Case Study - Questions Flashcards

1
Q

What was your best comparable and why?

A

In this instance my best comparables were recent transactions in the building (Category A of the Hierarchy of Evidence).

The most recent deal in the building was to a Software company who took a new lease on the 3rd floor in 2020 at £52.00 per sq ft (10 months rent free taken as 5 + 5). They also took a separate lease on the 1st floor on the same terms (with 4 months rent free).

I also had reference to the previous deal on the 4th floor in 2019 - at £52.50 per sq ft.

HOWEVER, I was fully aware market conditions had changed a lot since then and analysed CONTEMPORARY comparable evidence as well.

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2
Q

What was your closest external comparable you had regard for?

A

9 HOLYROOD STREET

A contemporary, open-market letting (2021) which was less than 5-minutes from the subject property.

Similar specification (with existing fit out in situ).

On a Headline basis this achieved £57.50 per sq ft with a 7-month rent-free period upfront. (Net Effective Rent of £46.00 per sq ft).

(A very good comparable & clear evidence of challenging market conditions post pandemic)

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3
Q

How did you analyse your Comparable Evidence?

A

With reference to the RICS Professional Standard: “Comparable Evidence in Real Estate Valuation” (2019).

Methodology - SIX steps:

  1. Source Comparables
  2. VERIFY the details and analysed to get a NET EFFECTIVE RENT
  3. Created schedule of comparables
  4. Adjust comps in relation to the Hierarchy of Evidence.
  5. Analyse to form opinion of value (MR).
  6. Stand back & look. Reported the value and prepared file note.
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4
Q

Why have you analysed Headline Rent in your comparable evidence schedule and not Net Effective?

A

Two reasons:

  1. Rent-free periods were not available for all of the comparable evidence, and therefore I analysed the comparables on a headline basis to ensure that I was carrying out a like-for-like analysis.
  2. The client requested to see comparable Headline Rents in the area (before devaluation).

HOWEVER, for analysing the the Estimate Rental Value (ERV) and quoting rent I had full regard to the Net Effective Rent.

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5
Q

Talk me through how you calculate Net Effective Rents?

A

I established the Headline Rent first so that I could devalue it to produce a Net Effective Rent.

I used the STRAIGHT LINE BASIS in Excel until the next lease event.

To do this, I AGGREGATED the cost of all rental payments (to include rent-free / any other incentives) and divided this by the term certain.

I deducted a 3-month fitting out period from the rent-free before devaluing (unless the space was already fitted).

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6
Q

Did the calculation of Net Effective Rent change the weighting of your comparable evidence in any way?

A

It did - it devalued the headline rent to produce the ‘true market rent’.

Having analysed the Net Effective Rent, the evidence was clear of challenging market conditions. Landlord’s were clearly granting longer rent-free periods (2.4 months per term certain).

The trend was roughly a £5.00 per sq ft devaluation of the headline rent.

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7
Q

Apart from the Straight Line method which is great - are you aware of any other approaches to calculate the Net Effective Rent?

A

You could use YP approach/time value of money (used by the VOA but not widely used).

You could also use a DCF.

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8
Q

How did you calculate the Net Effective Rent for the 3rd floor in the subject property?

A

I established the Headline Rent (£52.00 per sq ft) so that I could devalue it to produce a Net Effective Rent.

I used the STRAIGHT LINE BASIS in Excel until the next lease event.

To do this, I AGGREGATED the cost of all rental payments (to include rent-free and any other incentives) and divided this by the term certain. (So 3rd floor was 5 months rent free before the 3rd year break option).

I also deducted a 3-month fitting out period from the rent-free before devaluation.

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9
Q

Why did you analyse until the first lease event rather than the full duration of the lease?

A

Because this is the ‘term certain’

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10
Q

What AML checks did you carry out before you undertook the instruction?

A

As the client (Fuller, Smith & Turner) were a PLC, I confirmed their position on the London Stock Exchange.

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11
Q

If the client was a Private Company - what AML checks would you be looking to do then?

A

Company Name

Company Number

Address of registered office

Names of Directors / Shareholders with 25% or more holding.

(then I would check if I need to do EDD checks).

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12
Q

What is the legislation for AML - what does the law say?

A

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on Payer) Regulations (2017) (as amended in 2022).

ALL letting agents MUST register with HMRC if they let individual properties for more than the equivalent of €10,000/month.

AML checks MUST be carried out on both Landlord & Tenant as a minimum.

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13
Q

What is the RICS Professional Statement on Money Laundering and what are the key takeaways?

A

Countering Bibery & Corruption, Money Laundering & Terrorist Financing (2019).

It is mandatory advice to members on how to interpret and apply the law.

Customer Due Diligence (CDD) checks MUST be carried out on both LANDLORD and TENANT at a minimum.

Enhanced Due Diligence (EDD) checks MUST be undertaken if RED FLAGS occur (e.g. high-risk country), or you are dealing with a POLITICALLY EXPOSED PERSON (PEP) or associated member.

A firm MUST appoint a Money Laundering Reporting Officer (MLRO) to report Suspicious Activity Reports (SARs) to the National Crime Agency.

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14
Q

How did you complete the Conflict of Interest check?

A

I completed the Conflict of Interest check in line with my companies policy.

I checked my company’s internal database.

I then sent a Conflict of Interest (CoI) check email across the company to all employees outlining details of the property and the client.

I waited a reasonable time for a response (1 week) before proceeding.

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15
Q

What did you include in your Terms of Engagement?

A

Terms of Engagement (agency purposes) include:

Proposed Fee Agreement

Clear Scope of Work / Basis of Appointment

Reference to my firm’s Complaints Handling Procedure

Any expenses to be paid

My firm’s contact details

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16
Q

What is your typical fee basis?

A

Typical fee basis will be 10% of the first year’s rent, ignoring the rent-free period.

I have also used 8% with a further 2% discretionary bonus based on - client satisfaction, time spent, deal outcome.

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17
Q

Talk me through the construction of the property?

A

The property is of 19th century concrete, masonry construction, with a cream Stucco cladding.

It is of Italianate Palazzo Style architecture - symbolic of rounded corners and a ‘cliff-like’ facade.

(The 4th floor was a later addition at the turn of the century. It is of steel frame construction with skylights).

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18
Q

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

A

Following Grenfell, COMBUSTIBLE MATERIALS, such as Aluminium Composite Material (ACM), and BANNED from residential buildings over 18m high and need replacing.

Since seen the introduction of the Fire Safety Act (2021) and Building Safety Act (2022).

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19
Q

How did you age the property? How could you tell?

A

The property was of early 19th century construction.

I could tell by:

Information from the client

The Land Registry

Research the date of planning consent

Architectural style or the architect’s certificate of PC.

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20
Q

Describe the locality in socio-economic terms?

A

The property holds a prominent position on the West side of Borough High Street, just south of the River Thames and directly opposite to London Bridge station.

This is a POPULAR part of Southwark with commercial occupiers, residential occupiers and tourists alike.

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21
Q

You inspected for agency purposes. You say you payed particular attention to features that would have an impact on rental value - what were you looking out for?

A

Any defects that would adversely affect the property

Any Wants of Repair / maintenance issues

STATUTORY COMPLIANCE (e.g. is it Equality Act 2010 compliant).

The internal specification (do fixtures and fittings need updating).

Marketability and layout of the floor

Building amenities (any bike racks / showers).

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22
Q

Did you find any defects?

What are common building defects for period office buildings?

A

There were no defects that could adversely affect the property.

Typical defects to look out for:

Wet Rot (Damp & Timber Decay)

Dry Rot (Fungal Attack)

Damp penetration at roof and ground floor level

WATER INGRESS around door and window openings

Structural movement

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23
Q

Would you say the office was ‘Grade A’ or ‘Grade B’?

A

Grade B

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24
Q

What is Grade A office space?

What is the BCO Guide to Office Specification (2023)?

A

As set out by the British Council for Offices Guide to Office Specification (2023), may include the following features:

Full access raised floor with floor boxes

Approximate floor to ceiling height of 2.6 - 2.8m

1:8m2 to 1:10m2 occupational density

Raised floor void of 150mm and Ceiling void of 350mm

Maximised opportunity for daylighting

Air conditioning and double glazed windows

Passenger lifts

1 cycle space per 10 staff, and 1 shower per 100 staff.

BCO update in 2023:

Adoption of 1:10m2 occupational density (following the pandemic).

Minimum sustainability target of BREEAM “Excellent” and 5 star NABERS rating for new schemes.

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25
Q

What was the floor-to-ceiling height, because in your photo it looks quite low? And how does this compare to what the BCO guide for Grade A?

A

The floor to ceiling height was 2.4m.

The BCO guide approximate floor-to-ceiling height of 2.6m - 2.8m.

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26
Q

Tell me about the Air Conditioning on the floor?

A

Wall-mounted, comfort cooling units.

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27
Q

Was it gas fired or electric?

A

Electric

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28
Q

What is the difference between Air Conditioning & Comfort Cooling?

A

Comfort Cooling is the simplest form of just cooling the air. It cannot be adjusted for different portions of the floor.

Modern Air Conditioning dehumidifies the air and are far more sustainable, for example:

Variable Air Volume (VAV system). This allows the most flexibility as the VOLUME of air can be varied to meet the heating / cooling needs of different building zones.

29
Q

What was the EPC rating for the building?

A

D

30
Q

What advice did you give your client in respect of the regulations and changes happening to EPCs?

A

I advised that as of April 2023, ALL commercial property MUST legally have an EPC rating of ‘E’ or above to be let, for both new and existing leases.

I am aware of proposed increases for the MEES to reach band ‘C’ by 2027 and ‘B’ by 2030.

31
Q

Interesting you say it’s D at the moment - what are you advising the Landlord in terms of upgrading the building?

A

Upgrading the Air Conditioning to VAV / 4-Pipe Fan Coil / VRF.

Upgrade the lighting to energy efficient LEDs. Also install PIR motion sensor LEDs that turn off when not in use.

Double Glazing / Triple Glazing.

Reflective coating or shading devices to the windows would prevent overheating.

Recommend an EPC assessment to identify areas of upgrade.

32
Q

Was the Building Listed?

If so, why was it not exempt from having an EPC?

A

It was Grade II listed.

Listed Buildings are only ‘exempt’ from having an EPC if compliance with EPC ratings would “unacceptably alter their character or appearence”

33
Q

You say the common parts were quite dated - did you look at any discussions with the Landlord as to how they could be improved?

A

Part of my marketing recommendations report included:

New paintwork

Soft seating in reception

New passenger lift

Replace carpeting

34
Q

How did you measure the floor?

A

In accordance with RICS Property Measurement (2018) and RICS Code for Measuring Practice (2015).

I reported on a dual basis and advised my client of the benefits to adopting IPMS.

35
Q

Why did you quote on an NIA basis on your marketing particulars?

A

The client provided a written request to just quote on an NIA basis.

They were more familiar with the term NIA and wished to wait for the widespread market adoption of IPMS to become the norm.

36
Q

When you measured to IPMS, where did you measure to, using your photographs in Appendix C as an example?

A

I measured to the Internal Dominant Face, i.e.g the inside finished surface comprising 50% or more or the floor-to-ceiling height of the vertical wall section.

37
Q

In your rental adjustment, how did you treat the 7 month rent free period at 9 Holyrood Street?

Why did you take this course of action?

A

I devalued the headline rent to produce the net effective rent.

To do this, I aggregated the cost of all rental payments (including rent free period / all other incentives) and divided this by the term certain.

For 9 Holyrood Street, this gave me a Net Effective Rent of £46.32 per sq ft.

38
Q

What was the Net Effective Rent for the deal you achieved in your case study?

A

Headline Rent = £53.00 per sq ft

Net Effective Rent = £41.96 per sq ft

The low Net Effective Rent was because of the short lease term certain (break at the end of the 2nd year).

39
Q

Why has the 4th floor achieved the highest rental value in the building?

A

The only floor to benefit from two balconies / outdoor space (which command a rental premium).

40
Q

What were the market conditions like?

A

The Market Conditions were incredibly challenging and flat for everything apart from ‘best in class’ space.

Two tier office market where ‘top quality’ is performing well (with high build amenities / strong ESG credentials) and the rest fairly flat.

Flight to Quality - occupiers wanting the very best space when returning to the office.

High demand in the market for fully fitted space (reduce upfront capex for fit out) - Landlord’s rolling out ‘CAT A+’

Occupiers downsizing - requirements for MORE flexibility in lease terms (tenant-favourable market).

41
Q

How did you analyse your comparable evidence?

A

With reference to the RICS Professional Standard: “Comparable Evidence in Real Estate Valuation” (2019).

Methodology - six steps:

  1. Source Comparables
  2. VERIFY details and analyse to get a Net Effective Rent.
  3. Create schedule of comparables
  4. Adjust comps in relation to the Hierarchy of Evidence.
  5. Analyse to form opinion of value (MR / MV).
  6. Stand back and look. Report value & prepare file note.
42
Q

What is the Hierarchy of Evidence?

A

Framework for comparables based on weighting:

Category A = DIRECT COMPARABLES

  • Data from the subject property itself (the best)
  • Completed transactions of near-identical properties.
  • Contemporary, full and accurate information.

Category B = GENERAL MARKET DATA

  • Published sources / Commercial Databases (e.g. CoStar).
  • Historic Evidence
  • Supply and Demand data

Category C = OTHER SOURCES

  • Wider market data (interest rates, stocks & shares)
  • MSCI
43
Q

What makes a good comparable?

A

Huge focus on “Contemporary” in the Hierarchy of Evidence (“Contemporary, full & accurate information”).

The best comparable will be in the subject property itself.

Strong comparable will be an almost identical property, next door to the subject property which transacted yesterday and you have full & accurate information on the deal. Think:

  • Contemporary
  • Location
  • Similarity
  • Transparency
  • Arms-length, open markt transaction.
44
Q

How did you find your comparable evidence?

A

Inspection of the local area to find ‘TO LET’ boards

Speaking with local agents

CoStar / Property Databases and VERIFIED the information by speaking to the respective agent.

45
Q

How accurate did you find the information on CoStar?

A

The data on CoStar was generally accurate but I ALWAYS ensured I VERIFIED the information from speaking to the respective agent.

46
Q

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

A

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

Barriers: Getting hold of the agents to verify the data. I would not use information as a comp until it was VERIFIED.

47
Q

How did you overcome any barriers to gaining the information?

A

If I couldn’t get hold of an agent I would speak to one of their colleagues to see if they had oversight of the deal.

I would also verify data via Triangulation.

48
Q

Were your comparables all new lettings?

A

Yes - all of my comparable evidence were within the last 2 years, which I judged to be a reasonable timeframe to generate enough evidence.

Any further back and the evidence would have been out of date due to the changes in market conditions.

49
Q

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

A

According to the Hierarchy of Evidence for leasing, a new letting sits at the top, followed by a Lease Renewal and THEN a Rent Review.

Open market letting is a “true letting”

Rent review is bound by the wording of the lease.

50
Q

What was the repairing liability you agreed with your Case Study letting?

A

Effective FRI lease.

51
Q

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

A

All of them were Effective Full, Repairing & Insuring (FRI) leases.

52
Q

What is an Effective FRI lease?

A

Most commonly found in multi-let buildings where there are shared communal areas.

The Landlord will charge the tenants a SERVICE CHARGE which will generally cover the upkeep & maintenance of the external + communal areas of the building, as well as building insurance.

53
Q

What is the difference between a FRI lease and an Effective FRI lease?

A

FRI = Tenant is responsible for maintaining, repairing & insuring the ENTIRETY of the property (internal and external).

Effective FRI = Found in Multi-Let Buildings where there are shared communal areas / shared external parts. The Landlord will charge the tenants a SERVICE CHARGE which will generally cover the upkeep & maintenance of the communal areas of the building, as well as building insurance. The tenant will only be responsible for arranging maintenance & repairs to their DEMISE.

The key difference: Effective FRI = SERVICE CHARGE.

54
Q

What is an Internal, Repairing & Insuring (IRI) lease?

A

IRI = Less common in commercial property. This means the tenant is only responsible for the upkeep and repairs to the internal elements of their demise. For example, if there was an issue with the roof, this would be the Landlord’s responsibility to repair.

55
Q

What was the Service Charge and what did it include?

A

The service charge was £7.39 per sq ft

This is the amount the tenant will pay to cover the upkeep of the communal facilities.

Included in the Service Charge budget here was:

Lift maintenance
Cleaning of common parts
Lighting and power to common parts
Fire alarm maintenance
Maintenance of the exterior
Managing Agents (in this case Cluttons Property Management team).

56
Q

With this being the 4th floor, would you say there were differences in values between the different floor in the building?

A

This was the top floor in the building and the only one to benefit from an element of outdoor space. Therefore, it was approprate to quote a rent of £55.00 per sq ft.

However, the specification was very similar to the lower floors and the levels of natural light did not improve by much. Therefore, I applied a premium for it being the top floor but the difference was not a lot.

57
Q

What were the Southwark Planning Restrictions?

A

In accordance with the Town & Country Planning Regulations (2007):

Planning consent must be required for non-residential properties if over 2 sq m (flat), or 2.3 sq m (if V board).

Maximum 1 letting board per building

Maximum 1m projection from the front of the building

NO illumination

Must be removed 14 days after completion of letting

Must have Landlord approval before being put up.

58
Q

Why did you reject the opening proposal on a 5 year lease? Why was this not an option?

A

The initial offer was starting at £40.00 psf which was significantly below the Market Rent, and should not be accepted.

Whilst I was conscious of difficult market conditions, one of the main objectives was to achieve a deal at the market rent.

59
Q

You granted an 8-month rent-free period. If I picked up the lease having completed the letting, how was that rent-free period documented in the lease?

A

I would look at the lease start date vs the rent commencement date.

(Term commencement date vs lease commencement date) and compare the difference.

60
Q

What was the process of getting the lease Outside of the Landlord & Tenant Act (1954) and how was it documented between lawyers?

A

(Section 38A)

Section 38A of the Act sets out the strict procedure which must be followed for the Landlord to grant outside of the Act:

  1. The Landlord MUST serve a HEALTH WARNING notice on the prospective tenant, explaining that the lease will not be protected. This is known as a health warning (advises the tenant to seek professional advice).
  2. The proposed tenant must then make a DECLARATION in response, confirming they have recieved the notice and understand the consequences of contracting out. The type of declaration depends on the timing:

1) SIMPLE DECLARATION = Given when the parties have recieved the warning notice at least 14 days or more prior to committing to the lease.

2) STATUTORY DECLARATION = Given when the parties have recieved the warning notice less than 14 days prior to committing to the lease. Statutory declaration mudt be obtained + requires an independent solicitor for oath.

61
Q

How would you be able to tell if a lease is Inside or Outside of the Landlord & Tenant Act (1954)?

A

Flick through the lease to see if you can see any manuscript entries.

If OUTSIDE there will be an ENDORSEMENT referring to the Landlord’s health warning and the Tenant’s STATUTORY DECLARATION that the lease is outside of sections 24-28 of the Landlord & Tenant Act.

62
Q

Going back to the rent-free period you agreed - was that initial or was it split out over the term, because I note there was a Tenant break at year 2?

A

The 8-months rent-free period was frontloaded in Year 1 (this was the fall-back position).

I strongly advised amortising the rent-free over the duration of the lease term (to be taken as 2 months per annum).

This was negotiated with the tenant - however they would only accept if frontloaded in year 1. My client took a view and was keen not to loose the tenant and extend the void period even further than it had been.

63
Q

What was the Rateable Value of the floor and what did you say to prospective tenants about that?

A

I am aware the VOA have revalued the Rateable Value of business properties and published a new RV list for England and Wales in April 2023 to reflect updated property market conditions.

The current uniform business rate for 2023 remains unchanged:

This is £0.49 for RV’s less than £51,000 (small business multiplier).
This is £0.512 for RV’s more than £51,000 (higher business multiplier).

So:

The Rateable Value for the 4th floor was £52,500. As this is higher than the threshold of £51,000, I used the higher multiplier (£0.512p). This = Rates Payable of £14.50 per sq ft for the 4th floor.

64
Q

What was the break notice period?

A

6 months

65
Q

What were the conditions attached to the break clause?

A

1) Up to date payment of all rent & service charge payments.

2) Making good & returning the property with full vacant possession.

66
Q

Why did you recommend a rental deposit in your case study?

A

Because they did not meet the market standard ‘Profits Test’ (3 x 3).

However, the last 2 years had shown significant profits.

I advised the client that requesting a 3-month rental deposit was justified, but recommended they seek professional accounting advice for further reassurance.

67
Q

Why did you advise this deal and what analysis did you do?

A

I advised this deal because I felt it fulfilled the client’s primary objectives.

Although the Net Effective analysis was low, this was a reflection of the short lease term.

However, this was a reflection of the market conditions at the time. Comparable Evidence had shown evidence of flexible lease terms after the pandemic.

My advice was to split the rent free period after the break to give the tenant incentive to extend. However, when faced with the prospect of losing the tenant, the client did not want to lose the tenant and extend the void period.

The client was also happy that the Headline Rent was agreed at £53.00 per sq ft.

68
Q

Did you go back straight away with your proposal - tell me how you approached this?

A

I reported all offers to the client in writing (as per the Estate Agents Act 1979).

Reported in writing immediately, and followed up with a call. I arranged a meeting to run through the advantages and disadvantages.

69
Q

How did you treat the balconies when you measured to IPMS: 3?

A

I included the balconies BUT STATED SEPARATELY to IPMS: 3