Specialised Property

Introduction• Special characteristics of the property are central to the business’

ability to generate profit• ‘Trading’ properties might be regarded as specialised because they are

– purpose built– owner-occupied– have some monopoly value due to their

• unique location• legal status (planning permission or license to trade)

• Attributes of the property with regard to the business operating therein are more important than the flexibility of the property for change of use

Specialised Properties• Specialised trading properties are not usually held on a leasehold basis

because of the significant investment in fixtures, fitting, furniture and equipment

• Consequently there is not much rental evidence• Where let, leases tend to be longer and user clauses more restrictive• Improvements and fit-outs are often more expensive and more

frequently undertaken than on standard commercial premises– check the handling of tenants’ improvements at rent review

• Some small businesses might attract purchasers willing to pay a price that includes a non-pecuniary return

Why value specialised properties?

• Loan security• Stock market listing• Mergers and acquisitions• Securitisation• Agency• Consultancy

Restricted Valuations:• Market Value• Market Value subject to special

assumptions• 180/90 days in which to complete a

sale• Accounts or records of trade not

available• Business open and

licences/registration retained• Business closed and

licences/registration lost or in jeopardy

HotelsProposal for Travelodge on Slough Trading Estate:• 22,000 sq ft equates to 70 bedrooms• Pay max of £3,800 per room• 25 Year lease. No breaks.• Reviews every 5 years at RPI• 6 months rent free• Yield 6.25%• £120 psf Build Cost (excluding fees, demo and planning)• Marginal returns and we needed to get to £4,300 per room and let a

restaurant of 3,500 sq ft on the ground floor at £22.50 psf to hit profits of 20%+

• That’s why I recommended we did the deal with 99p stores instead, which is now on site

Pubs• Majority of trading potential conferred by licence• Therefore included in sale price (not separate)• Investment market firmly established• Large numbers of tenanted places on market with commercial leases• Likened (in the main) to secondary retail• Freehold managed houses (Plc as employer) - likened to good

secondary / prime retail• Tied house profit derived from 3 sources:

– Wholesale (beer, liquor, some food)– Retail (beer, liquor, some food)– Tied rent

• Free house profit derived from 2 sources– Retail profit / discount (beer , liquor, food)– Machine income

Pub Valuation Methods1. The Kennedy Method

(Profits on beer supply + rent) x YPThis was a Lands Tribunal method looking directly at wholesale profit and Tied Rental Income. It is still an interesting method to be applied to the New Pub Estate Companies, whose income streams are very similar.

2. Investment MethodRack-rented: rent payable under commercially acceptable lease x YPReversionary: term and reversion approach

3. Profits MethodFreehold: ANP (EBITDA) x YP (5-8) Leasehold: ANP (EBITDA) x YP (1-2)

4. Rental ComparisonComparable (perhaps secondary retail) rent per square foot, or% of turnover rent

Pub Valuation Example (1)Valuation of the freehold interest in an attractive country freehouse of appeal to owner-occupierTurnover:

Food £35,000

Liquor £40,000

Machines £ 3,000

£78,000

Net profit to proprietor @ 24% x 0.24

£18,720

Beer Discount 60 barrels x £20 £ 1,200

£19,920

x YP perp at 14% (based on comps) 7.1429

Valuation £142,286

Pub Valuation Example (2)Valuation of a town pub, recently let on a 15 year FRI lease with a beer tie of interest to a regional brewer / multiple operator

Rent calculationTurnover Food £ 10,000

Liquor £120,000£130,000

Rent agreed @ 14% t/o x 0.14£18,200

Wholesale profit200 barrels - 45 barrels (guest):= 155 barrels x £47.50 £ 7,362

£25,832x YP perp @ 15% 6.6666

£172,212

Pubs often valued by reference to “barrelage” - enables valuer to estimate likely turnover and profit - a short cut comparison approach

Petrol Stations• Focusing on self-contained main road /motorway facilities (as opposed to

“services”)• These facilities can be broadly classified as

– Those with large "throughput" - worth Oil Companies acquiring– Those with lesser "throughput" -worth supplying

• Outlets operated either through:– Direct Purchase of existing facilities - operated by "Majors“ (refiners/wholesalers)-

Esso, Gulf, Shell, Gulf, etc.)– Direct Purchase of Site and Development - operated by Majors– Purchase and Leaseback - supplied by Majors as wholesaler and operated by dealer /

retailer paying a "tied" or low rent• The market is dominated by the Majors who own and operate only where a

"threshold" throughput can be achieved. Below a certain figure, Majors will become suppliers.

• Therefore a valuer must be able to classify the facility (according to throughput) and understand the tenure arrangements

• On the petrol sales, must determine source of income:– Wholesale profit only?– Wholesale profit and tied rental?– Rebate arrangement?

Petrol Station InvestigationsRelevant factors• Facility

– Age, depreciation, obsolescence– Visibility– Layout, forecourt size, pump arrangement, canopy– dealer management standards– pricing policy – type / grade of fuel sold (branding) – opening hours

• Road– category of road: (M’way, arterial, secondary etc..)– diversions (temporary and permanent)– traffic volume– Speed limits - fast roads reduce “turn -in” especially where visibility and signage are

poor– Crossing Factor (% offside traffic turn-ins)

• Competition– from new stations (type of competition)– expansion or closure of existing stations and other facilities

• Demographics– Local population size– car ownership percentages

Petrol Station Valuation• Estimate Throughput• Classify facility in terms of likely trading potential and trading structure• Examine factors currently influencing ability to trade

– Average turn-in (DoT)• Busy Trunk road = 3 to 4%• Motorway = 12 to 15%

– Average petrol purchase = 5 gallons / customer (DoT / Commercial)– Self-service and use of credit cards increase 25% (DoT / Commercial)

• Example• Dual carriageway; 17,500 vehicles per day; stations on both sides over 120 mile

stretch @ 4 mile intervals = choice of 30 stations without crossing. Assume average turn-in to a particular station of 3.33%

– 17,500 vehicles / day x 3.5% turn-in: 612.5 vehicles x 5 galls = 3,063 galls / day (approx 955,500 galls pa (6 days))

• Where the facility is worth acquiring/operating, the valuer will capitalise throughput at a standard rate and capitalise remaining facilities (e.g. shop, car-wash)

• Where worth supplying, then tied rent arrangement might operate

Golf Club Valuation

Golf club valuation by profits method

• Variety of methods used - Profits most reliable indicator• Cost approach provides useful check• Never employ profits approach in isolation “stand back and look”• Imperative to classify facility to enable estimate of reasonable

maintainable turnover• Classification (municipal, daily fee, resort, semi-private, private)• Check list (tees, fairways, greens, roughs, bunkers, practice facilities,

watering systems, clubhouse facilities, parking, maintenance of buildings, fairways, greens, buildings & equipment)

• Sources of income and expenditure (estimate where necessary)• Capitalisation rate? combination of mortgage and equity rates

(effectively opportunity cost or weighted average cost of capital)• Limited alternative use

Assume net adjusted net profit after allowing for expenditure on ASF to replace tenant's capital and interest is £475,000 p.a.

Capitalisation rate comprises a mortgage and an equity element

For the mortgage element, assumeo 20 year termo Rate of 9%o Therefore, annuity £1 w.p. = 0.1095

For the equity element, assumeo Target return of 20%

Golf club profits method valuationexample

Now need to weight the mortgage and equity elements

Assume 75% LTV Mortgage (annuity) = 0.1095 x 0.75 =

0.0821 Equity return = 0.20 x 0.25 =

0.0500 Weighted average cap rate =

0.1322 Say, 13.22%Valuation = Net adjusted profit cap rate

= £475,000 0.1322

= £3,593,040 Say, £3.6m

Golf club profits method valuationexample

• Trading information can be difficult to obtain• Use comparison method as an alternative• Obtain number of rounds played per annum and level of

green fees• From comparable(s) determine:

– Price per round (PPR); Capital Valuenumber of members x ave number of round per player

– Green fee multiplier (GFM);PPR / average green fee

• Apply to subject property

Valuation by sales comparison

Analysis of comparable facilities has been performed for facilities of the appropriate class (say semi-private)

1500 members @ average of 22 rounds per annum per member (market average)

Average green fees @ £15.00 per round Comparable recently sold for £5m

Valuation by sales comparison

Analysis of comparable evidence:PPR = £5m / 22 x 1500 = £151.51 / round p.a.GFM = £151.51 / £15 = 10.10

Valuation of subject: 1,400 members with average green fees of £13.00 per

round PPR = £13.00 x GFM

= £13.00 x 10.10= £131.30 / round p.a.

Valuation = £131.30 x 1,400 x 22= £4,044,040

Say, £4m

Valuation by sales comparison