Level Three - Example One (MK) Flashcards
What other due diligence did you do?
- Business rates
- Contamination
- Flooding risk
- Highways
- Legal title and tenure
How might covenant strength impact the Market Value?
It is likely a higher capitalisation rate would be applied to a property with an uncertain covenant strength as there is more risk involved, therefore lowering the value.
Was there a rent review coming up?
Yes, upward only.
How did you account for the rent review in your valuation?
Upward only but no rental growth so assumed the same rent for rest of the term.
What was the additional risk?
The company going into financial trouble:
- Going bust
- Not paying rent
- Risk of having to re-let unexpectedly.
What advice did you give your client? Why was it suitable for secured lending? How did your advice impact your client?
I advised my client that the property was overrented and that the covenant strength was uncertain.
It was suitable for loan security because it was low LTV.
What would make a property unsuitable for secured lending?
High LTV. Aim for 60%
How might planning impact market value?
Might be planning to develop the site which can make the property more valuable due to the potential.
What did you find in the planning?
Nothing significant - planning for the erection of the unit in 2004. Display sign changes et etc.
Is it common to have a national occupier with an uncertain covenant strength?
Pretty unusual, but it is possible.
Can you talk me through how you used the hardcore and layer approach here?
Capitalised the over-rented tranche at a higher capitalisation rate until lease expiry and then at the lower rate on the Market Rent into perpetuity.
Did you give any other advice other than the report being suitable for loan security purposes?
Overrented – due to evidence I established this.
Opportunity to subdivide the property – due to such a large space and risk with reletting
Tenant risk – although not qualified I advised my client to speak to a chartered account regarding the tenant covenant
How did you establish that the tenant covenant strength was uncertain?
Looked at Creditsafe and looked at the rating but formed my own opinion on:
Pre-Tax Profit
Turnover
Net Worth
caveat that we are not chartered accountant
How did you arrive at the conclusion that the property was over-rented?
looked at similar properties where a deal had been agreed recently and they were agreed at a lower rent than the subject property. Warehouse similar size and spec.
RPI or CPI linked RR?
