Task : Case Study
ASSIGNMENT BRIEF TASK :
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
Term calculation
Yield rate is established to be 7.25%
Years purchase in perpetuity in perpetuity
YP perp = 1/I= 1/0.0725 = 13.7931
Where I= interest rate expressed as a decimal rate.
Ground rent £40,000 x 13.793 = £551724
The present value PV = 1/(1+i)^n
PV= 1/(1+0.0725)^10 = 0.4966
We need to reflect the risk and the fact that the expected growth has already happened so an investor will be looking for a slightly higher yield. In this case, we use the rate of 8.5
100/8.5 = 11.7647
This figure will be used to value the right to receive £12,000 p.a. forever.
PV £1 @8.5% deferred for 10 years = 0.44228
YP is multiplied by the PV to give a deferred YP.
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.