Rack-Rent

Rack-rent is the full market rent a property can command. A property is rack-rented when the rent the tenant currently pays, the passing rent, equals its market rental value. The distinction decides which rent a gross rent multiplier is built on, and whether the multiplier describes the property as it is or as it could be.

A GRM on passing rent describes the income you will actually collect until the lease resets. A GRM on market rent describes the property's potential. On a $500,000 property leased at $3,500 in a $4,000 market, the two multipliers are 11.9 and 10.4. Buyers pay somewhere between, depending on when the reset comes.

Sellers quote the market figure; buyers should underwrite the passing figure and treat the gap as upside that arrives later. When the lease is above market, the reverse applies and the passing-rent GRM flatters the property until it resets. Either way, ask which rent a multiplier was built on before comparing it to anything.

In valuation, rack rent is the market rent a valuer applies to the property, not the passing rent the tenant pays today. A leased property is valued in two parts: the passing rent until the lease ends, then the rack rent once it resets.

A property already let at its rack rent needs no reversion adjustment, so one multiplier on the passing rent values the whole interest. On a $500,000 property leased at $3,500 in a $4,000 market, the rack-rent grm is 10.4 and the passing-rent grm is 11.9, and the gap is the reversion. Ask which rent a quoted multiplier was built on before treating it as a valuation input.