A.CRE

In-place Rent

In-place Rent is the rent being charged/collected on existing leases at a property. In contrast to Market Rent, in-place rent is not based on market conditions but rather is based on the lease contract signed between the landlord and tenant.

Also see: Contract Rent.

Putting “In-place Rent” in Context

Scenario:

Blue Ridge Capital Partners, a real estate investment firm specializing in value-add acquisition investments, has identified an opportunity to purchase Glenwood Office Park, a 150,000-square-foot suburban office property located in Raleigh, North Carolina. The property is 85% leased, with a mix of small to mid-sized tenants occupying suites ranging from 2,000 to 10,000 square feet.

Background:

Glenwood Office Park was built in the early 1990s and has been well-maintained, but the current ownership has not invested in significant renovations in the past decade. This has led to some tenants paying below-market rents, as lease agreements were signed several years ago when market conditions were less favorable. Blue Ridge Capital Partners sees this as a value-add opportunity, where they can renovate common areas and amenities, re-lease vacant space, and potentially increase rents as leases roll over.

In-place Rent Analysis:

As part of the due diligence process, the Acquisitions Associate at Blue Ridge Capital Partners conducts a thorough analysis of the current rent roll. The average in-place rent at Glenwood Office Park is $22 per square foot, which is based on the leases currently in effect. In contrast, market rent for similar office spaces in the Raleigh suburban market has risen to approximately $28 per square foot over the past few years, reflecting stronger demand and limited supply of quality office space in the area.

Implications for the Investment:

The difference between in-place rent and market rent presents a significant upside for Blue Ridge Capital Partners. For example, if they can bring the in-place rent closer to market rent through strategic lease renewals and tenant improvements, they stand to significantly increase the property’s Net Operating Income (NOI).

Here’s a simplified calculation:

  • Current Annual Rent (In-place Rent):
    127,500 SF (leased space) * $22/SF = $2,805,000 per year
  • Potential Annual Rent (Market Rent):
    127,500 SF * $28/SF = $3,570,000 per year
  • Potential Increase in Annual Rent:
    $3,570,000 – $2,805,000 = $765,000 per year

By increasing the in-place rent to market levels, Blue Ridge Capital Partners could potentially enhance the property’s value by increasing NOI, which would lead to a higher valuation upon sale or refinancing.

Conclusion:

In this hypothetical case, “In-place Rent” is a key metric that highlights the potential value-add opportunity at Glenwood Office Park. Understanding the disparity between in-place rent and market rent allows the investment team at Blue Ridge Capital Partners to quantify the upside and structure their investment strategy accordingly.

Frequently Asked Questions about In-Place Rent in Real Estate Investment

In-Place Rent is the rent being collected on active lease agreements at a property. It is based on contractual lease terms, not current market conditions. It is also referred to as Contract Rent.

In-Place Rent reflects what tenants are currently paying under existing leases. Market Rent reflects what landlords could charge today based on current market conditions. The difference between the two can indicate value-add potential.

The average in-place rent at Glenwood Office Park was $22 per square foot, according to the current rent roll reviewed by Blue Ridge Capital Partners.

The market rent for comparable suburban office space in Raleigh had risen to approximately $28 per square foot.

Blue Ridge calculated the potential rent uplift as follows:

Current Rent: 127,500 SF × $22 = $2,805,000/year

Market Rent: 127,500 SF × $28 = $3,570,000/year

Potential Rent Gain: $3,570,000 – $2,805,000 = $765,000/year

Analyzing in-place rent helps investors identify underperforming assets where existing leases are below market. This creates an opportunity to increase Net Operating Income (NOI) as leases renew or roll over at higher rates.

They targeted a value-add strategy by acquiring a well-located but under-rented office property, with plans to renovate, re-lease vacant space, and capture rental upside as leases renew closer to market rent.

In-Place Rent is also known as Contract Rent, as it reflects the rent specified in legally binding lease agreements currently in effect.

Synonyms:
Contract Rent
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