Fair Market Rent vs Market Rent
Fair Market Rent vs Market Rent
Although the terms “fair market rent” and “market rent” share similar wording, their definitions are quite contrasting and can lead to materially different rental outcomes. Market rent is a more commonly used basis of valuation than fair market rent, which is often used colloquially to mean “fair” “market rent” instead of “fair market rent.”
Fair Market Rent Definition
Fair market rent is not defined by the International Valuation Standards Committee (IVSC) however, it is defined by the Australian Property Institute (API). The API defines fair market rent as “The rent that would be fair for the particular landlord and particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them of a new rent from the review date.” The API states further with regards to fair market rent, “The test is largely subjective. ‘Fair market rent’ is considered to be different from ‘current market rent’ to take into account what is reasonable between the actual parties to the lease.” The API defines fair market rent upon their website and within guidance paper AVGP 301 – Rental Valuations and Advice.
Market Rent Definition
Market rent is defined by the IVSC as “the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
Key differences between Fair Market Rent and Market Rent
Some of the differences between fair market rent and market rent are as follows:
Market rent assumes an arm’s length transaction whereas fair market rent considers the particular landlord and tenant to the negotiations. Further, fair market rent takes into account all circumstances relevant to any negotiations between the specific landlord and tenant of a new rent from the review date.
Market rent assumes parties acting “knowledgeably, prudently and without compulsion” whereas fair market rent does not assume parties acting knowledgeably, prudently and without compulsion.
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