Business Rates Valuation Issues in 2010 Andrew Hetherton MRICS
IRRV (Hons) Business Rates Director GL Hearn
Slide 2
Valuing in a Recession Valuation Assumptions Incentives Market
Conditions Empty Properties Air Conditioning Valuation issues
2010
Slide 3
2010 Revaluation saw a falling market between Antecedent
Valuation Date and List Commencement Date Have to consider the
following: Economic Factors Physical Changes Valuing in a
Recession
Slide 4
Matters to be taken to be as they are assumed to be at 1.4.2010
(a) matters affecting the physical state or physical enjoyment of
the hereditament, (b) the mode or category of occupation of the
hereditament, (c) the quantity of minerals or other substances in
or extracted from the hereditament, (d) matters affecting the
physical state of the locality in which the hereditament is
situated or which, though not affecting the physical state of the
locality, are nonetheless physically manifest there, and (e) the
use or occupation of other premises situated in the locality of the
hereditament. Valuing in a Recession
Slide 5
Antecedent Valuation Date 1 April 2008 Material Day 1 April
2010 What was the impact on rents at AVD, if any? What is the
impact on rental value of any MCCs between AVD and Material Day?
2010 Revaluation and Recession
Slide 6
Reval 2010 and Economic Factors Standing at AVD on 1 April 2008
looking forward in the light of what has happened up to that point
in time, and making reasonable assumptions as to what might happen
in the future, what rental deal might a willing landlord and
willing tenant have agreed?
Slide 7
Compilation Date As properties change over time, it is
important to establish the exact date when the physical
circumstances of the property are taken into account. This is the
material day Where a VO prepares a new rating list this date is the
date the new list comes into force. For R2010 this is 1 April 2010
and is known as the Compilation Date
Slide 8
Adjustment and Analysis Rating is very much about rents. All
RVs are ideally based on rents in the open market Rents paid are
not always on the same basis as for rating Ratings basis is an
annual rent FRI from year to year with a reasonable prospect of
continuance Rents used are normally on a three or five year review
term.
Slide 9
Common Adjustments Rates Service charges Fixtures and fittings
User covenants Premiums Goodwill Fixtures and fittings Key money
Capitalised profit rent
Slide 10
Incentives Many new rental deals are structured so as to keep
the headline (or contractual) rent as high as possible thereby
protecting the landlords reversionary interest. So we have: Capital
contributions Stepped rents Rent frees Other incentives can
include: Shorter leases/flexible lease terms Break clauses Service
charge caps These all need to be adjusted to the equivalent of a
constant rent under the rating hypothesis
Slide 11
Guidance RICS Valuation Information Paper No. 8 The Analysis of
Commercial Lease Transactions VOA Rating Manual Vol 4: Section 5:
Practice Note 1 2010 - Rent Adjustment Case Law Morrison E F (GP)
Ltd v Central Scotland assessor [2004] Retail units in factory
outlet centre correct rate/m2 examination of how to analyse rental
evidence including rent free periods and inducements. It is
therefore correct to base calculations on the periods before the
breaks and not on the full period of the leases. Decision to
analyse to either 5 years if a break or 10 years if not. See table
[2004] RA 112
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Incentives in Detail The RICS/IRRV Red Book Valuation
Information. Paper No. 8 Analysis of Commercial Lease Transactions
provides some guidance on these issues. See para 5.6 Time over
which the incentive should be analysed - It will be recognised that
the landlord will usually contend for the longest time, such as the
full term of the lease, and the tenant the shortest time, such as
the first review. The valuers decision has to be a judgement
between these conflicting claims having regard to the overall
effect of the all the incentives, anticipated rental growth and
knowledge of the market, motivation of the parties and what, in the
real world, the valuer believes might be achieved in an open market
letting on the hypothetical terms.
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Incentives in Detail Example: Lease term 15 yrs with 5 yr rent
reviews 2 yr rent free including 3 months fit out Headline rent
100,000
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Incentives in Detail Depending on the assumptions made the end
figure can vary enormously What was in mind of the Landlord and
Tenant? What was the expected growth in rents? Was it likely FRV
would have reached headline level by first review. Should you
amortise to second review or beyond? A. Amortising to first
review65,000 p.a. B. Amortising to second review82,500 p.a. C.
Amortising to end of lease88,333 p.a.
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Incentives - Conclusion Correct Approach: There is no correct
approach! What is sought is what the tenant would have been happy
to pay as an annual rent but without the rent free period
Ultimately, the valuer needs to stand back and look and use
professional judgement
Slide 16
Key Dates for the Leading Up to the Revaluation 2005 B&Q
announces it is curtailing the development of its Warehouse format
22 June 2007 Bear Stearns reveals it has spent $3.2 billion on
bailout of its hedge funds Ben Bernanke warns that the sub prime
crisis could cost up to $100 bn 6567.45.5%5.94% 4 September 2007
LIBOR historic high6271.25.75%6.8% DATEEventFTSEMLRLIBOR
Slide 17
Key Dates for the Leading Up to the Revaluation 13 September
2007 BBC reveals that Northern Rock has sought and obtained
financial support from the UK Government 6363.95.75%6.88% 17
February 2008 Alistair Darling announces that Northern Rock will be
nationalised 5787.65.25%5.65% 1 April 2008Antecedent Valuation
Date5852.65.25%6.00% 26 September 2008 Rosebys placed into
Administration 5159.75%6.26% DATEEventFTSEMLRLIBOR
Slide 18
Key Dates post the AVD BUT prior to the Material Day 6 November
2008 B of E cuts interest rates by 1.5% to 3%. Euro zone, Russia,
US, Japan are now all officially in recession 4272.43%5.56% 26
November 2008 MFI into administration Woolworths the next day
4226.13%3.93% 24 December 2008 Zavvi placed in Administration 5
February 2009 Bank of England cuts rates 3529.90.5%2.14% 17 July
2009 Allied Carpets placed into Administration 4388.80.5%0.96%
DATEEventFTSEMLRLIBOR
Slide 19
The Market - Before AVD Upsize or Downsize looking for a more
flexible trading format Surrender of stores as a whole that are not
working or the re-let/assignment/sublet of Standard DIY size format
falling to typically to 20-30,000 sq ft MFI are reviewing the whole
portfolio ready for a possible sale Focus want to hive off part of
their larger stores either through division or by concessions
Experimentation for some retailers with different trading formats
such as mezzanine floors A trend for shorter leases Creating Asset
Value The creation of PODS to enhance asset value Drive Thru
Convenience and Food Increase in demand for smaller out of town
units with high street moving out of town
Slide 20
The Market - Before AVD Uncertainty due to doubts as to the
strength of occupier demand By Summer 2007 a change in confidence
Renegotiation of rental values Some very desirable parks withdrawn
from the market Incentives including capital contributions and rent
free periods increase A Tenants market ? real lending rates almost
doubling, the first signs of the residential market cooling, a
credit crunch due to the collapse of the sub prime mortgage market
(ie rubbish lending) in America and the possible downturn of retail
spending does not look too rosy for investors Graham Chase Chase
& Partners Dec 2007
Slide 21
Market Activity in 2008 The concept of vacant / void becomes
increasingly important as a result of Rating (Empty Properties) Act
2007 effective from 1 st April 2008 An increase in Turnover related
rents Large incentives for the right tenants to occupy large space
Discussion continue with financiers and landlords to renegotiate
terms: Switching to monthly rents Rent holidays, Reducing rent for
a period or even for the rest of the lease Pre Pack has become
common place The momentous impact of the crash of Lehman Brothers
and the worlds financial stability really start to come be seen as
reality
Slide 22
Market Changes - PRE AVD The market changes but we need to
consider how to interpret these changes taking into account the
statutory assumptions. Take a out of town retail park, which has
been impacted by a new edge of town scheme with a range of fashion
and bulky goods
Slide 23
Market Activity Post AVD / Relevant to Material Day Post AVD
but at Material Day The market reflects the empty space available
but also reflects the changes in demand 2006 Evidence was
supporting a falling market Heads of Terms agreed on a range of
units 12-36 months rent free Significant Capital Contributions
Market Analysis supports levels at 50% of the proposed 2010 List
assessment
Slide 24
Market Changes pre AVD Source Trevor Wood Associates
Slide 25
The issues of a Revaluation Appeal Reviewing the range of
rental evidence pre AVD, around AVD and post AVD The onus is very
much on the appellants to demonstrate why the VOA approach is
incorrect. Considering changes in occupancy and number of voids
Looking at shifts in retail patterns, retail mix and other changes
such as closure of key retail draw
Slide 26
Retail The VOA are clear that the onus is very much on the
appellants to demonstrate why the VOA approach is incorrect.
Coordination continue to be critical to review and evaluate the
range of rental evidence
Slide 27
Average Rental Value Growth % (c) Investment Property Databank
Ltd, all rights reserved
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Analysis and Adjustment of Rents In a Changing Market
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Offices West End City M25/Golden Triangle Provincial
Centres
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Warehouses/Distribution Too much supply Predates the
recession
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Warehouse/Distribution
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Impact of Empty Properties Act 2008 Increased propensity to
demolish Reduced supply will push up rents Where there is no market
theres no effect on value?
Slide 33
Material Changes of Circumstance Retail over supply where is
it?
Slide 34
Air Conditioning Valuation Issues for 2005/2010 Air
Conditioning systems are a rateable item of plant and machinery and
are valued as part of the rating assessment of any property where
installed. In retail properties these are normally installed by the
tenant and are therefore not reflected in the rent for the
property. Because of this there has been a long running issue with
way the Valuation Office has valued air conditioning. In the 2005
List the Valuation Office adopted an approach which applied a value
of 7 psm for high street properties and a rate of 5% addition to
the basic price for out of town retail properties. GL Hearn has
been concerned about the revised approach and has led the way in
challenging this issue at a number of Tribunal hearings although
the Valuation Officer sought to appeal to the Upper Chamber (Lands
Tribunal).
Slide 35
Air Conditioning Valuation Issues for 2005/2010 The first case
concerns the valuation of A/C in Next at Moorgate A complex case
that involved analysis of rental information that included air
conditioning in the rent. The matter was also complicated by a
surrender and renewal Valuation Officer sought a figure based on
11.35 psm at the second hearing GL Hearn sought a figure of 3.75
psm Detemined by VT at 4.35 psm
Slide 36
Air Conditioning Valuation Issues for 2005/2010 The second
concerns the valuation of A/C at Currys at Batley Basic Price 250
psm reduced from 300 psm Valuation Officers addition 12.50 VT
determined 2.79 psm
Slide 37
Air Conditioning Valuation Issues for 2005/2010 In both cases
the Valuation Officer appealed to the Upper Chamber (Lands
Tribunal) A considerable amount of work has now resulted in
agreement by Consent from the Upper Chamber. High Street Shops: A
rate of 7 psm based on optimum coverage ie 13.5kw cassette covers
85m 2 if the optimum coverage is not met 7 psm for the area
affected Retail Warehouses: A rate of 4 psm based on optimum
coverage for both cassette and ducted systems for cassette based
systems again the optimum coverage assumption to be applied. ie
2800 sq m with 6 cassettes would result in 625/2800 x 4 psm 0.75p
psm