The Profits / Accounts Method

Question 1

What is the profits / accounts method?

Answer 1

•Used to value properties typically sold as part of a business such as hotel, caravan parks, cinemas, and public houses.
•Value is determined having regard to estimated future trading potential
•Method involves estimating the profitability of the business and isolating a portion of profit available as rent
–Calculate the total potential income then deduct the working expenses
–Potential net profit adjusted to reflect the trading of a reasonably efficient operator
–The resulting adjusted net profit is divided between the tenant and the landlord (the landlords “share” being equivalent to the rental value)
•The rent can be converted to a capital value if required
•It may be possible to make comparisons with similar trades on a wider geographical scale, perhaps examining profit made per hotel bedroom or nightclub floor

Question 2

Am I competent in this method?

Answer 2

No as I have not had any experience in this method other than personal reading.

Question 3

The profits and accounts method should generally only be used if?

Answer 3

. Value by capital comparison is not possible
. When the investment method cannot be applied
. When you have to resort to another method, which for anything like leisure facilities would be the profits method

Question 4

What types of property would be valued by the profits/accounts method?

Answer 4

. Amusement parks
. Hotels 
. Theatres 
. Purpose built pubs
. Caravan parks
. Football stadium

Question 5

Why are certain properties valued by the profits method?

Answer 5

Because we can’t separate the use

Question 6

Explain the basic approach to the profits method?

Answer 6

Looking at the level of business achieved in the property or achieve able from it. The level of profits determines the price someone will pay on something susceptible to unique factors

Question 7

What valuation checks can be carried out on a valuation produced by the profits method?

Answer 7

. Price per room per hotel, Care home, pitch, seat in cinema/theatre.

An ability to interpret accounts and to analyse profits are needed to arrive at the value

Question 8

What do I need to know?

Answer 8

If the property is unique, comparison with other properties may be impossible.

The value under the profits method is determined by actual level of business achieved in the property or that is achievable.

The level of sales clearly determine the level of potential profit and the level of potential profits determine the price someone will pay for the property.