Internal rent is a form of transfer pricing

Transfer pricing

Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property . Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other...

 where a company owning its own premises forces single department

Departmentalization

Departmentalization refers to the process of grouping activities into departments.Division of labour creates specialists who need coordination. This coordination is facilitated by grouping specialists together in departments....

s in that company to pay rent

Renting

Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...

 for the real estate

Real estate

In general use, esp. North American, 'real estate' is taken to mean "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; an item of real property; buildings or...

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

Landlord

A landlord is the owner of a house, apartment, condominium, or real estate which is rented or leased to an individual or business, who is called a tenant . When a juristic person is in this position, the term landlord is used. Other terms include lessor and owner...

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

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
  Open market
  The term open market is used generally to refer to a situation close to free trade and in a more specific technical sense to interbank trade in securities.-Use of the term in economic theory:...
  
   rental value of the space that it occupies. This prevents the treating of space as a free good
  Free good
  Free goods are what is needed by the society and is available without limits. The free good is a term used in economics to describe a good that is not scarce. A free good is available in as great a quantity as desired with zero opportunity cost to society....
  
   and, as an individual profit centre, each department will then rationalise its holdings to minimise its costs.
• The second advantage is from a strategic viewpoint: by charging an asset
  Asset
  In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
  
   rent, the holding department can identify the performance of its real estate holdings. This can then be compared to an internal or external benchmark
  Benchmarking
  Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost...
  
   to help determine whether the company has adopted the most efficient tenure pattern for its properties.