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Commercial valuations


Image of a modern office building.

You may need to value your business property for any number of reasons: security on a loan, buying or selling a property, for inclusion in accounts or in a prospectus of for insurance purposes. Valuation is a complex business and there is no such thing as a single valuation for a property, useful for all purposes. Valuations are produced on different assumptions - and may come up with different answers, depending on their end use. Your chartered surveyor will recommend and carry out the best valuation for you. But only after you have explained very clearly what you want the valuation for.

The valuations undertaken by Chartered Surveyors are regulated by the RICS Appraisal and Valuation Manual - usually known as the Red Book. Before doing the valuation, the valuer will liaise with you to establish its purpose and anything else you need. This helps you understand what to expect and also makes sure the valuer provides the right advice. Frequently, valuations are required on various alternative assumptions. The valuer might be asked to assess the value once certain improvements have been completed, or to establish the effect of a change in the occupation of the property. To avoid scope for misunderstanding, any assumptions of this kind must be clearly agreed between valuer and client at the outset. In the interests of consistency.
The Red Book also contains rules on the bases of valuation and on the way in which valuations are reported. For most valuations the chartered surveyor is bound to stick to the Red Book rules. Where there is a possibility that the valuation may be relied on by a third party, these rules are particularly strict. However, there are exceptions where valuation advice may be given outside Red Book rules. An example is if you require informal advice when you are thinking of selling a property. A valuer may also depart from Red Book rules in exceptional circumstances, though this must be stated in the report.

What is the valuation based on?

1. The most common basis of valuation is market value (MV) - the estimate of the sale price if the property was sold at the date of valuation. MV, or open market value as it used to be called, is an internationally recognised valuation basis. Where an alternative use of the property is possible, say for redevelopment, this would be reflected in MV if it produced a higher figure than the one for the existing use (depending, of course, on getting relevant permission and the time of redevelopment). Where either the buyer or seller was (or might come) under pressure to complete the transaction, advice on the MV alone might not be adequate. The valuer will need to look at the effect of the special circumstances on the price achievable, and how this differs from MV. This might happen if a buyer had a special interest in getting the property for redevelopment or to expand their existing property for example.

2. Where a value is needed for a company's accounts, or to be included in any other form of financial statement, special rules apply. Except for specialised property, all owner occupied property should be valued on the basis of existing use value (EUV). Similar to market value, EUV actually reflects the costs the owner would need to pay for acquiring the property for the existing use in the market place. But it ignores any higher value that could come from an alternative use. However, investment or surplus properties are normally valued at MV, even in financial statements.

3. You may need a valuation for tax purposes. The valuation basis largely depends on the regulations covering the specific building. Although these bases are usually similar to MV, there are important distinctions. Specialist properties in which there is no real open market (like a power plant, say) are normally valued on a depreciated replacement cost (DRC) basis. Land is valued on an existing use basis. The buildings on that land are valued at what they would cost to replace, with a deduction for age or non-use. The two figures are then added together to provide the value.

4. Finally, how do you get a figure for insurance purposes? Since the insurer is interested in the cost of replacing the buildings, not in the value of the land that they stand on, you would need a 'reinstatement cost assessment'. As such, it is not one of the Red Book valuation bases, though your chartered surveyor can supply it.

5. You may also want a valuation for example as evidence in legal proceedings or as part of an appraisal of the viability of a development. These also differ from those in the Red Book.

What information will the valuer need?

There is quite a lot, and the Red Book sets out the items on which information will be needed (the 'conditions of engagement') before the valuer can report. Many of these are obvious. What is being valued (are plant and fixtures to be included)? What is the purpose of the valuation? What leases, if any, are involved? Your chartered surveyor will be able to guide you through this process.

What is not covered by a valuation?

A valuation is not a building survey. The valuer looks at the general condition of the building, but will not do a detailed search for defects. Nor will a valuation normally spot possible environmental problems, unless you have specifically asked for the valuation to reflect a land quality statement or other environmental advice.

May I use the results as I like?

No. A valuation is produced for a specific client, a specific purpose and is based on specific assumptions. To use it in a different context could be misleading. You will need to agree with your valuer from the beginning why you want the report.

What are the fees?

It all depends on what is being valued so you need to discuss this with your chartered surveyor at the start. As part of their codes of conduct chartered surveyors must give you a written note of their fees before the valuation. But do remember that there is an inevitable element of opinion in any property valuation.

Is your business property insured?

Protect your business with the right insurance for your premises. Remember, buildings insurance does not usually cover disruption to your business, contents or stock that will probably need to be insured separately. And if you are a tenant, your lease probably needs it. A chartered surveyor can calculate the reinstatement cost for insurance purposes, advise you on precautions that will satisfy your insurer and negotiate on your behalf if you are unlucky enough to suffer a loss.

Image of a small industrial unit.

How do I arrange insurance?

If you are a tenant, establish who is responsible for insuring the premises. You may have to both arrange and pay for the building insurance. On the other hand your landlord might arrange insurance but pass the cost on to you. If you occupy only part of a building, the landlord will probably arrange insurance for the building as a whole and charge you your proportion of the cost. Normally you go through your own insurance broker but do get at least three quotes. Once you have made a choice, get a copy of the policy document and ask your broker to advise you on its details. Your insurers may want to see the reinstatement cost assessment that your chartered surveyor has produced, and might also want to carry out their own inspection of the premises. Your landlord may also want to see evidence you have adequate insurance with a reputable company.

How much I should insure for?

Your chartered surveyor can do a reinstatement cost assessment. This tells you what it would cost to rebuild the premises if they were to become a total loss, including the cost of demolition and clearing the site plus professional and local authority fees. However, make allowance for inflation in construction costs. In an industrial building, any process plant would normally be insured under a separate policy. Make sure your insurance provides cover for disturbance and relocation costs in case your premises become unusable following serious damage. Also have insurance cover for continuing to pay rent in the event that the building is damaged and you are unable to run your business from it.

How do I keep my insurance up to date?

Your insurance policy will probably have an 'indexation clause'. This automatically increases the sum insured in line with construction costs each year. However, you need to review the figures whenever you make alterations. In any case get your chartered surveyor to review the reinstatement cost every three to five years.

What happens if I suffer a serious loss?

If your premises are seriously damaged by fire, for example, the fist task will be to carry out emergency work to protect the building and its contents. Contact your chartered surveyor immediately and they will be able to negotiate with your insurers or their loss adjusters over the emergency measures and administer the work. Later, your chartered surveyor will be able to negotiate the full claim on your behalf. Your lease may say you no longer pay rent if the premises are no longer usable. Finding alternative space will be your own responsibility. If you were responsible for insuring the property, it will normally be up to you to arrange to have it repaired or rebuilt. Again, your chartered surveyor can help with the planning and may act as contract administrator for the construction work

Business rates

If you have business property you probably pay business rates. But did you know that you could challenge these rates? Business rates are a tax based on the rateable value of the property, reflecting its rental value. These rates often change depending on any alterations to the building or if there's a change in the surrounding area. And some limited classes of property are exempt from business rates altogether. Rating is complex. But with the highly qualified help of a chartered surveyor you may save money. 

Who has to pay business rates?

Most business property has a rateable value and is assessed for business rates. Where business premises are combined with living accommodation - say a flat above a shop - and occupied by the same person the property is known as a 'composite'. You'd pay business rates on the business and council tax on the living accommodation. Properties exempt from business rates include: churches and most places of recognised worship, agricultural land and buildings, and fish farms. Some properties used mainly for disabled people, public parks and some businesses working within them.

Image of the interior of industrial unit.

How are business rates calculated?

There are two main factors: The rateable value of the property and the level of the uniform business rate (UBR), seen as a fraction of a pound. Multiply the one by the other and in theory you would have the annual amount of business rates. But there is a catch. Increases (or decreases) in business rates may be phased in over time; the amount actually payable could be below or above the figure this sum produces. The Valuation Office Agency (VOA) of the Inland Revenue assesses the rateable value of all relevant properties in England and Wales.

Rateable value is the open market rental value - the rent a property would get in the market. This is used for owner-occupied, leased or occupied under a licence properties. The VOA assess the open market rental value on a fixed date; usually two years before each rating list comes into force. So the revaluation on 1 April 2002 used the rental values at market prices on 1 April 2000. Although rates are based on the rental value, the VOA also takes into account the physical state of the property and any alterations made, as well as its locality. Every five years the VOA updates the rating list for each billing authority. You can see this list at your local VOA office or online at www.voa.gov.uk A copy is also available at the offices of the billing authority.

What is the uniform business rate (UBR)?

The UBR is the multiplier that is applied to the rateable value to calculate the rates due. Each year, the UBR increases in line with inflation. For the rating year 2001/2, which runs from 1 April to 31 March, the UBR was set at a level of 0.43 in England (0.426 in Wales). So if your building in England had a rateable value of 50 000, your theoretical business rates would have been: 50 000 x 0.43 = rates payable of 21 500. But this is not necessarily the end of the story. The amount actually payable may be affected by the transitional relief scheme.

How does transitional relief work?

Transition relief spreads the impact of larger changes in rateable value - limiting the rise in rates each year. The limits are different for large and small properties, and for different years. Ask your chartered surveyor for more on this. For example, the business rates on your large property in England in 2000/1 would not have risen above the old 1999/2000 level by more than 12.5% plus the rate of inflation. But if the rating revaluation leads to a drop in your business rates, the relief also limits the reduction in any one year in the amount that you pay. Transitional relief, whether up or down, does not apply to new properties, extensions or alterations, which were completed after 1st April 2000, despite the increase the property's value. Wales has a different transitional system.

What other business rates relief are available?

Empty properties not in use - there is usually nothing to pay for the first three months Industrial and storage, land, listed buildings or premises with a rateable value of less than 1 900 (in England) - even if the building is empty for more than three months, the organisation is a registered charity, certain non-profit making organisations and certain rural businesses. If the building is only temporarily or partly occupied your billing authority may grant you relief.

Can I appeal against the rateable value?

You can make an appeal against the rateable value shown on your business rates bill if: You believe it to be wrong The VOA has changed the rateable value and you feel it is incorrect A change in circumstances affects the value of the property - including: - change in use of the building or a neighbouring building, changes to the actual premises, changes to the surrounding area such as construction. Either you, or your chartered surveyor on your behalf, can make the appeal. But beware, some types of appeals have fixed time limits so get professional advice here. You need to make your appeal in writing or by using a specific form from the VOA, available at your local valuation office or online at www.voa.gov.uk. Unless your proposal is judged invalid (in which case you'll be told), the valuation officer will let you know in writing of how long your appeal will take to discuss. Be warned - it can take some time. The VOA may fast track your appeal if you having financial problems because of the delay. Most appeals are settled by agreement, but in some cases they go to the local valuation tribunal. You or your representative must appear in person, rather than provide written details. But if you still disagree with the tribunal's decision you can go on to the Lands Tribunal. You'll need to speak to your chartered surveyor on this procedure.

What if the rateable value is reduced?

If the rateable value is reduced, you should qualify for a refund (unless the effect of transitional relief means that your rate has not changed despite the reduction). You will normally receive interest on the amount overpaid, as long as your rate payments are on time and up to date.  

Are your service charges too high?

Did you know service charges for business premises are not specifically regulated by legislation? It is up to you, with your chartered surveyor's help, to make sure before you take a lease that you are happy with the information you receive on the expenses passed on to you in the service charge.

What does a service charge cover?

It probably includes your share of the cost of maintaining common parts of the building and a proportionate share of the costs of repair or redecoration of the building. It would also cover your proportion of the cost of insuring the premises where the landlord is responsible for insurance. If major items of equipment need replacement, such as a central heating boiler that serves the whole of the building, your proportion of the cost would probably be charged by way of the service charge. Your lease should set out what items would come within a service charge. It is important to get your chartered surveyor to explain to you the implications of this part of the lease and what expenditure you might face.

How is a service charge levied?

This depends on the wording of the lease. One pattern is for the landlord to prepare each year an estimated annual charge to cover likely expenses and spread it among the different tenants as a service charge. You, as tenant, would pay this estimated charge in four instalments, quarterly in advance. At the end of the year, actual expenses will be compared with the estimate, possibly meaning you pay a top up or receive a rebate.

Will I have an opportunity to vet the figures?

Make sure you get accounts of the actual expenses. Best practice is for these accounts to be audited by an independent firm of qualified accountants who can certify the expenditure is properly used under the terms of the lease. Some leases stipulate that a chartered surveyor or an accountant signs the accounts.

How can I avoid being overcharged?

Even with audited accounts there can be disagreement about the quality -- and therefore the cost -- of work that needs to be carried out. Often about the cost-effectiveness of the contractors the landlord employs. It is a good idea to get competitive tenders for major items of expenditure, except in an emergency. And always review regular contracts for cleaning, maintenance and the like every few years.

What happens to the money collected before it is spent?

Ideally, the money should be held on trust for the tenants who contribute, so interest earned on the money goes to reduce the amount they need to pay each year. The landlord, too, should contribute service charges for any vacant parts of the premises.

Are you paying more tax than you have to?

You may be able to set property-related spending against your profits for tax. But this depends on the type of the expenditure - a highly complex area where you need the specialist advice of your chartered surveyor and your accountant at the earliest possible stage.

How is property expenditure classified?

Broadly, between: revenue expenditure: this may be charged against your income before arriving at the profits that are subject to tax, capital expenditure: this is spending on items that remain on the balance sheet beyond the year-end as an asset of the business. Though these assets will devalue in your accounts, this is not allowable against profits for tax purposes. Instead of this you may charge against income a 'capital allowance' in respect of money you have spent on certain classes of asset. Unfortunately, only certain categories of property qualify for a capital allowance. What qualifies as revenue expenditure? Revenue expenditure covers your spending on 'consumable' items that will have no value after the year-end, such as rent, insurance, building repairs, salaries, stationery and the like. But the definition of 'repairs' may be complex and you need professional advice here.

What qualifies as capital expenditure?

In general terms, capital expenditure is spending associated with the creation or acquisition of an enduring asset, typically semi-permanent or permanent items that have a value beyond the end of the financial year. For example, your spending on buying a property, on a shop front, on computers, heating equipment, manufacturing equipment, etc.

Where is the dividing line between capital and revenue spending?

This is where the problems begin to crop up. You need the early advice of your specialist chartered surveyor and your accountant. Repairs would normally be a revenue expense. But suppose you buy or rent a dilapidated building at a price, which is low to reflect the money you will need to spend on it. The cost of repairs in this case will count as a capital item so you will not be able to offset it against your profits, unless some of it qualifies for capital allowances. And you cannot have it both ways. Increasingly, the Inland Revenue requires your tax accounting and your published accounts to follow the same lines (except in the case of depreciation!). If you capitalise an item in your accounts but claim it as a revenue deduction in your tax calculations you cannot be sure of getting 100% tax relief against your profits.

How do capital allowances work?

Capital allowances are always complex and not always very logical. They are available on industrial and warehouse buildings, but not on the building 'fabric' of shop or office buildings. However, shops and offices often contain large amounts of plant and machinery, possibly a significant proportion of the cost of the property as a whole, which may qualify for capital allowances. For instance, air-conditioning systems, lifts, IT/data cabling, sanitary appliances and certain electrical installations.  In other words, the annual amount of eligible expenditure you may offset against your profits, before applying your tax rate. Over time, the vast majority, if not all, of the cost of the asset should be recoverable via these tax allowances. 

Can I plan ahead to minimise tax?

Yes. But call in your property tax advisor (chartered surveyor and/or accountant) before making any major expenditure, because you must understand and plan its revenue and capital allowance consequences. It is a good idea to take notes and photographs of the condition of buildings before repairs or improvements are carried out and to record the reason for the work. These may help 'prove' subsequently to your inspector of taxes that the cost should be tax deductible. You can also get capital allowances retrospectively on earlier expenditure, so there may be opportunity to lodge significant new claims or review and improve previous claims where you still own the assets.

Disrepair

Shock! Horror! You're near the end of your business premises lease when suddenly the landlord demands you fix any damage and do any repairs. And if you don't do this work, you may still need to pay the cost of having it done. But don't despair over your state of disrepair. As a tenant you may be able to challenge the landlord's list of work, known as a 'schedule of dilapidations'. With the help of your chartered surveyor you can form a plan and budget for any dilapidations before you sign a lease.

When do I need to think about dilapidations?

Before you take a lease. A survey will establish the condition of your premises. It will give you a list of work that may be needed, both immediately and later. It sounds obvious, but doing regular maintenance during your lease really will help to avoid greater expense later.

What if the premises are already in a poor state?

Most commercial leases require the tenant to put and keep the property in repair. Unless you and the landlord specifically agree otherwise, the fact that the premises were in a poor condition when you took them on is irrelevant. You still have to put them right. So negotiate for a lower premium or a lower rent to compensate for costs later. Or you could persuade the landlord to agree that you return the premises in a similar condition at the end of the lease to the state in which you took them. In this case, you must have the premises surveyed, and their condition established, recorded and attached to the lease as a 'schedule of condition'.

When will the landlord submit a dilapidations claim?

Generally speaking, landlords do not serve dilapidations claims earlier than three years before the end of the lease. If you, as tenant, have a statutory right to a new lease, the landlord probably will not serve a dilapidations claim unless or until you say you no longer need your lease.

What about the alterations I have made?

This depends on the terms of the lease and any approval the landlord gave you to make alterations. On giving consent, the landlord probably added that at the end of the lease you restore the property to its original state if requested to do so. So unless the landlord thinks your alterations have added value, you will probably have to reinstate the property or pay the cost. The exception is if neither the lease nor the licence for alterations gives the landlord the option of requesting reinstatement.

Do I have to accept the landlord's claim?

No, don't accept it without taking professional advice. The cost may be inflated or the claim may include a few added 'extras'. And possibly the landlord may not intend to repair the property, but demolish it. In this case you would have a good defence at law to the claim.

What if we cannot reach a compromise?

If you cannot reach agreement, the landlord may go to court. But this is a slow process and expensive for both sides. Landlords will generally avoid it if they can. Talk to your solicitor, as well as your chartered surveyor, if things look like going this way. In a court hearing your chartered surveyor will be able to act as an expert witness on your behalf.




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