Market rent adjustment
A market rent adjustment restates the rent a business actually pays, for example to an owner or a related company, to what the space would cost on the open market. BDC lists non-market rent among the items adjusted for in an adjusted EBITDA.
When the owner holds the property personally, or the landlord is a family company, the rent in the books may not be what an outsider would pay. BDC names non-market rent as one of the items adjusted for when bankers and valuators restate EBITDA. The adjustment can move earnings either way, depending on whether the rent paid was above or below market.
What “market” means
The CRA defines fair market value generally as the highest dollar value you can get for your property in an open and unrestricted market between an informed and willing buyer and an informed and willing seller who are dealing at arm’s length. The adjustment borrows that arm’s-length idea for rent. It is a judgment, so the basis needs to be shown.
What to check or ask
- How the market figure was reached, and by whom
- Whether there is a written lease, and how long it runs
- Whether the new owner would sign the same lease after closing
Start with related-party transactions and the answer on below-market related-party rent.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentWhat is EBITDA?
- 02Canada Revenue AgencyGovernmentRental Income
- 03Business Development Bank of CanadaGovernmentHow to value a business you’d like to acquire
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