New Rates Act could result in double loss for landlords
08-03-2005
When the new Property Rates Act of 2004 comes into effect in a few months’ time, property valuers will be explicitly prohibited from considering the impact of existing leases on market value, unless those leases are registered at the deeds office. In reality, only a fraction of property leases are registered, and there is no reason to believe that this pattern of non-registration will change.
To commercial and industrial landlords, this could mean that if they sign a long lease at below market rentals — or with an escalation rate that turns out to be below the market-rental growth rate — it could turn out to be doubly costly, warns Rode & Associates chief valuer Karen Scott. Apart from the obvious cost of owning a lease that is below market levels, the landlord will in addition have to pay rates and taxes that are higher than what the cash flow warrants. This is so because the "market value" calculated by the municipal valuer would be based on the higher market rental levels.
Thus, in the case of long leases that are not going to be registered, landlords can adopt either of the following tactics to avoid such a situation:
- Frequent reversions to market rentals (say, every three years).
- Indexation of the rental to a market-rental index.
Both these approaches would be safer — and fair to both landlord and tenant — compared to long leases with fixed escalations.
The flip side of the coin would obviously apply if a property owner should secure a long lease that remains above market rental, because he would then reap the double benefit of super rental income and relatively low property rates and taxes.
