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I am auditing a fund that is leased to a related party. The fund has entered into a 5 year lease agreement that does not allow for annual rent increases to either CPI or market value during the 2022 year. When the lease was entered into, the rent was at the bottom end of market value at $120 per acre (property is 445 acres). Market rate rent for the 2023 year for comparable land is been between $150-190 / acre. Would this be considered to be on commercial arm's length terms? Is there a potential concern for NALI and also the business real property exemption?
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Hi Lacey,
As the property is leased to a related party a rental appraisal from an agent or valuer should have been obtained by the trustees to support the rental per the lease agreement.
If no such appraisal was obtained one should still be able to be obtained that should be able to refer to the earlier time period when the lease was signed. This appraisal will determine if arm's length rental is being paid.
If it is common for such leases to be drafted with no CPI or market value increases over a 5 year period then the trustees should be able to argue that this is consistent with an arm's length rental agreement. Again preferably the agent or valuer would comment on this.
Thanks
The Auditors Institute