Case Study - Questions Flashcards
What was your best comparable and why?
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.
What was your closest external comparable you had regard for?
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)
How did you analyse your Comparable Evidence?
With reference to the RICS Professional Standard: “Comparable Evidence in Real Estate Valuation” (2019).
Methodology - SIX steps:
- Source Comparables
- VERIFY the details and analysed to get a NET EFFECTIVE RENT
- Created schedule of comparables
- Adjust comps in relation to the Hierarchy of Evidence.
- Analyse to form opinion of value (MR).
- Stand back & look. Reported the value and prepared file note.
Why have you analysed Headline Rent in your comparable evidence schedule and not Net Effective?
Two reasons:
- 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.
- 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.
Talk me through how you calculate Net Effective Rents?
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).
Did the calculation of Net Effective Rent change the weighting of your comparable evidence in any way?
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.
Apart from the Straight Line method which is great - are you aware of any other approaches to calculate the Net Effective Rent?
You could use YP approach/time value of money (used by the VOA but not widely used).
You could also use a DCF.
How did you calculate the Net Effective Rent for the 3rd floor in the subject property?
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.
Why did you analyse until the first lease event rather than the full duration of the lease?
Because this is the ‘term certain’
What AML checks did you carry out before you undertook the instruction?
As the client (Fuller, Smith & Turner) were a PLC, I confirmed their position on the London Stock Exchange.
If the client was a Private Company - what AML checks would you be looking to do then?
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).
What is the legislation for AML - what does the law say?
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.
What is the RICS Professional Statement on Money Laundering and what are the key takeaways?
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.
How did you complete the Conflict of Interest check?
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.
What did you include in your Terms of Engagement?
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
What is your typical fee basis?
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.
Talk me through the construction of the property?
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).
What do you understand about the banning of cladding material from certain buildings?
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).
How did you age the property? How could you tell?
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.
Describe the locality in socio-economic terms?
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.
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?
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).
Did you find any defects?
What are common building defects for period office buildings?
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
Would you say the office was ‘Grade A’ or ‘Grade B’?
Grade B
What is Grade A office space?
What is the BCO Guide to Office Specification (2023)?
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.
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?
The floor to ceiling height was 2.4m.
The BCO guide approximate floor-to-ceiling height of 2.6m - 2.8m.
Tell me about the Air Conditioning on the floor?
Wall-mounted, comfort cooling units.
Was it gas fired or electric?
Electric
