Profits

Question 1

What section of the RICS Valuation - Global Standards summaries trade related vals?

Answer 1

VPGA 4

Question 2

What is adjusted net profit?

Answer 2

This is the valuer’s assessment of the actual net profit of a currently trading operational entity.

Question 3

What does EBITDA stand for?

Answer 3

Earnings before interest, taxes, depreciation and amortisation

Question 4

What is EBITDA?

Answer 4

This term relates to the actual operating entity and may be different from the valuer’s
estimated FMOP.

Question 5

What is fair maintainable operating profit?

Answer 5

This is the level of profit, stated prior to depreciation and finance costs relating to the asset itself (and rent if leasehold), that the reasonably efficient operator (REO) would expect to derive from the fair maintainable turnover (FMT) based on an assessment of the market’s perception of the potential earnings of the property

Question 6

Fair maintainable turnover (FMT)?

Answer 6

This is the level of trade that an REO would expect to achieve on the assumption that the property is properly equipped, repaired, maintained and decorated

Question 7

An operational entity usually includes:

Answer 7

• the legal interest in the land and buildings

• the trade inventory, usually comprising all trade fixtures, fittings, furnishings and
equipment and

• the market’s perception of the trading potential, together with an assumed ability to
obtain/renew existing licences, consents, certificates and permits.

Consumables and stock in trade are normally excluded.

Question 8

Personal goodwill (of the current operator)

Answer 8

This is the value of profit generated over and above market expectations that would be extinguished upon sale of the trade related property, together with financial factors related
specifically to the current operator of the business, such as taxation, depreciation policy, borrowing costs and the capital invested in the business.

Question 9

Reasonably efficient operator (REO)

Answer 9

This is a concept where the valuer assumes that the market participants are competent operators, acting in an efficient manner, of a business conducted on the premises. It involves estimating the trading potential rather than adopting the actual level of trade under the existing ownership, and it excludes personal goodwill.

Question 10

Tenant’s capital?

Answer 10

This may include, for example, all consumables, purchase of the inventory, stock, and working capital.

Question 11

Trade related property

Answer 11

This is any type of real property designed or adapted for a specific type of business where the property value reflects the trading potential for that business.

Question 12

What is step 1 of the profits method?

Answer 12

An assessment is made of the FMT that could be generated at the property by an REO.

Question 13

What is step 2 of the profits method?

Answer 13

Where appropriate, an assessment is made of the potential gross profit, resulting from the FMT.

Question 14

What is step 3 of the profits method?

Answer 14

An assessment is made of the FMOP. The costs and allowances to be shown in
the assessment should reflect those to be expected of the REO – which will be the most
likely purchaser or operator of the property if offered in the market.

Question 15

What is another word for the FMOP?

Answer 15

Divisible balance

Question 16

What is step 4 of the profits method?

Answer 16

A. Apply suitable capitalising rate of return reflecting risk and rewards of the property using relevant comparables.

B. Improvements and repairs impact on trade implicit in FMT with an allowance of these costs made in the operating costs.

Question 17

What legislation governs Premises Licenses?

Answer 17

Licensing Act 2003: a single integrated scheme for licensing premises which are used to serve alcohol

Question 18

What is a premises licence?

Answer 18

A premises licence, or a club premises certificate, is a permanent licence granted for a specific location, that authorises the holder to carry on any or all of the following licensable activities: the sale of alcohol. the supply of alcohol by a club to its members and guests.

Question 19

Other trade-related legislation?

Answer 19

•	Transfer of Undertakings (Protection of
         Employment) Regulations 2006;
•	 Food Act 1984 (as amended);
•	 Food Safety Act 1990 (as amended);
•	 Equalities Act 2010

Question 20

Public houses are typically viewed under one

of six broad types:

Answer 20

•	 town centre: circuit bar (including chameleon
bar);
•	 town centre: traditional pub (either food or wet
led);
•	 community: urban;
•	 community: suburban;
•	 community: rural; and
•	 food led: destination.

Question 21

They are typically operated in one of four ways:

Answer 21

• under direct management;
• by a lessee, occupying by way of a full repairing
and insuring lease;
• by a tenant, occupying under the terms of an
internal repairing short term agreement; and
• by individuals as owner/occupiers.

Question 22

What is free of tie?

Answer 22

Owned by brewers or pubcos
Freehold or leasehold
Tenancy granted with supply ties

Question 23

Name some typical special assumptions?

Answer 23

(a) on the basis that trade has ceased and no
trading records are available to prospective
purchasers or tenants;
(b) as in (a) but also assuming the trade inventory
has been removed;
(c) as a fully-equipped operational entity that
has yet to trade (also known as ‘Day One’
valuation); and
(d) subject to stated trade projections –
assuming they are proven. This is appropriate
when considering development of the
property

Question 24

Standard pub assumptions?

Answer 24

it is normally assumed that all licences
and permits will be transferred or granted on the
date of transfer of the property interest

Question 25

Where the property is trading and the trade is
expected to continue, the valuation will be reported
as:

Answer 25

Market Value [or market rent] as a fully
equipped operational entity having regard to
trading potential [subject to any agreed or
special assumptions which must be clearly
set out]

Question 26

Where the property is empty, the valuation

will be reported as:

Answer 26

Market Value [or market rent] of the empty
property having regard to trading potential
subject to the following special assumptions
… [which must be clearly set out].

Question 27

Why do pubs and restaurants typically have longer leases?

Answer 27

in order amortise the initial fit out costs

Question 28

What does Amortise mean?

Answer 28

gradually write off the initial cost of (an asset) over a period.

Question 29

Lease Terms impacting the value of leisure property?

Answer 29

Extent of the demise: Is it a ground rent, a shell
rent, a fully fitted rent or something in between?
•	 Lease or hypothetical lease term:
•	 User provisions: 
•	 Tenant obligations: 
•	 Alienation provisions:
•	 Rent review provisions: 
•	 Trading matters: 
•	 Wholesale supply tie provisions

Question 30

Why is market evidence so difficult to rely on with licensed property?

Answer 30

The difficulty with licensed properties is the
complexity of the submarkets that exist and the
wide variety of lease terms that prevail in the
market.

Question 31

Matters that impact the apportionment of the divisible balance are?

Answer 31

•	 attractiveness and style of property;
•	 availability of finance;
•	 economic and regulatory matters;
•	 length of lease and lease terms;
•	 location;
•	 provision of domestic accommodation;
•	 quantum of profit;
•	 supply of similar properties;
•	 surplus or obsolescent accommodation/
amenities;
•	 terms of, and restrictions on, trading;
•	 trading potential and risk; and
•	 type of operation.

Question 32

Comparable evidence can be derived from
differing sources, as the valuer will be looking for
evidence at three levels. These are:

Answer 32

(a) the FMT;
(b) the FMOP, i.e. the conversion of turnover to
profit for a particular style of operational entity;
and
(c) the split of the divisible balance between
landlord and tenant.

Question 33

Impact of this for pubs Monopolies and Mergers

Commission report in 1989

Answer 33

e largest brewers were forced
to sell substantial numbers of public houses and
security of tenure was afforded to public house
tenants.

Question 34

How do ties vary?

Answer 34

Supply terms vary widely from a simple beer
tie (with or without freedom for guest ales) through
to a full drinks tie, and from zero contractual
discounts through to substantial contractual
discounts.

Question 35

Dog & Bell public house profits method:

Answer 35

FMT Gross Profit
£400,000 67% = £264,000
Costs on FMT 
Wages 25% = £100,000
Other costs 18% = £ 72,000
Stock etc £45,000 @ 10% = £ 4,500
= £176,500
FMOP = £ 87,500

YP in Perp at 16.5% = 6.06
6.06 * £87,500 = £530,000
Less purchers costs at 6.5%
£495,550

Question 36

Dog & Bell public house investment method:

Answer 36

FMT Gross Profit
£400,000 67% = £264,000
Costs on FMT
Wages 25% = £100,000
Other costs 18% = £ 72,000
Fitting out £45,000 @ 10% = £ 4,500
Operatomg costs = £176,500

Divisible Balance = £ 87,500
Rental Bid @ 50% = £ 43,750
Say = £ 44,000
Open Market Rent £44,000
YP @ 8% perpetuity 12.50
Total £550,000
Less purchers costs at 6.5%
£514,250

Question 37

What is the role of the Pub Code Adjudicator?

Answer 37

The Pubs Code Adjudicator is responsible for enforcing the statutory Pubs Code. The Pubs Code regulates the relationship between all pub companies owning 500 or more tied pubs in England and Wales and their tied tenants.

Fiona Dickie is the Adjudicator

Question 38

The pub companies covered by the Code are:

Answer 38

Admiral
Greene King
Marston’s
Punch Pubs
Star Pubs & Bars
Stonegate (trading name of Ei Group)

Question 39

What is the most important element of the Pubs Code

Answer 39

Tied tenants in certain circumstances can request a Market Rent Only (or MRO) option.

Question 40

What is MRO?

Answer 40

Simply put, the Market Rent Only (MRO) option allows, when a tenant/lessee requests, the granting of a free-of-tie rent and an ending of all product and service ties (with the exception of buildings’ insurance) and the landlord’s direct involvement in the trading operations of a tenanted or leased pub.