13 Jan Which Rent Comparable Data is Best – Just Leased, Pending/Most Likely or Asking for Lease for the Income Approach?
In a recent Linkedin group discussion, Avison Young broker and investment advisor, Tony Kim, provides illuminating insights into establishing the most accurate market lease analyses for appraisal and/or formulating client advisory:
“For general appraisals in Los Angeles & other counties in the Southern California market, there is still quite a spread differential for asking for lease vs. completed just leased rent comparables, typically a difference of 20% exists and asking is typically the maximum ceiling. In the Orange County submarket, need to be aware of substantially lower base rent teaser rates during the first year only of the lease and these should also be looked at regarding concessions and overall net effective rent.
“Client requirements vary for a solid rent study & analysis in the Income Approach, 6 total lease comparables are ideal with a mix: 4 to 5 completed, 1 asking and 1 to 2 pending or most likely. Nationwide lenders would like to see 4 signed minimum.
“I would first rank pending or most likely based upon asking which is generally the best indicator as a lease is out for signature and very accurately reflects real time market activity and the most current negotiations. 2nd would be just leased actual rent comparables, especially since 3 things need to be looked at: base rent, CAM’s and total rent paid. As property taxes are the main component, can’t just pick a rent based on base rent, overall rent needs to be looked at closely, depending on date purchased, NNN’s can range very widely, high or low for even properties right across the street from each other.
“Marketing period of # of months on the market should be looked at, similar to the sales comparison approach marketing time which is needed when providing a concluded value. If the leased rents are older, more than 18 months prior, a judgement call is needed.
“The reason completed rents are critical is due to actual concessions: free rent, annual increases & TI’s that can’t be obtained from just asking for lease comparables. The more confirmed data leased data the better support and easier the analysis, reasoning and conclusion.
“In order to solidify the concluded rent for the subject property, additional 3 to 4 local submarket expert opinion surveys of subject market rent should also be included from leasing brokers in the immediate submarket with actual discussions and confirmations/verifications just as any rent data utilized is needed.
“In takings, arbitration/eminent domain, the market rent definition is different, highest most probable rent and it is mandatory to have completed rent comparables only which makes sense from a governmental agency standpoint.”