Internal rent is a form of

transfer pricing In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort ...

where a company owning its own premises forces single

departments Department may refer to: * Departmentalization, division of a larger organization into parts with specific responsibility Government and military *Department (administrative division), a geographical and administrative division within a country, ...

in that company to pay

rent Rent may refer to: Economics *Renting, an agreement where a payment is made for the temporary use of a good, service or property *Economic rent, any payment in excess of the cost of production *Rent-seeking, attempting to increase one's share of e ...

for the

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

they use. This is typically organized by one department—the holding department—functioning as a

landlord A landlord is the owner of a house, apartment, condominium, land, or real estate which is rented or leased to an individual or business, who is called a tenant (also a ''lessee'' or ''renter''). When a juristic person is in this position, ...

, while the other departments—the occupying departments—functioning as

tenants A leasehold estate is an ownership of a temporary right to hold land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord. Although a tenant does hold rights to real property, a l ...

. One study lists two advantages with internal rents: * It requires the occupying department to "contribute" an amount to the business equivalent to the

open market The term open market is used generally to refer to an economic situation close to free trade. In a more specific, technical sense, the term refers to interbank trade in securities. In economic theory Economists judge the "openness" of markets a ...

rental value of the space that it occupies. This prevents the treating of space as a

free good A free good is a good that is not scarce, and therefore is available without limit. A free good is available in as great a quantity as desired with zero opportunity cost to society. A good that is made available at zero price is not necessarily a ...

and, as an individual

profit centre A profit center is a part of a business which is expected to make an identifiable contribution to the organization's Profit (accounting), profits. Overview A profit center is a section of a company treated as a separate business. Thus profits ...

, each department will then rationalise its holdings to minimise its costs. * The second advantage is from a strategic viewpoint: by charging an

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that ca ...

rent, the holding department can identify the performance of its real estate holdings. This can then be compared to an internal or external benchmark to help determine whether the company has adopted the most efficient tenure pattern for its properties.

References

Renting {{Realestate-stub