Contract Rent
Sometimes referred to as In-Place Rent, Contract Rent is the rent being charged/collected on existing leases at a property. In contrast to Market Rent, contract rent is not based on market conditions but rather is based on the lease contract signed between the landlord and tenant.
Putting ‘Contract Rent’ in Context
Scenario:
Newbury Rose Investments, a real estate investment firm specializing in core-plus acquisition investments, has recently acquired a suburban office property named Cambridge Corporate Center in the outskirts of Boston, MA. The property is a 150,000 square-foot Class B office building constructed in the late 1990s, located in a growing suburban area with a mix of corporate tenants and tech startups.
Context:
Cambridge Corporate Center is currently 92% leased, with a diverse tenant mix that includes both long-term leases signed five to seven years ago and newer leases signed within the last 12 months. The average Contract Rent across the property is $32 per square foot per year, which is the rent that is being collected under the existing lease agreements with the tenants.
Market Dynamics:
The suburban Boston office market has seen significant rent growth over the past two years due to increased demand from companies looking to move away from the high costs of downtown Boston. Currently, Market Rent for similar Class B office space in the area is approximately $38 per square foot per year.
Analysis:
The disparity between the current Contract Rent ($32 per square foot) and the Market Rent ($38 per square foot) presents an opportunity for Newbury Rose Investments. As leases come up for renewal, the firm can potentially increase rents to align more closely with the market rates, thereby increasing the property’s Net Operating Income (NOI). This strategy would likely enhance the value of Cambridge Corporate Center over the investment horizon, especially given the rising demand in the area.
Example Calculation:
Assuming a 10,000 square-foot tenant is up for lease renewal:
- Current Contract Rent: $32 per square foot x 10,000 SF = $320,000 per year
- Potential Market Rent: $38 per square foot x 10,000 SF = $380,000 per year
If Newbury Rose Investments successfully negotiates a renewal at market rent, they would increase annual revenue from this tenant by $60,000, directly contributing to an improved NOI and overall property valuation.
Conclusion:
In this scenario, Contract Rent represents the rent currently being collected based on existing leases, while the opportunity lies in bridging the gap between Contract Rent and Market Rent as leases expire or new tenants are brought into the property. Understanding the difference between these two rent figures is crucial for Newbury Rose Investments in executing their core-plus investment strategy and achieving their financial goals with Cambridge Corporate Center.
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