Case Study (submission) Flashcards
What was the date of valuation?
22 January 2020
What was the date of inspection?
8 January 2020
What was the basis of valuation in the instruction letter?
• Market Rent • Market Value • Market Value on the Special Assumption of Full Vacant Possession
What section of the “Red Book” is relevant for valuations for secured lending purposes?
VPGA 2
What additional information must a report for secured lending purposes include?
• Disclosure of any conflicts of interest identified / agreement put in place to avoid a conflict of interest • Valuation methodology adopted • Where a transaction has recently occurred on the Subject Property or been provisionally agreed, the extent to which that has been accepted as Market Value • Comment on the environmental considerations • Comment on the suitability for mortgage purposes • Any circumstances the valuer is aware of that could impact the price
What sections of the “Red Book” did you adhere to?
• PS 1: when does a valuation have to be “Red Book” compliant? • PS 2: must act in accordance with the RICS Professional and Ethical Standards, must act independently by identifying and managing conflicts of interest, must comply with the minimum terms of engagement • VPS 1: minimum terms of engagement • VPS 2: must undertake inspections to verify information being relied upon • VPS 3: minimum requirements to be stated within a report ALSO VPS 4/5! • VPGA 2: valuations for secured lending
What does VPGA 2 state with regards to conflicts of interest?
• Any previous, current or anticipated involvement with the prospective borrower of the property to be valued must be disclosed to the lender • ‘Previous involvement’ usually defined as within the last two years but can be longer
Explain the process of a conflict of interest check?
Check property name and name of the borrower in accordance with VPGA 2
If there had been a conflict, what would you have done?
- Conflict avoidance 2. Written advice to both parties 3. Conflict management
What was contained within the Terms of Engagement?
According to VPS 1, the minimum matters must be included in Terms of Engagement: • Identification and status of the valuer • Identification of the client • Identification of any other intended users • The asset to be valued • Currency • Purpose of the valuation • Basis of value • Valuation date • Extent of investigation (i.e. whether inspection will be conducted) • Nature and source of information to be relied upon • Assumptions and special assumptions to be made • Format of the report • Restrictions for use, distribution and publication • Confirmation of Red Book / IVS compliance • Fee basis • Complaints handling procedure to be made available • Statement that the valuation may be subject to compliance by the RICS • Limitation on liability agreed
What matters may you have discovered during your due diligence that would have adversely impacted on the value of the Property?
• Environmental – if it was located in an area at high risk of flooding (Environment Agency website) • Contamination – if it was situated on a former landfill site (would have commissioned a Groundsure report if necessary) • Planning – if there was planning permission granted which would adversely impact the property (Gateshead Council website) • Lease terms – prolonged lease with no rent review provision would have an adverse impact on the property (Land Registry) • Title Deed - onerous restrictions, encumbrances or outgoings contained within the Title Deed. (did not receive a Report on Title which indicated that there were none, but check the Title which appeared to indicate there were no problems)
What does the “Red Book” state about the inspection of Properties?
According to VPS 2, valuers should take the necessary steps to verify the information being relied upon for a valuation to ensure the information is professionally adequate for its purpose
What was the age and construction of property?
• Constructed in 1999 (who informed me/how did I know?) • Steel portal frame construction with brick and blockwork walls below profile metal sheeting clad upper walls. • Mono-pitched profile metal clad roof incorporating approximately 10% translucent rooflights. • Stretcher bond masonry externally - cavity construction. • Likely a pad slab foundation system (incorporating a raft) to support the concentrated weight of the steel portal columns. • DGMF windows?
What are the common defects associated with this type of property? What would you look for to identify these?
• Roof leaks around roof lights: dripping water (on to floor), stained areas around rooflight, moisture. Could get sun damaged, that would indicate potential leaks. • Damaged cladding panels: dents in panels (plastesol sheeting) • Cut edge corrosion: internal profile construction exposed (metal/insulation), rusting edges as no longer protected by outer plastic coating. • Water damage from poor guttering or burst pipes: become blocked and overflow = damp and discolored patches on cladding and walls. • Settlement/cracking in brick work panels: small hairline cracks (diagonal), if more than 1/4 inch wide could indicate a more serious structural issue. • Subsidence: ground becomes unable to support the load e.g. if drain collapses or a tree is planted = Vertical cracks • Ground heave: ground expands and pushes up as moisture content increases e.g. if trees are cut down or die = Vertical cracks • Blocked valley gutters: not applicable for this building as there are no valley gutters.
How would you describe Team Valley?
• An originally heavy industrial estate developed by the Government in 1930s, under the management of UK Land Estates has evolved to become a modern business park (warehouse/industrial/office/retail) and has been the north-east’s premier industrial (and now business) estate for many years. • Comfortably the regions largest industrial estate, covering 700+ acres and spanning 2 miles north-south. • Strategically positioned in the region: bounded to the west by A1(M) with junctions at both north/south ends, whilst also forming part of the Tyneside conurbation (western edge of Gateshead) and having relatively easy access to both Gateshead and Newcastle city centre (2/3 miles west/south) • Nearest mainline rail station is in Newcastle, 34 buses per hour to Newcastle/Gateshead/wider area. • Mainly private sector employers, over 700 companies employing 20,000 people, ranging from local to national businesses. • Full range of unit sizes from smaller starter units up to large factories, with trade, warehousing and manufacturing occupiers, with skilled and manual and service trade to high end manufacturing and professional services, world leading research and development. • Significant out of town retail provision at Retail World, large Sainsbury’s and Maingate (Premier Inn, retail, gym) smaller number of office users and leisure.
How would you describe the situation of the Property?
• Situated on the western side of Earlsway, one of the main routes running north-south through estate, towards northern end, just to south of junction with First Avenue, which connects to A1 half mile west. • Surrounding properties mainly comprise modern industrial units, with many trade occupiers. (prime part of estate?) • Neighbouring occupiers include Crossling, Aalco, TCM, ATS Euromaster, Park Electrical Distributors and Templeman Retailing and Vending. (which are national tenants?)
How could you tell that the unit was in one of the best parts of Team Valley?
• The best locations in terms of accessibility are at the northern and southern ends (closest to A1), and on the 3 main circulatory roads north to south (Earlsway, Queensway, Kingsway), subject immediately south of First Avenue (north connecting road to A1) and directly off Earlsway. • Additionally, most of the units nearby were modern, built in last 5-30 years, and Earlsway Trade Park c. 100m to the north was recently constructed by UK Land Estates. • Large proportion of national and regional businesses (look up examples if have time).
What is development activity like on Team Valley?
• UK Land Estates continues to refurbish existing premises and build new units for businesses on Team Valley. • Like most of region, little development in recent years. • UK Land developed Dukesway Central (2017) - 10 acre site, 200,000 sq ft industrial contructed. • UK Land marketing Kingsway North (key northern site), first phase will comprise 3 industrial units of 128,000 sq ft., distinctive units with Grade A offices. • Enterprise House currently being redeveloped to provide newly refurbished high quality office space on the first floor, and new retail units on the ground floor (completed Spring 2019?)
Describe the specification of the accommodation?
Main warehouse space: • Minimum eaves height of 5.5m • Single 4.5m electric roller shutter door • Painted block walls to 2.2m • Suspended strip lighting and Powermatic gas fired warm air space heaters. Offices: • Single storey integral offices to front of building, includes WCs, staff kitchen and 4 cellular offices. • Painted concrete floors, plastered and painted walls and ceilings. • Flourescent strip lighting with ceiling mounted air conditioning units. • Double glazed aluminium framed windows. Mezzanine/Shared Space: • Steel frame timber floor constructed over entire floor area. First floor stud framed small office space. • Metal framed stairs to first floor mezzanine. • Access doors constructed into separating wall to adjoining unit at ground and mezzanine levels.
What source of errors are associated with using a laser measuring device?
• Human error – not using the device appropriately i.e. not measuring a horizontal distance • Systematic error – devices should be regularly checked for accuracy of calibration by checking a known distance and recording the results in a log
What did you include / exclude from your GIA measurement of the car showroom accommodation? How did you measure and account for the mezzanine? How did you measure the office space, and how did you consider the proportion?
Gross Internal Area (GIA) is the area of a building measured to the internal face of the perimeter walls at each floor level Exclude: • Perimeter wall thickness and external projections I reported the Gross Internal Area including the mezzanine (10,402 sq ft) as GIA includes mezzanines with permanent access, but for the purposes of the valuation excluded the mezzanine floor area (5,201 sq ft) as I considered it was of limited value to the market at large, and the lease stipulated it’s removal and rectification at lease end. I measured the office space on a GIA basis as they are ancillary to the main industrial use. I reported the ratio to be 18%.
What is Market Rent?
‘The estimated amount for which an interest in real property should be leased’ • On the valuation date • Between a willing lessor and a willing lessee • On appropriate lease terms • In an arm’s length transaction • After proper marketing • When the parties had each acted knowledgeably, prudently and without compulsion
What is Market Value?
‘The estimated amount for which an asset or liability should exchange’ • On the valuation date • Between a willing buyer and a willing seller • In an arm’s length transaction • After proper marketing • When the parties had each acted knowledgeably, prudently and without compulsion
What is Vacant Possession Value?
Market Value of the property under the Special Assumption that the property is vacant
What were the conditions of the rent review clause?
• Review date: 20 December 2024 • Upwards-Only Open Market Rent Review – rent reviewed on what the commercial property would be let for on the open market i.e. if rent assessed as being lower than currently achieved, rent will stay the same • Assumed term of 10 years - could limit rental growth. • Disregard tenant improvements if landlord consent has been granted for the works • Time is not of the essence i.e. failure to exercise right within the time limit means that the right is not lost • That the property is a standalone unit which is the condition of a shell unit (without any mezzanine) (i.e. excluding the fact that is shared with next door, and the tenants works). • Independent Expert determination.
What were the conditions of the break clause?
• Tenant must serve written notice within 6 months of the break date (20 May 2026). • Must have paid Annual Rent due payments.
What is a full repairing and insuring (FRI) lease? What is the Estates Management Charge? What was the charge for Service Road maintenance?
• Tenant has responsibility for all costs of repairs and insurance. • Landlord will also maintain insurance and recover cost of premium from the tenant • ESTATES SERVICES RENT/MANAGEMENT CHARGE: CAN’T FIND IN LEASE, DISCUSS WITH SOMEONE WHAT THIS MEANS, AND WHETHER IT MEANS EFRI? • 25% of the cost incurred by the Landlord in maintaining, repairing and renewing the Service Road. (the service road means the roadway and footpath shown coloured brown on the plan (Craster Court road).
Was the lease inside or outside of the 1954 Act?
• The lease was contracted inside of the act • This would give the tenant security of tenure at the end of term
What would the landlord have to do to terminate the tenancy given that the lease is inside the 1954 Act?
Would have to issue tenant with a Section 25 notice no more than 12 months and no less than 6 months before the date for the termination of the tenancy
What grounds would the landlord have to refuse a new lease from the tenant given that the lease is inside the 1954 Act?
Section 30 states that there are SEVEN grounds for opposition to grant a new tenancy: 1. Breach of repairing covenant 2. Persistent delay in paying rent 3. Other substantial breach 4. Provide suitable alternative accommodation 5. Uneconomic subdivision i.e. landlord could get more from renting out the property as a whole (compensation payable) 6. Demolition or reconstruction (compensation payable) 7. Owner occupation (compensation payable) Would have to compensate tenant 2 x rateable value as they have been in occupation for longer than 14 years
What use class does the property fall under?
• B8 use class (informed by local planning authority website). Lease stated permitted as B1-B8, assumed correct for purposes of valuation given strong relationship between UK Land and Gateshead Council (?). • Therefore planning said Warehouse (granted 1 December 1998) whereas lease said business, industrial and warehouse.
What recent transaction had taken place/what was the current instruction, and what were the terms of the superior lease and head lease?
• Borrower (St Cuthberts Newcastle Estates Limited) had recently made a cash purchase of property, requested valuation from client (Lloyds Bank). • Held for 125 years FRI from 1 Feb 1999 (less 3 days) at peppercorn, approx. 104 years unexpired. • Fully qualified assignment/sub-letting of whole permitted. • B1/B2/B8 use class restriction. • Payment of estate maintenance charge + 25% contribution for maintenance/renewal of service road. • Head lease above on similar terms - 1 Feb 1999 - freeholder (One North East), long leaseholder (City and Northern Projects Limited).
When did the occupational lease commence, between who and who, at what rent/unexpired term and with what incentives (net rent)?
• Occupied by Euro Car Parts Limited on a 10 year 5 month FRI lease commencing 20 December 2019 at 31,194 p.a. (6 psf), 10.33 years unexpired at valuation date. • Open market RR on 20 Dec 2024 (4.92 years), • T.o. break 20 May 2026 (6.33 years)
How did the lease deal with the tenants alterations/shared occupation?
• Tenant occupied adjoining Unit 3. • At lease end - unless required otherwise by the Landlord by service of a notice no later than 6 months before lease end, the Tenant shall: • Remove its fixed machinery, plant and equipment. • Remove any alterations and additions it has made to Property (whether before or after lease date) as shown on annexed Plan A, to return Property to layout on annexed Plan B, including: • reinstatement of wall with Unit 3 • removal of internal mezzanine • removal of extension to staff amenity unit on ground floor • reinstatement of roller shutter • separation of Service Media (shared) and alarm system
How did you arrive at a Market Rent of £6 per sq ft?
• I used my professional judgement to interpret the comparable data, taking account the Subject Property location, specification, lease terms and size to conclude that it sat broadly in the middle of the best available evidence. • This was corroborated by the open market letting of the Property in December 2019.
How did you weight the comparable rental evidence at the time of valuation?
- Open market lettings 2. Lease renewals 3. Rent reviews 4. Third party determinations 5. Sale and leasebacks 6. Inter-company transactions
If you were to conduct the valuation now, how would you weight the comparable rental evidence?
Guidance Note RICS Comparable Evidence in Real Estate Valuation (1st edition), 2019. Valuer should use professional judgement to assess importance of evidence on a case-by-case basis • Category A: direct comparables • Category B: general market data • Category C: other sources
What is a net effective rent?
This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period
What are the other comparable industrial estates in the region and why?
Washington, Birtley and Newburn are the competing locations as they are also along the same A1 corridor. Highly regarded but generally at a level slightly below Team Valley, primarily because of the long-established track record of Team Valley/size of the estate/proximity/transport links to Newcastle?
The rental evidence is quite dated - why did you not include evidence from competing locations?
Although I discovered some more recent evidence on competing estates (Washington, Birtley and Newburn), I considered that as Team Valley was the strongest location regionally, this was a more important factor of comparison than transaction date.
What impact would lease length have on rental value?
Tenant’s seek a discount if they have a long lease i.e. one which is longer than a lease that might be granted in the open market
Why did analyse the rental comparables on both a headline and net effective basis? !!
As I was able to analyse the most comparable evidence on a net effective basis I decided to give more weighting to evidence analysed on this basis, and therefore adjust for differences in order to ensure it was analysed on a like-for-like basis.
What is a net initial yield?
• Immediate return of the property based on the present income that the property produces • Calculated as passing rent divided by Gross Purchase Price (inclusive of purchasers costs)
What purchaser’s costs would you include when calculating a net initial yield?
• 1% agents fees (+ 20% VAT) • 0.5% legal fees (+20% VAT) • Stamp duty: Up to £150,000: Zero £150,001 - £250,000: 2% + £250,000: 5%
How did you derive the EY from the comparable evidence you used?
• Where a property is rack rented NIY = EY • Can derive EY from comparable evidence by forming an opinion of what the Market Rent would be
Why did you analyse on a net initial yield basis?
• Rack rented, fully income producing, reversion in 6.33 years. • Incorporating explicit void period unnecessary given relatively long term certain. • Active investment market for investments of this type. • Typically analysed by investors on this basis, and sales evidence the same.
What type of yield did you apply to value?
• Net Initial Yield…more?
How did you account for the tenant’s fit-out when valuing the property?
• Under the yielding up clause the tenant was required to return the property in the same condition which it was let under • Tenant improvements were therefore disregarded when establishing the Market Value of the Property
The investment comparables date back to March 2017, how did you account for this?
• Examined the overriding yield trends • Judged market sentiment from discussions with local investment agents
What is your understanding of covenant strength?
Assessing the ability of the tenant to perform the covenants in the lease e.g. rent, service charge and repairing covenants
How have you accounted for covenant strength in your comparable evidence?
• Covenant strength is reflected in the pricing of a property investment • Many of the investment comparables were let to national level covenants similar to Euro Car Parts Limited, and primarily had ‘Very Low Risk’ Experian Credit Risk Scores. Worthington Armstrong (UK) Ltd was the exception, being a ‘Below Average Risk’ prominent local business operating solely from one site, which I factored into my yield analysis of the investment.
How did you arrive at 12 months as the marketing void period?
• Conversations with local agents informed me of the typical void period of an industrial unit • Accounts for 9 month marketing period and 3 month rent free.
How did you calculate the rates liability?
Obtained the Rateable Value for the Property from the Valuation Office Agency (VOA) website. Multiplied this by the business rates multiplier: 0.491 x £28,000 for 9 months = £10,311 (Property would benefit from the small business rates multiplier as the rateable value is below £51,000)
Why did you not account for business rates exemption on empty properties? NOT WHAT I DID, CONSIDER, MAYBE ASK SOMEONE…
• I am aware that you do not have to pay business rates on empty properties for 3 months • I did not include this exemption as it is related to the tenant, rather than the property itself • Under the hypothetical scenario where the property is vacant, the tenant may have decided to vacate 3 months prior to the expiry of the lease, in which case the landlord would not benefit from the exemption
How would the length of the assumed term impacted what the value of the property is under the VPV scenario?
• The Market Rent would be capitalised into perpetuity from the beginning of the new lease • The assumed term would impact the yield that would be applied to the Property as it would influence its attractiveness to a prospective investor
What impact does the nature of the rent review have on the value of a property?
Subject had 10 year assumed term - this could reduce rental uplift potential. Other comps were all open market upwards only, no other terms given.
Examining your comparable investment evidence, wow would you account for the outstanding rent review on Unit 16, Octavian Way? INTERESTING, CONSIDER ANSWER.
The rent review was upwards only and so it is assumed that upon settlement, the rent would increase. It would be assumed that this was priced into the purchasers calculations, meaning that the unit is likely to have traded at a lower yield than it would have done if it did not have an immediate reversion i.e. would have bought off a deemed yield rather than a contracted yield
What was your Market Value valuation? Purchasers costs %, agents/legal/stamp duty %, total number? Net valuation, and rounded down to? Stamp duty amounts and % (X% and X%)
What was your Market Value VP valuation? Capital costs, and consisting of what 2 figures? Purchasers costs %, agents/legal/stamp duty %, total number? Net valuation, and rounded down to? Stamp duty amounts and % (X% and X%)
