Market is rent is often requested by lenders to better understand debt servicing ratios. Market Rent can be given to most self-contained living units, given they have private access, a full working kitchen and bathroom. This is easy enough for apartment units, townhomes, and single family homes. But what if the home has a suite, or two suites? Let Jerry Seinfeld explain it.
What’s the deal with market rent for illegal or unauthorized suites?
- 4 Important Facts: (as per Appraisal Institute of Canada)
- Appraisers can provide market rents for a basement suite if the zoning allows for a secondary suite
- The suite does NOT have to be legal – it can be an illegal suite
- If the zoning does NOT allow for a secondary suite, no rent can be provided
- If the property has 2 suites, but the zoning allows for 1, only 1 rent can be provided
I hope this clears things up. The Appraisal Institute provides clear instructions on how to handle all rental situations. If you are having issues with your appraisal and believe the appraiser to be acting contrary to these guidelines, please contact Appraisal Institute of Canada for a review.
Here is the full summary from the Appraisal Institute of Canada.
Illegal Suites
Question: How do I address illegal suites and their rent in my report?
Answer: There are four potential scenarios a member may encounter where a suite exists in a single-family residential property.
- A Suite is Permitted by Local Zoning Bylaws
If:
suites are permitted by local zoning bylaws
Then:
a member must determine if the subject suite was constructed following the local building permit process
If:
the local municipal authority indicates that the suite was constructed with proper permits
Then:
this suite is considered a legal suite and a member may provide a market rent analysis for the suite
- A Suite is Permitted but Does Not Meet Local Building Permit Process
If:
suites are permitted by local zoning bylaws but the subject property’s suite was not constructed following the local municipal building permit process
Then:
a member may invoke a Hypothetical Condition and Extraordinary Assumption that this suite was constructed legally and may complete a market rent analysis for the suite. Per CUSPAP 7.10.5, a member must clearly note throughout the report the assumptions and conditions applied and that their absence would result in a different value
- Local Zoning Bylaws Do Not Permit Suites but Likelihood of Change
If:
local municipal zoning may not currently permit the presence of suites in residential properties, but there exists a good possibility that local bylaws may change, thus permitting suites, or a variance could be obtained permitting the presence of a suite in the subject property
Then:
a member may invoke a Hypothetical Condition and Extraordinary Assumption that this suite was constructed legally and may complete a market rent analysis for the suite. Per CUSPAP 7.10.5, a member must clearly note throughout the report the assumptions and conditions applied and that their absence would result in a different value
- Local Zoning Bylaws Do Not Permit Suites and No Likelihood of Change
If:
Local zoning does not permit the presence of suites and there is minimal to no likelihood that this will change in the foreseeable future.
Then:
a member should not provide a market rental analysis of the subject suite
In a Report:
Members should note if:
- a property contains a suite
- local zoning bylaws permit legal suites
- the local municipal office indicates the subject suite was approved and developed through the appropriate permit process
Members may also note:
- the rent the suite currently receives
*this is not an opinion of market rent, but a note of the suite’s factual current rent
Bear in Mind
An illegal rent does not reflect the Highest and Best Use of a property; market value is premised on Highest and Best Use. AIC members are advised not to provide a market rental analysis for an illegal suite because this would not reflect market value.
In some situations, providing an analysis of market rent for an illegal suite can be contrary to CUSPAP and may invalidate a member’s insurance coverage.
Alternatives
A Member may still be able to complete a Consulting Report that provides information on market rents for legal suites in similar properties within the area in which the subject property is situated.
The Member would complete and provide their client with two reports:
- an appraisal report for the dwelling and
- a Consulting Report for the market rents in the neighbourhood.
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