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Sunday, August 10, 2008

Daily Observations - Market Rents

I wanted to share with you an experience that happened to us on Friday, which I trust will be eye-opening for you as well as it was for us.

I have mentioned that when a lender looks at a project they always add additional expenses to determine the bottom Net Operating Income, such as the following:

Tenant Improvement Cost
Leasing Costs
Marketing Cost not necessarily included in the above
Vacancy Factor will be applied even if property fully leased out
Management Fee even if on-site manager is there already, or owner will manage.

But what I never saw before is the following:

The Lender reduced the market rents that are being currently paid, because they felt that if they had to take the property back they would have to lower the rents.

Now I can understand raising the rents because they are below market, but not lowering them when they're at the market. To me the market rate should be the following:

What a willing renter is willing to pay a willing landlord, very similar to the definition of what a market price is for a piece of real estate.

But obviously in this market the lender would not agree.

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