Case Study

Question 1

What did you include in your terms of engagement?

Answer 1

• Date
• Property Address
• Client’s contact details
• My firm’s contact details
• Scope of the instruction
• Basis of Appointment
• Fee Basis

Question 2

What money laundering checks were you looking to carry out?

Answer 2

No money laundering checks were required on the tenant in this instance as the rent was less than 10,000 euros a month.

However, I had carried out KYC checks and customer due diligence on my client at the point of instruction.

Question 3

What conflict of interest checks did you undertake?

Answer 3

I ensured that there were no party, personal or confidential information conflicts.

After checking with all other principals and members of staff in my firm I was satisfied that there was no reason for my impartiality to come into question.

I identified that there may be a potential future conflict of interest when I was instructed to bring similar properties to the market on behalf of other clients. I made sure to gain informed consent from my client at the point of instruction before proceeding.

Question 4

Describe the construction of the property?

Answer 4

Steel frame construction.
Glass curtain walling to the unit (double glazed).
Flats above with cladding which has since been replaced.

(Mullions = vertical and transoms = horizontal)

Question 5

How old was it? How could you tell?

Answer 5

I know that the property was completed in 2014. The design and construction is in keeping with similar schemes across London dating from the same period.

Question 6

What was the cladding material?

Answer 6

The building was initially constructed with Aluminium Composite material (ACM) cladding.

All ACM panels on the building and the phenolic insulation below them have been removed and replaced with non-combustible materials.

The new cladding is made from:
Solid aluminium panels with mineral wool insulation (class A1).

Question 7

Did you note any issues around the cladding of the building? What checks did you undertake?

Answer 7

I was aware from my dealings with the original developer that there was an ongoing project to rectify any cladding issues with such as the presence of combustible materials like ACM.

Being aware of cladding issues around high rise blocks, I emailed the Project Manager to enquire about the cladding and make sure I was up to speed with matters relating to the building. He confirmed to me that a project was underway to replace all the cladding at the expense of the freeholder.

Question 8

What do you understand about the banning of cladding material from certain buildings currently?

Answer 8

Combustible materials such as Aluminium Composite Material (ACM) are banned from residential buildings over 18 metres high and need replacing.

The government has recently announced a £5bn package of measures to replace unsafe cladding for all leaseholders in residential buildings above 18 metres (6 storeys).

Question 9

Describe the locality in socio-economic terms?

Answer 9

Reasonably affluent area with a mixed demographic. The immediate area consists of several housing developments comprising around 1,000 flats. Lots of young professionals and young families.

Question 10

Why did you use NIA to measure and not IPMS?

Answer 10

I measured the property to both IPMS and NIA and dual reported these to the client. While she was not a property professional, she was familiar with the term NIA and felt more comfortable using that basis of measurement.

Question 11

If you were measuring using IPMS where would you measure to using your photographs in Appendix D as an example?

Answer 11

I would measure to the internal dominant face, i.e. The inside finish surface comprising 50% or more of the surface area for each vertical section.

Question 12

In your rental adjustment how did you treat the 3 month rent free period at Five Eastfields?

Why did you take this course of action?

Answer 12

I calculated the net effective rent over the life of the lease by using the straight line approach. To do this I aggregated the total cost of all rent payments, and divided by the total contract term.

This gave me a Net Effective Rent of £32 psf.

Question 13

How would the size of the property impact upon the rent per square metre being achieved?

Answer 13

Generally speaking, small units can sustain a higher rate per sq. ft. as the overall quantum of rent is lower…

From a landlords perspective, there can be more room for negotiation when the numbers are high to start with.

Question 14

What was the market doing between 2018 and 2019?

Answer 14

The local market was softening generally over that period of time due in part to (1) the slow down of residential conversion from offices under Permitted Development and (2) a significant increase in market uncertainty as Brexit negotiations continued in a chaotic manner.

Question 15

Why do you say the market was better in 2018?

Answer 15

The area in general had been on an upward trend, with steady rental growth since the last recession and was benefitting from major development in southwest London.

Also the implementation of Permitted Development Rights took out a large level of office stock (for conversion to residential), which in turn led to increased rents throughout London.

Question 16

Why did you advise £32.50 when your closest comparable to the valuation date was let at £30 psf?

Answer 16

I took lots of different factors into account and not just the size or valuation date.

This unit benefitted from much more natural light and high ceilings compared to 29a. Although that was closest in size, the specification of this unit was more similar to the Eastfields units which achieved £35 - £38 psf.

Question 17

How did the 5 year term at Unit 2 impact upon the rent as opposed to 1.5 years and 3 years at the comparables?

Answer 17

As the tenant was prepared to take a longer term we offered a slightly discounted rent compared to our quoting terms. If we had needed to agree a break clause, we may not have conceded as much rental discount.

This deal was done in stronger market conditions which explains why the rent is higher than the other comparables.

The landlord was happy not to insist on a rent review mid term as he was satisfied with the level of rent proposed.

Question 18

How accurate did you find the information on CoStar? What other data bases could you have used?

Answer 18

The comparables were generally accurate although I would ensure to phone the relevant agents to verify the details. Fortunately the closest comparables in this instance were transactions carried out by my firm so I had a very reliable data source.

I could have used EGi Property Link which is also a well respected property database.

Question 19

How did you verify the information from CoStar and what barriers did you encounter?

Answer 19

Speaking to local agents to verify the data (rent, floor area etc).

Barriers: getting hold of people to verify details.

Question 20

How did you overcome any barriers to gaining information?

Answer 20

If I couldn’t get hold of an agent I might try to speak to one of their colleagues to verify the data.

I would not use a comparable until we had verified it.

Question 21

Were your comparables new lettings?

Answer 21

Yes - All the comparables were within the last two years, which I judged to be a reasonable timeframe to generate enough evidence. Any further back and the evidence would have arguably been out of date due to the changes in market conditions.

Question 22

Why is a new letting better evidence than say a rent review, lease renewal or asking rent?

Answer 22

According to the hierarchy of evidence for weighting, a New Letting sits at the top, and is followed by Lease Renewal and THEN Rent Review.

Open market letting is a “true letting”
Rent Review bound by the wording of a lease.

Question 23

How did the repairing liabilities differ in the comparables and the subject?

Answer 23

All the same.

All the leases were Full Repairing leases by way of service charge.

I know this as we did all these deals internally.

Question 24

Was there a separate service charge for repairs and how was this calculated?

Answer 24

The service charge covered the landlord’s contribution to the superior landlord’s building maintenance and repairs (i.e. structural issues).

The tenant was responsible for internal repairing liabilities.

The freeholder issued a S/C budget and annual accounts which were passed onto the tenant.

Question 25

Part of the floor is almost a mezzanine from the photos? Is this as valuable as the ground floor? What was your advice and what were your reasons?

Answer 25

Most of the mezzanine was fully useable, bar a small area which was slightly narrow. Therefore I did not feel that a particular discount should have applied.

My knowledge of the area demonstrated that similar units of this type had been let on an overall basis with no discount applied to the mezzanine. The Riverside development is highly sought after and tenants had been prepared to pay full rent on ground and mezzanine floors.

If I was challenged on this point, for example by an acquiring agent, I would have been prepared to apply an adjusted rent of say 75% to the mezzanine floor and advise my client that this would have been reasonable in the circumstances.

Question 26

What proportion lies on the upper floor? Is this similar to other properties?

Answer 26

Ground Floor - 850 sq. ft
Mezz - 214 sq. ft.

TOTAL: 1,064 sq. ft.

Question 27

How would you treat viewings in the current climate of COVID?

Answer 27

I have been carrying out viewings this year and have ensured to use PPE including a mask if applicable, and adhere to social distancing. I have advised applicants about our COVID Policy and requested that they also wear PPE.

Question 28

Why did you reject the offer of £30,000 on the table? Why was this not an option?

Answer 28

The initial offer equated to just £28 psf. While I was conscious of the market conditions, I felt that this was genuinely below the market rent, and I was confident I could secure a better deal for my client. I kept the client’s best interests at heart and ensured that I explored all options before agreeing terms.

Question 29

Why was short term cashflow of paramount importance to the client?

Answer 29

My client was a private individual, rather than a property company or wealthy investor. Moreover she had been liable for the outgoings including business rates on the empty unit and therefore wanted to secure an income as quickly as possible.

Question 30

What would be your analysis of the rent be should you have gone with option 2 and offered 3 months rent free and £37,500 thereafter?

Answer 30

I would have used a straight line approach up to the first break date and factored the 3 months rent-free into my analysis of the net effective rent.

I would have subtracted one quarter’s rent (or £9,375) from the first years headline rent of £37,500 and added this to the full rent for years 2 and 3.

I would have then divided this by the term length (3 years) to arrive at a Net Effective Rent of £34,375 for the first three years up to the break date.

I carried out the same exercise for the full term (assuming the tenant did not break). This gave an higher net effective rent of £35,625pa over the full term.

Question 31

You appear to have ignored the rent free of 3 months in your comparables? Straight line approach to the break at 3 years appears to get close to your target rent?

Answer 31

See Q. 12

Question 32

What is your analysis of the stepped rent in option 3?

Answer 32

In analysing the stepped rent (with no rent-free) I took an average of the first two years rent (£34k and £37k) to arrive at a net effective rent of £35,500 (£33.36 psf).

I carried out a separate exercise on the assumption that the break was not served, and this gave a net effective rent of £36,666 (£34.46 psf).

I was comfortable recommending the client to accept these levels as it was close enough to our target figures and original advice.

Question 33

On a straight line approach it appears to take you above the target of £32.50 psf over 3 years and also over 2 years. It is also well above what the tenant was proposing. What was your approach did you use Present Value and YP tables to calculate the value today of income received in the future? If so, what yields did you use?

Answer 33

Yes the net effective rents arrived at were above the tenants offer and our original figures.

However, this factored in the fact my client had to spend some money on the unit. The tenant was happy to pay a little bit more due to having the flexibility of the break option.

I did not use YP tables. Due to the short term nature of the lease, a simple negotiation process with the tenant was deemed sufficient for the client to compare her options.

Question 34

Why did you advise this deal? What was the analysis of the deal in terms of £ psf and how does this compare to your initial advice on value?

Answer 34

I advised this deal because I felt it fulfilled the client’s primary objectives, which were to secure an income at the earliest opportunity and to mitigate the empty rates and service charge liabilities.

Moreover, I felt that on analysing the net effect rents on both a 2 year and 3 year basis, this exceeded our original guidance and I was happy to recommend the client to accept.

Question 35

Tell me about the negotiations that resulted in your advice on the stepped rent. How did you convince the tenant to come up so much when they said the premises were not fully what they were looking for?

Answer 35

I took the time to listen to the tenants requirements and I was able to establish where there may have been flexibility.

Background research / gut feeling etc.

We threw a bit more at the deal to make it happen at the best rent.

Question 36

They were offering around £32000 for 2 years? Did you go back straight away with your proposal? Tell me how you approached this?

Answer 36

On receipt of the offer I confirmed that I would put this forward to my client for review and that I would revert shortly with further instructions.

I then passed the written offer over to my client, and followed up with a phone to discuss the proposal, observing that I felt the offer was too low and that we should be able to do better.

I discussed several options with the client, explaining the pros and cons of each one.

Over the next couple of days I prepared a short analysis of the options for the client and and we jointly agreed on a suitable counterproposal to revert to the tenant with.

I confirmed my understanding of the client’s instructions in writing before reverting to the tenant to discuss the next steps.

Question 37

When looking at the condition issues was option one never on the table? The tenant had already informed you that they were not wanting to take on remedial work?

Answer 37

Option one could have been on the table, if the tenant had been prepared to take a view on the condition of the premises. While there were some relatively minor issues, it is plausible that another tenant may have accepted this, with a reduced dilapidations liability. In this instance, the tenant did feel that the carpets and paintwork needed addressing as they are a customer facing business and felt that the existing condition was not satisfactory.

Question 38

How would you have approached existing dilapidations in drawing up the lease had the tenant agreed to carry out the works in option two?

Answer 38

Option 2 - Rent Free Period.

In offering a rent free period we would have put a condition in the lease that the tenant would have to carry out remedial works to an agreed specification.

The unit would therefore have to have been returned in the same condition as on completion of these works.

Question 39

What sort of rent-free period would you have advised should the tenant undertake the works?

How would you have calculated this?

Answer 39

CHECK NUMBERS
I would have advised offering a rent-free roughly equivalent to the value of the works, possibly allowing slightly longer to account for the time taken to carry these out.

Having obtained a quote from a contractor for this, I knew that the cost of the repairs was roughly £4k.

Given the first years’ rent was £34,000, 1/2months rent-free may have been appropriate.

Question 40

Why did you advise that option 3 was the most suitable for the client?

Answer 40

It was costing the client money to have the unit unoccupied. (rates, s/c etc). In this scenario, speculating on a relatively small cost to secure a deal for two years’ income was a viable and reasonable solution.

Furthermore, the tenants may not have proceeded without my client carrying out the repairs.

Question 41

What was the outcome and what were the costs in carrying out the works?

Answer 41

Costs TBC.

Question 42

What advice did you give on costs and what tenders were sought?

Answer 42

I offered to provide the client with details of some local contractors to tender the work.

The client advised me that she had a regular contractor who had done work for her previously, and whom she was happy with and did not need us to get further involved in the process.

Question 43

In your SWOT analysis why was one of the weaknesses not the fit out of the property?

Answer 43

Because on the face of it the unit seemed to be in good condition, and it was only made apparent at a later stage, once the desks and furniture had been removed, that there were certain areas in a poor state of repair, such as the paintwork and the carpets.

However, on reflection I should have foreseen this and recommended that works were instructed at an earlier stage.

Question 44

What was the EPC for the property?

Answer 44

The EPC was rated B.

Question 45

What money laundering checks of the company did you undertake?

Answer 45

Same as Q2 - not required.

Question 46

If doing this again what advice would you have given concerning the furniture and carpets?

Answer 46

I would advise a client in the future to ensure that an outgoing tenant fulfils their dilapidations obligations, by either carrying out the necessary repair works, or retaining a sum of money on account equivalent to the cost of the required works, as agreed by a dilapidations surveyor.

Question 47

What advice did you actually give to the client concerning the market?

Answer 47

I advised the client on market conditions on a regular basis, observing the impact of Brexit and political developments, as well as changing trends such as the emergence of serviced office / coworking providers.

Impact was lots of uncertainty and further incentives on deals required etc.

Question 48

Was it not the case that there was a volatile market and how did you manage the expectations of the client?

Answer 48

I advised in my initial marketing report that the market was volatile, and that void periods, incentives and reductions in headline rents were becoming more and more likely. In hindsight I may have cautioned the client a bit more expressly about expectations of occupiers in the market, particularly as more extensive incentives were being agreed across the board.

Question 49

What adjustments did you make when analysing your comparable evidence?

Answer 49

I accounted for any rent-free periods by ascertaining the net effective rent for each comparable. (This gave a N.E.R of £32 psf for unit 2, 5E).

I made adjustments based on specification and location, using a matrix to compare like for like and make additions or deductions from the rental value as necessary.

Question 50

Did the upcoming competing properties not represent a conflict of interest for you?

Answer 50

Upcoming instructions may well have posed a potential conflict of interest.

I highlighted this to the client at the outset, explaining that my firm acted for most of the long leaseholders and that we would have similar properties coming to the market shortly.

I gained the client’s informed consent to proceed with the instruction, and I was satisfied that any potential conflict would not prevent me from providing competent and diligent advice to the client.

Question 51

Why is it important to avoid conflicts of interest?

Answer 51

The most important reason is to avoid anything getting in the way of your duty to advise and represent each client objectively and independently.

Question 52

How might you avoid a Party Conflict?

Answer 52

DEFINE SCOPE - Agree with the client at the instruction stage, restrictions on the scope of the duties/services taken on in the professional assignment.

Question 53

You haven’t included a scale on your plans - why and what was the scale?

Answer 53

There was a scale on the full copy of the plans. This was outside the cropped area for the purposes of the presentation.

Floor plans were 1:100 @A3
Location plan was 1:500
Google maps plan was 1: