Comparing net with gross rents

Abstract

In some circumstances, property valuers (appraisers) must compare net and gross rents. Suggests a number of ways in which this can be done and describes the difficulties of adjusting rents to reflect the liability for property operating costs. Outlines several reasons why the equivalent gross rent is often not the sum of the net rent and the operating costs (the principal reason being the unwillingness of either the landlord or the tenant to bear the uncertainty of these costs). There may also be difficulties in estimating expected operating costs over the period of the lease. Contends that the evidence of recent lettings will rarely enable the valuer to isolate the effect of the basis of leasing on the rents. The views of landlords and tenants on switching from gross to net rents are often unclear. Outlines a single‐period theoretical model of the expected adjustment between gross and net rents (based on compensation for bearing the risks of the running costs). However, there are grave dangers in the valuer adopting such a model which may not reflect market practice. It is no more reliable than resorting to an arbitrary rule of thumb. As well as rental valuations, counselling and advice on lease negotiations may require that the difference between gross and net tenancies is considered. With international comparisons of rental levels becoming more important to footloose businesses, there is a growing need for methods of adjusting rents to reflect the lease conditions that prevail in different countries. Appendices illustrate a theoretical model of rental adjustment and show adjustment methods in practice.

Citation

Rowland, P. (1996), "Comparing net with gross rents", Journal of Property Valuation and Investment, Vol. 14 No. 3, pp. 20-32. https://doi.org/10.1108/14635789610118262