   

When there is little sales data, a retail property valuation can also use a third method of valuation, that is, the Summation Approach or also known as the Cost Method as a check method to determine the value of the retail property.

Retail Property Valuation - Income Capitalisation approach

This method bases the valuation of the retail property on its projected future rental income plus any recoverable outgoings, and then deducts all unrecoverable outgoings and expenses, including suitable allowances for vacancies, to arrive at the net income from the property. This net maintainable income is a forecast of earnings that are assumed to last in perpetuity and is discounted using an appropriate capitalisation rate (or cap rate) derived from comparable sales evidence.

When conducting a valuation using the income capitalisation method, these two crucial considerations must not be overlooked:

The Income Capitalisation Approach is frequently used as the primary method in the valuation of commercial properties including retail premises.

Sales Comparison approach

Sometimes referred to as a Market Comparison Approach, using this method of valuation, the value of a retail property is determined by examining sales data from comparable properties (a.k.a. comps) and comparing those comps with the property being valued.

When assessing the value of retail property using the sales comparison approach, two key considerations are:

The Sales Comparison Approach is frequently used as a secondary method by retail property valuers when preparing a retail property valuation.

Cost method or Summation approach

This method of valuation involves the summation of the depreciated replacement cost of improvements (that is, comprising the main building and other ancillary structures and built areas) to the underlying vacant land value to determine the property's value.

The method is affected by these three main issues:

The Cost Method or Summation Approach is not suitable for retail properties that form part of their parent building or complex such as a shop lot in a shopping mall or mixed-use building.  

Factors to consider for a Retail Property Valuation

When conducting a valuation, the retail property valuer must consider many factors and it is vitally important to understand these factors, as they will affect the valuation.  Some of these are listed below:

Physical Characteristics

Improvements

Site

Location

Market

Tenancy

Why appoint AskTheValuer to value your Retail Property?

You will be getting more than a 'standard valuation'. A Hidden Value Property Check-Up will be included as a bonus.

< Find out how AskTheValuer gives you more than a standard valuation > 

< Find out what's a Hidden Value Property Check-Up >  

The valuation of your retail property will be performed by the independent Principal Valuer @ AskTheValuer, a very experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. For more details about the valuer, go to <About>.

Industrial real estate valuation can be very complicated due to the large variety of industrial property and the factors that affect their value. Industrial property, a subset of commercial property, includes:

Most industrial properties incorporate an office component or other accommodation, the use of which is incidental to its primary activity. <More>

Although not mandated in the International Valuation Standards (IVS), an industrial real estate valuation usually combines two of the three primary methods of valuation used by commercial property valuers to obtain a sound estimate of the value. These two methods are:   

When there is little sales data, a valuation of an industrial property can also use a third method of valuation, that is, the Summation Approach or also known as the Cost Method as a check method to determine the value of the industrial property.

Industrial Real Estate Valuation - Income Capitalisation Approach

This method bases the valuation of the industrial property on its projected future rental income plus any recoverable outgoings, and then deducts all unrecoverable outgoings and expenses, including suitable allowances for vacancies, to arrive at the net income from the property. This net maintainable income is a forecast of earnings that are assumed to last in perpetuity and is discounted using an appropriate capitalisation rate (or cap rate) derived from comparable sales evidence.

When conducting an industrial real estate valuation using the income capitalisation method, these two crucial considerations must not be overlooked:

The Income Capitalisation Approach is frequently used as the primary method in an industrial real estate valuation.

Sales Comparison Approach

Sometimes referred to as a Market Comparison Approach, using this method of valuation, the value of an industrial property is determined by examining sales data from comparable properties (a.k.a. comps) and comparing those comps with the property being valued.

When assessing the value of industrial property using the sales comparison approach, two key considerations are:

The Sales Comparison Approach is frequently used as a secondary method by industrial property valuers when preparing an industrial real estate valuation.

Cost Method or Summation Approach

This method of industrial real estate valuation involves the summation of the depreciated replacement cost of improvements (that is, comprising the main building and other ancillary structures and built areas) to the underlying vacant land value to determine the property's value.

This method of industrial real estate valuation is affected by these three main issues:

Factors to Consider for an Industrial Real Estate Valuation

When conducting an industrial real estate valuation, the property valuer must consider many factors and it is vitally important to understand these factors, as they will affect the valuation.  Some of these are listed below:

Physical Characteristics

Improvements

Site

Location

Market

Tenancy

Why Appoint AskTheValuer to Carry Out an Industrial Real Estate Valuation?

You will be getting more than a 'standard valuation'. A Hidden Value Property Check-Up will be included as a bonus.

< Find out how AskTheValuer gives you more than a standard valuation > 

< Find out what's a Hidden Value Property Check-Up >  

The valuation of your industrial property will be performed by the independent Principal Valuer @ AskTheValuer, an experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. <For more details about the valuer>.

A commercial office valuation is essential to commercial real estate agents, potential commercial property buyers or commercial property vendors. The agent requires the assessed value of the commercial office to advise their buyer or vendor client; the buyer requires the valuation to know that he is not overpaying; and the vendor requires the valuation to know that he is not selling below what the commercial office is worth. 

Although not mandated in the International Valuation Standards (IVS), when two of the three primary methods of valuation used by commercial property valuers are combined, a sound estimate of the value of a commercial property can be evaluated. These two methods are:

When there is little sales data, a commercial office valuation can also use a third method of valuation, that is, the Summation Approach or also known as the Cost Method as a check method to determine the value of the commercial property.

Commercial Office Valuation - Capitalisation Approach

This method bases the valuation of a property on the projected future rental income plus any recoverable outgoings, and then deducts all unrecoverable outgoings and expenses, including suitable allowances for vacancies, to arrive at the net income from the property. This net maintainable income is a forecast of earnings that are assumed to last in perpetuity and is discounted using an appropriate capitalisation rate (or cap rate) derived from comparable sales evidence.

When conducting a commercial office valuation using the income capitalisation method, these two crucial considerations must not be overlooked:

The Income Capitalisation Approach is frequently used as the primary method in the valuation of a commercial office.

Sales Comparison Approach

Sometimes referred to as a Market Comparison Approach, using this method of valuation, the value of a commercial property is determined by examining sales data from comparable properties (a.k.a. comps) and comparing those comps with the property being valued.

When conducting a commercial office valuation using the sales comparison approach, two key considerations are:

The Sales Comparison Approach is frequently used as a secondary method by commercial property valuers when preparing a valuation of a commercial office.

Cost Method or Summation Approach

This method of valuation involves the summation of the depreciated replacement cost of improvements (that is, comprising the main commercial building and other ancillary structures and built areas) to the underlying vacant land value to determine the property's value.

The valuation method is affected by these three main issues:

Why appoint AskTheValuer for your Commercial Office Valuation?

You will be getting more than a 'standard valuation'. A Hidden Value Property Check-Up will be included as a bonus.

< Find out how AskTheValuer gives you more than a standard valuation > 

< Find out what's a Hidden Value Property Check-Up >

The valuation of your commercial office will be performed by the independent Principal Valuer @ AskTheValuer, a very experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. For more details about the valuer, go to <About>.

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Commercial property rent review clauses are standard in almost all commercial or retail property leases. This clause(s) outline how the rent will be increased once every year and at the start of a new term (if any). Some lessors and lessees may find these provisions complex and difficult to comprehend.

If a thorough evaluation of the rent amount and how it can vary throughout the term of the lease is not carried out, entering into a lease can be risky.

There are three common methods for a commercial property rent review, namely:

(1)  Fixed Percentage Increase

A commercial property rent review based on a fixed percentage increase is a set rent increase that occurs on specific times during the lease term, known as a "fixed percentage increase review." This usually happens on the anniversary of the lease's start date. In practical terms, this means that every year on the anniversary of the commencement date, the rent will rise by the amount of the fixed review. This sum typically ranges from two to five percent of the current annual rent.

(2)  Increase Based on the Consumer Price Index (CPI)

A commercial property rent review based on the consumer price index (CPI) is directly related with changes in the CPI which is a measure of inflation. It is implemented in accordance with an arithmetic formula found in the lease that is usually based on the city or state where the premises are located. The CPI for each Australian location is published by the Australia Bureau of Statistics (ABS).

(3)  Market Rent Review

A market rent review means that the rent for a property will adjust to reflect the state of the market. Typically, market rent reviews are not carried out during the lease term. If the lease has an option for a further term(s), a market rent review will usually occur if the lessee decides to exercise the option. This will kick off the provisions for market rent review, allowing the rent to be "reset" to match the market at the start of the subsequent term.

However, some landlords would insert a "ratchet clause" in the lease to prevent market declines. This provision states that the reviewed rent cannot be less than the rent in the current term. Ratchet provisions in retail leases are prohibited by Australian law. Commercial leases, however, do not contain such prohibition.

Pros & Cons of the 3 Commercial Property Rent Review Methods

(1)  Fixed Percentage Increase

Pros

A fixed rent increase is usually simple to calculate and impose. There is therefore limited room for disagreements. On each of the dates mentioned, the predetermined percentage increase is automatically applied.

A commercial property rent review with a fixed percentage increase also gives the lessee and lessor security. Both can budget accordingly because they are fully aware of the annual rent increases.

Cons

If the rent at the start of a lease was a high fixed rate or if an inherited lease has a high fixed rate (transferred from the previous owner of the business that was purchased), a costly situation would arise for the lessee. The lessee could try to negotiate a lower percentage rent rate. However, market forces (that is, supply and demand) will typically determine the final rent amount. Currently, a percentage rent increase rate could range from 2% (which is about equal to the consumer price index) and 5% (which is on the high side of the market). This applies to a lessor who finds that the annual fixed increases are below market rental rates.

Another drawback of a fixed rent increase is that rent may increase disproportionately to the growth of the business if the economy undergoes a downturn or recession when a high rate of increase is paid (for example, 5%).

Another drawback is that if there is an economic slowdown or a recession at the time the lessee is paying a high rate (example 5%), the rent may increase disproportionately to the growth of the lessee's business

(2)  Increase based on the Consumer Price Index (CPI)

Pros

The most equitable commercial property rent review method for a lessee is CPI. This is because the reviewed rent:

Cons

Most lessors with highly sought-after commercial properties would be hesitant to accept this approach. This is because it:

In order to deal with this, many lessors will either:

(3)  Market Rent Review

Pros

A market rent review may have advantages and disadvantages for both the lessor and lessee. This is due to the fact that market movements are unpredictable. Rents might go down if the market does not change or even declines. The rent will increase in line with the market, and it may even end up costing less overall than a fixed price increase. Additionally, rather than the lessor, an independent expert valuer often determines market rentals (unless the market rent has otherwise been agreed between the lessee and the lessor).

Cons

In some markets, the market rent can rise quickly, which would make budgeting for your rent more difficult. Additionally, any rapid growth in the market may result in rent that is substantially more than it was earlier. If the lease is to be assigned, this could also have consequences.

Additionally, determining the market rent can be expensive and time-consuming. The lessor or the lessor's agent will first conduct a market review and inform the lessee of the findings. If there is disagreement between the lessor and lessee with the lessor's review of the market rent, an independent professional valuer might be required to evaluate the results.  If an additional valuation is required, it will incur extra costs.

In some cases when the requested rent increase was modest, the expense of determining the market rent outweighs the advantage of the rent increase.

<More>

Why appoint AskTheValuer for your Commercial Property Rent Review?

The rent review of your commercial property will be performed by the independent Principal Valuer @ AskTheValuer, a very experienced, skillful and knowledgeable professional who has done numerous such valuations in over 15 years. For more details about the valuer, go to <About>.