Question 6

You are advising a developer who is negotiating to purchase the freehold of a site   located on a town centre bypass.  The site has planning permission to build 60,000 sq. ft. of offices (Gross Internal Area, GIA) although it is currently occupied by

dilapidated and vacant storage buildings.

You understand from the Local Planning Authority (LPA) that a payment of £275,000 will be necessary to fund improvements to the highway under section 278 Highways  Act 1980. In addition, a Community Infrastructure Level (CIL) payment of £155,000    will become due on implementing the planning application.  You can assume construction costs are £170.00 psf GIA and the current market rent of £37.00 psf based on a net internal area (NIA).

Marketing Agents are likely to agree a direct cost of £50,000 ex. VAT for marketing of the proposed development, whilst agent’s fees for selling are 2% and legal costs at     0.5% (all ex. VAT).  The construction period is assumed to be 12 months.

There is an issue over a restrictive covenant which requires removal from the

freehold title. This could delay completion of the sale by up to 12 months and involve legal fees approaching £25,000.

(a)    In this question, assume that the title issue is resolved successfully on the basis as noted above (12 months’ time period and legal costs of £25,000). Making any other appropriate assumptions and stating explanations as to  the inputs you have used, carry out a residual valuation of the site

assuming your client (the developer) will purchase the site with a minimum of 15% profit on Gross Development Value. (35 marks)

(b)    If resolution of the legal title issue might stand a 40% chance of failure, recast your valuation under part (a) to reflect this downside with an appropriate discursive appraisal. (15 marks)

(Total: 50 marks)

Question 7

(a)    In respect of assets which are valued using the profits method, define the terms Reasonably Efficient Operator (REO), Fair Maintainable Operating Profit (FMOP) and Exceptional Profits or Losses, comparing and contrasting these terms against the actual accounting figures a trading entity may produce. (10 marks)

(b)    Stating any relevant assumptions and attaching an explanation as to how you have effected your calculation, derive the Fair Value of the following   asset which is held by a private investor (freeholder) based on the

undernoted annual trade figures. The trading pattern for the establishment was heavily curtailed in 2020 with a strong continuing recovery in 2021

during the COVID-19 pandemic lockdown periods. You may assume a market yield of 6% and a return on capital employed of 9%. (40 marks)

Property:                      The Anvil Public House

Purpose of Valuation:  Accounting Purposes

Basis of Value:             Fair Value

(Total: 50 marks)

Question 8

Using appropriate assumptions and annotated comments to your valuations, prepare  the three undernoted valuation scenarios in the following property interests where the freehold yield for a sound covenant on a rack rented property is 6% and for short leasehold interests,10% (no tax applied).

The retail premises are held on a 10-year protected business tenancy with 1 year remaining.  The lease is on FRI terms with the rent last reviewed 4 years ago to full    rental value at £200,000 pa.  The current Market Rent based on a 5-year FRI lease is £230,000 pa with 6 months’ rental incentive.  The tenant’s covenant strength indicator shows a low risk of business failure and a net asset value in excess of £35 million.

Market knowledge suggests that the property could take 6 months to re-let.  The Rateable Value of the premises is £160,000.

The landlord has just served notice to determine the lease in 12 months’ time on the   basis he wishes to upgrade the premises at a cost of £1.0 million over 6 months upon vacation.  He anticipates that the property could then re-let at £325,000 pa with 3 months’ rent-free incentive.  The marketing would be carried out whilst the works are being carried out.

Value the following interests:

(a)    Market Value of the freehold interest as existing (without improvements). (15 marks)

(b)    Market Value of the freehold interest, special assumption all upgrade works are to be completed. (15 marks)

(c)    Market Value of the leasehold interest on the basis the landlord regains possession at the end of the fixed term.(20 marks)

(Total: 50 Marks)