Real estate evaluation

Task 1: Case Study

ASSIGNMENT BRIEF TASK 1: 20% of Total Module Mark

Each part carries equal marks. You should take the valuation date for this

assignment as February 3, 2017.

Billy Button (Landlord) owns a mixed use commercial property in Bournemouth. It

comprises 2 shops on the ground floor and 2 upper floors of offices.

Lease and Property Information

Shop A

Shop A is let to a rug selling company trading as Alibaba Rugs Ltd for a term of 10

years from 3 February 2014 at an initial passing rent of £40,000 pa subject to a 5

yearly upwards only review. The lease is on effective FRI terms with the tenant

liability for a proportionate share of repairing, maintaining and decorating the external

and common parts, together with insurance provision. The rent review clause has

the usual tenant’s assumptions and disregards with the rent to be determined on net

effective terms.

The following measurements are available (assuming that all welfare facilities are

separate to the retail trading space given below):

Net frontage: 6.75 metres

Shop depth: 42.95 metres

Shop B

Shop B is let to a local pharmacy trading as Pills R Us Ltd for a term of 15 years from

3 August 2015 at an initial passing rent of £48,700 pa subject to a 5 yearly upwards

only review and a tenant’s break at the end of years 5 and 10. The lease is on

effective FRI terms with the tenant liability for a proportionate share of repairing,

maintaining, and decorating the external and common parts, together with insurance

provision. The rent review clause has the usual tenant’s assumptions and

disregards with the rent to be determined on net effective terms.

The following measurements are available (assuming that all welfare facilities are

separate to the retail trading space given below):

Net frontage: 7.21 metres

Shop depth: 42.95 metres

Comparison

You may, for this assignment, rely on the single comparison detailed below as being

indicative of market rental levels as the valuation date. Retail premises in very close

proximity have been let from 3 February 2017 for a 10 year term on FRI terms

subject to an upwards only review at the fifth anniversary of the term. The rent has

been agreed at £ 45,500 pa subject to 9 months’ initial rent free.

The following measurements are available (assuming that all welfare facilities are

separate to the retail trading space given below):

Net frontage: 5.43 metres

Shop depth: 26.50 metres

Investment evidence in the area shows that the all risks (market) yield for rack rent

retail premises selling in the area is 7.25% (net basis) for average tenant covenant

risk.

There are two questions to answer:

A. Billy Button has been approached by a national convenience store outlet (‘At

Your Convenience’) to take both premises on a single tenancy (with attendant

opening up works to trade as a single outlet). He has approached Alibaba

Rugs Ltd and Pills R Us Ltd and even though they have only been in the units

for relatively short terms, both are struggling to pay their rents and have

signalled that if they are given a sensible premium, they will vacate without

any dilapidations liability.

Evidence suggests that with an improved covenant the market yield is likely to

strengthen by 50 bps. However the prospective tenant has requested that the

Landlord pays for all the opening up works with a new lease for 25 years

being agreed with 12 months’ rent free at market rent (the comparison noted

above should be used to determine this). Rent reviews will be 5-yearly based

on CPI uplifts.

Stating all reasonable assumptions, calculate the premiums that each of the

tenants could expect to receive if the Landlord can make the surrender and

re-grant work. You should explain what your results mean.

B. Using the above information and stating any reasonable assumptions, should

the Landlord be approached by At Your Convenience where it wishes to

contract on the same terms but leaves open the amount of rent free which

could be offered (in place of the 12 months noted above) by the Landlord,

calculate and explain how much rent free the Landlord could reasonably offer

with the deal still being affordable. Both existing tenants have demanded a

premium each of £35,000 to vacate.

MAXIMUM MODULE MARK: 20 MARKS (equal to Parts A and B)

Suggested word limit: circa 1,000 (excluding references)

Assessment Criteria

Assessment of your submission will be based on the weighted criteria as given

below. These relate to your module learning outcomes.

Assessment Criteria Mark (%)

CASE STUDY (40% of this Assignment):

20 Module Marks

Communication: Presentation & Structure (beginning to reach a

professional standard). Accurate Spelling; Good grammar and

sentence and paragraph construction; evidence of editing and proof

reading; Writing style appropriate to task (report; essay; etc.); work

well structured; understanding of both legal and academic referencing.

5%

Research: evidence of wider reading round the subject; list of

references quite substantial; use of books and professional literature

and beginning to use academic literature through search engines;

developing appreciation of the quality of literature. Appropriate use of

recognised academic and legal referencing systems.

5%

Surrender calculations: Understanding of the concept of surrender

and re-grant calculations, appropriate analysis of evidence, full

statement of valuation assumptions, and carrying out of relevant

calculations to determine tenant compensation. Demonstration of a

level of knowledge and understanding to present a fully argued and

supported outcome based on the material circumstances given.

30%