APC QUESTIONS

There have been a few APC questions kicking around this season. Now available to all:

 Accounts

Why assess covenant strength?

• The risk of tenant default affects security of income.
• It affects the capital value of the property. Effect on investment yields

How would you assess the covenant strength of a tenant?

• References from a previous Landlord.
• A bank, accountant and 2 trade references
• Ask an accountant to check at least 3 years of audited accounts. A copy of the business plan for a new business.
• Profits test – net profit for business must be 3 times the rent for 3 consecutive years or the net asset value of business must be 5 times the rent
• An external credit rating for the business – such as Dun & Bradstreet
• Improve covenant – rent deposit, bank guarantee, personal guarantee/surety

What is Dun and Bradstreet?

• Commercial database containing business records.
• Run credit checks, monitor credit rating, assess business risk

Client Care

What is the aim of PII?

• Protect staff, firm and client from financial loss arising from negligence.
• You must make sure you have 6 years of run-off cover if you move to a different company.
• Required by the Rules of Conduct

What are the levels of turnover for PII?

• RICS PII Policy Sheet
• £100,000 or less                        =          £250,000
• £100,000 to £200,000                 =          £500,000
• £200,000 and above                  =          £1,000,000

What are the minimum levels of uninsured excess?

• Up to £500,000 indemnity          =          Greater of 2.5% of the sum insured, or £10,000
• Over £500,000 indemnity            =          2.5% of the sum insured

Can a surveyor be personally liable if employed by a company and covered under their PII?

• Merrett v Babb 2001 = a surveyor was individually liable for a negligent valuation report when he did not have the protection of PII due to the firm’s insolvency. The purchaser was entitled to recover damages from the defendant personally.
• Should have run off PII insurance for 6 years after practising.

Provide some examples of monies held on behalf of clients?

• Service charges, insurance, sale proceeds, rent deposits, shop fit deposits

What is money laundering?

• Where the proceeds of criminal activities are disguised, then realised as legitimate funds/assets
• Money Laundering Regulations 2007– more risk-based approach. Simplified due diligence for low-risk clients and enhanced checks for high-risk e.g. terrorism finance
  • Confirm – identity of customers
  • Appoint – Money Laundering Officer
  • Train – staff
  • Control – business by having anti-money laundering procedures
  • Hold – records for 5 years
  • Proceeds of Crime Act 2002 – criminal offence if fail to report suspicion

What is the Bribery Act 2010?

• Makes criminal offence

1. Offering a bribe
2. Receiving a bribe
3. Bribery of a foreign public official
4. Failure of a commercial organisation to prevent bribery on its behalf

When should you decline an instruction?

• If you are not competent – knowledge and experience
• Personal interest in transaction
• Irresolvable conflict of interest
• Refer them to the RICS ‘Seek a Surveyor’ scheme.

What does Acting as an Expert Witness 2008 say?

• Has a duty of care to the court or other dispute resolution panel rather than their client.
• Duty to court to share knowledge.
• Fee on time-basis, not incentivised.
• Part 35 Civil Procedure Rules – experts in court

Conflicts

What is a conflict of interest?

• Professional, financial or business interest with another who is involved with the firm I work for
• Your independence is threatened due to the existence of a conflict
• Loyalty to two different clients
• E.g. carrying out a rent review on a building when somebody else is trying to sell that building, firm acting for both Landlord and Tenant in LR/RR, acting for competing purchasers

How would you deal with a conflict of interest?

• Conflict avoidance = inform the client, and withdraw yourself from acting on the transaction.
• Conflict management =
  • Disclose the nature of the conflict
  • Recommend they obtain professional advice
  • Establish proposals for dealing.
  • Get written permission to continue acting
  • Set up an information barrier/Chinese wall. The firm’s compliance officer must oversee all actions.

When should you decline an instruction?

• If you are not competent – knowledge and experience
• Personal interest in transaction
• Irresolvable conflict of interest
• Refer them to the RICS ‘Seek a Surveyor’ scheme.

RICS

Tell me about the RICS?

• Founded 1868, incorporated by Royal Charter 1881
• First president – John Clutton
• Completed updating Royal Charter and byelaws in November 2008 – new governance model for RICS
• RICS Regulations – rules of the RICS – covers firm registration, subscription payment, disciplinary action
• Governed by 70 strong council (elected RICS members) lead by President
• Meets three times per year
• Currently 150,000 RICS members
• 17 professional groups, e.g. arts and antiques, commercial, valuation, building surveying
• 8 specialist interest groups, e.g. building construction, dilapidations, health and safety, recovery and insolvency, telecoms

What are the RICS help sheets?

• Help in complying with Rules of Conduct
• Members:
  • Maintaining Professional and Ethical Standards
  • Advice for Sole Practitioners
  • CPD for Members
  • Firms:
    • Complaints handling procedure 
    • Clients’ Money: General advice for firms 
    • Training for Firms 
    • Registration

Sustainability

Do you prepare the EPC? What goes in?

• An accredited energy assessor must produce the EPC.
  • Shows energy efficiency of building (rated A-G)
  • Includes EPC no. and date of issue
  • Includes ways the building can be made more efficient.
  • Valid for 10 years.

What is BREEAM?

• Building Research Establishment Environmental Assessment Method
• Voluntary basis rating buildings on environmental friendliness
• Issues – energy consumption, health and well being, water use, transport links, land use and ecology, risk of pollution
• Rating – Pass, good, very good, excellent, outstanding

Measurement

What size is a brick?

• 215mm x 102.5mm x 65mm

What scales are used on plans?

• 1:50 = Room Plan (1cm = 50cm)
• 1:100 = Building Plan
• 1:1250 = Street / Location Plan
• 1:2500 = Location Plan
• 1:5000 = Road/Walking Map

What does GEA include?

• Area of building measured externally at each floor level
• Everything in the main envelope of the building.
• Atria
• Internal balconies
• Loading bays
• Pavement vaults
• Garages
• Conservatories

What does GEA exclude?

• Canopies
• Roof terraces – state area separately as they may have value
• Open-sided balconies
• External fire escapes
• Open vehicle parking areas
• Greenhouses

What does GIA include?

• Same as GEA but from the inside of the wall.

What does GIA exclude?

• Same as GEA but from the inside of the wall.

What does NIA include?

• Atria (if let to a single tenant)
• Skirting and perimeter trunking
• Pavement vaults
• Kitchens
• Notional lift lobbies
• Stationary cupboards
• Ramps, internal steps but not stairwell

What does NIA exclude?

• Atria and entrances (where shared in a multi-let building)
• Areas under 1.5m
• Protrusions of more than 0.25m (e.g. heating or cooling units)
• Usable space less than 0.25m wide (e.g. fireplace)
• Internal structural elements
• Corridors (circulation space). If it has a single function and cannot be considered usable.
• Continuous heating or cooling across the whole wall
• Vehicle parking areas

How does GIA differ from NIA?

• GIA is measured up to perimeter walls and includes structural partitions.
• NIA measures usable area only.

Have you measured an office building? – How do you deal with radiators?

• Depends – if intermittent include the space, continuous or more than 0.25m you take out.

What basis of measurement do you use for rating?

• How you would normally measure for that type unit
• NIA – offices, shops
• GIA – supermarket, industrial, warehousing, leisure

What source of errors could there be in measurements?

• Human error – misreading, additional check measurements.
• Unsure what to in/exclude – take enough measurements to calculate later on
• Equipment error – faulty equipment which should be checked and calibrated quickly/annually.

What is an appropriate level of accuracy?

• Depends on the subject property, how difficult it is to measure, site specific conditions
• Depending on this – may range from +/- 1% to +/- 10%.
• Greater margin acceptable measuring a car park compared to a City of London office.

How does a laser disto work?

• The time for the laser to go there and back

Valuation

Security of Tenure?

• Security unless specifically contract out s. 24-28 of Landlord and Tenant 1954
• Landlord serve health warning 14 days before the beginning of the lease – tenant sign a simple declaration accepting consequences of notice.
• If 14 days is not forthcoming then tenant has to sign statutory declaration in front of an independent solicitor
• Regulatory Reform (Business Tenancies) Order 2003 simplified the contracting out process – court not needed anymore

What types of covenant are there?

• Positive – can do something
• Negative – cannot do something
• Absolute – cannot do anything
• Qualified – can do something with landlord consent
• Fully qualified – can do something, with landlord consent, not to be unreasonably withheld
• Pre Landlord and Tenant (Covenants) Act 1995, Landlord and Tenant Act 1927 means all qualified alienation/assignment clauses become fully qualified. After 1996 assume qualified is fully qualified unless expressly stated in the lease. Does not apply to user clause.

How would you choose a discount rate?

• Adequate rate of return that compensates investor for risk taken
• A discount rate (hurdle rate / equated yield) reflects the time value of money.
• Should reflect the relative risk of the project and the returns that could be made elsewhere.
• Use the required rate of return for the fund – 7.4%
• Use WACC
• Could take a risk-free rate from 10-year gilts, add on a risk property to reflect the inefficiencies of investing in property and the risk of the particular project
• Use CAPM: r = rf b(rm – rf)
  • R = return
  • Rf = risk free
  • Rm = market risk
  • B = risk

How do you calculate net effective rents?

• Straight line method:
  • Does not allow for time value of money
  • Market practice – 3 month rent free for fit out (UKGN 6 Analysis of Commercial Lease Transactions), remainder as incentive
  • Headline rent – divide annual rent by floor area
  • Net effective rent – multiply annual rent by term certain. Deduct rent free and capital. Divide by term certain, then by floor area
  • Cash flow basis using ARY:
    • Reflects time value of money
    • Capitalise rent using yield then PV to include incentives
    • = annual rent then divide by floor area
    • Investment basis:
      • Only apply to investor landlords
      • Calculate headline rent into perpetuity deferred by time for incentives
      • Net effective into perpetuity must equal capital value above but without incentives
      • Discounted cash flow:
        • Explicitly stated assumptions
        • Tend not to use for simple transactions

What is a ransom strip?

• A small strip of land that is retained by a previous owner of the land that can prevent the development of land. The real purpose is, more often than not, to extract payment for its release.
• Value usually open to negotiation.
• Stokes v Cambridge = a value of 1/3 of the additional development value was awarded.

What are the 5 methods of valuation?

• Calculation to derive valuation bases
• Market based:
  • Comparable – find comparable evidence
  • Investment – capitalise the rental value
  • Residual – land value (GDV –  development costs – profit = land value)
  • Profits – use YP multiplier to capitalise profits
  • Non-Market based:
    • Depreciated Replacement Cost – current cost of reproduction/replacement

What is market value/rent?

• The estimated amount for which an asset or liability should exchange/be leased
• (on appropriate lease terms)
• on the valuation date
• after proper marketing
• in an arms-length transaction
• between a willing buyer and a willing seller
• where the parties had each acted knowledgeably, prudently and without compulsion
• Disregards any special value (includes synergistic value)

What is the hierarchy of evidence?

• Relative weight attached to the consideration of comparable evidence
  • Open market transactions – market tested
  • Lease renewals – market tested
  • Rent reviews – market tested
  • Third party determinations (expert…arbitrations…court determinations) – not market tested
  • Sale and leaseback transactions – not market tested
  • Inter-company transactions – not market tested

What is necessary in a valuation report?

• Client name
• Valuation purpose
• Valuation subject
• Property to be valued
• Property type and use
• Basis of value
• Date of valuation
• Disclosure of material involvement
• Status of the valuer
• Currency
• Assumptions, special assumptions, departures
• Extent of the valuer’s investigations
• Nature/source of information relied on
• Restrictions on publication
• Exclusion of liability to parties other than the client
• Confirmation that valuation accords with these standards
• Valuation approach
• Valuer is competent
• Opinions of value in figures and words
• Signature and date of the report.

Inspection

How do you stay safe when on inspection?

• Safe to go alone?
• Put in diary and tell someone where you are going
• Take mobile
• Wear PPE if necessary
• Sign in and out on construction site

What guidance is there dealing with safety and inspections?

• RICS Surveying Safely 2011– guidance on surveys and inspections
• Suzy Lamplugh trust website
• In 1986 Suzy Lamplugh, estate agent, disappeared after she went to meet an unknown client.

How would you carry out an inspection?

• 4 step process:
• 1) Prepare for the inspection.
  • Read the lease.
  • H&S assessment at the office re. lone working, PPE.
  • 2) Inspect the area.
    • Location, situation and aspect.
    • Local market / economic conditions.
    • Vacancies, letting boards, tenant mix etc.
    • Availability of services – transport links, car parking.
    • Check site boundaries against an OS or title plan.
    • Environmental factors such as contamination or risk of flooding.
    • 3) Inspect externally.
      • Repair/decoration and condition of external envelope.
      • Defects.
      • Method of construction.
      • Age of the building.
      • Run off of surface water and foul water.
      • 4) Internal inspection
        • Interior finishes.
        • Layout, quality and specification of the accommodation.
        • Condition, repair and defects.
        • Fixtures and fittings.
        • Existence of asbestos and deleterious materials (check asbestos register).
        • Services – age and quality.
        • Compliance with planning, building and DDA regulations.
        • Compliance with lease obligations.

What types of specification would you expect for different building types?

• Grade A offices – either steel or concrete frame with supporting columns
• Institutional office specification – raised floors, carpeting, ceiling void, suspended ceiling, LG7 lighting, air conditioning, double glazed windows, lifts,  WC, kitchen, car parking
• Types of fit out:
  • Shell and core – common parts complete, office floors left for fit out
  • Category A fit out – to Grade A specification
  • Category B fit out
  • Cellular offices
  • Shops – Steel or concrete frame, capped off services, concrete floor, no suspended ceiling. Shell condition for fit out
  • Industrial/warehouses – Steel portal frame, 6m min eaves height, full height loading doors, capped off services

What hazards might you find in vacant properties?

• Asbestos, weak steps, structural issues, gas/electricity faults
• Need regular inspections, health and safety assessment, security, plan maintenance, plant servicing, inform property insurers, agree disposal/marketing strategy, fire risk assessment, asbestos register, EPC, business rates

What common defects are you aware of?

• Inherent defect = built in defect that could not have been discovered by a reasonably thorough inspection of the property.
• Period office / shops = dry/wet rot, roof tile slippage, death watch beetle, damp, structural movement / settlement.
• Modern office buildings = damp, water damage from burst pipes or AC units, structural movement and poor mortar joints in brickwork.
• Modern industrial buildings = leaks around roof lights, damaged cladding panels, water damage from poor guttering or burst pipes, rusty panels and settlement/cracking in brickwork.

What is Japanese Knotweed?

• Plant that damages hard surfaces e.g. foundations– expensive and difficult to eradicate

How can you tell when a property was built?

• Georgian = 1714 – 1811
• Regency = 1811 – 1837
• Victorian (Early, Mid, Late) = 1837 – 1901
• Edwardian = 1901 – 1914
• Roof.
  • Mansard = Georgian
  • Pitched, Bargeboard, Chateau = Victorian
  • French roof = Edwardian
  • Height & size = generally larger the newer they are. 80ft height limit in London.
  • Ornamentation
    • Plain (only doorway ornate) = Georgian
    • Ostentatious (terracotta) = Victorian
    • Imperial = Edwardian
    • Windows
      • Large windows at 1^st floor = Georgian
      • Sash windows = Victorian
      • General style
        • Classical = Georgian
        • Stone bands and brickwork = Victorian

L&T

What sections of Landlord and Tenant Act 1954 are there?

• 23 – meaning of business tenancy
• 24 – continuation tenancy unless terminated (security of tenure)
• 24a – interim rent
• 25 – landlord to terminate or renew
• 26 – tenant to renew
• 27 – tenant notice to quit (3 months)
• 28 – freedom to agree new lease
• 29 – courts application
• 30 – landlord grounds of opposition
• 32 – demise
• 33 – term
• 34 – rent
• 35 – any other terms
• 37 – disturbance compensation
• 38 – contracting out
• 40 – request for information
• 43 – excluded business tenancies
• 44 – competent landlord
• 64 – new lease start date

What is the valuation date for a lease renewal?

• It is set by when you apply to court, otherwise you’d value on the day after lease end.

On what grounds can a 1954 Act protected lease be terminated?

• S. 30, 1954 Act – grounds A-G
  • A – Breach of repair covenant
  • B – Persistent delay in the payment of rent
  • C – Other substantial breach
  • D – Suitable alternative accommodation
  • E – Uneconomic subdivision
  • F – Redevelopment
  • G – Owner occupation
  • Grounds E-G landlord pays compensation (S. 37 L&T 1954):
    • Occupation over 14 year – 2 x rateable value for property
    • Occupation less than 14 years – 1 x rateable value for property
    • Avoid compensation if provide suitable alternative accommodation
    • Compensation payable based on RV at date of s. 25 notice

Can a tenant lose their 54 Act rights?

• If no new lease terms have been agreed by the lease end date, or the T hasn’t applied to the court to agree terms or for an extension, they can lose their rights.

What are the main differences between a lease and a licence?

• Lease is an interest in land, a licence makes legal what would otherwise be illegal
• Term certain
• Exclusive possession
• Rent
• Demise…specific
• Street v Mountford and Clear Channel v Manchester City Council
• Lease often assignable, licence personal

Investment Management

Is property an inefficient market?

• Yes
• Imperfect information
• Highly differentiated products
• Limited buyers and sellers
• Barriers to entry, e.g. transaction, finance costs, management costs
• Generates externalities, e.g. local authority planning
• Efficient market hypothesis – weak (reflect past info), semi strong (past info and publicly available info), strong (reflects all public/private info)
• Hard to find suitable properties
• Obsolescence (depreciation)

What are the main asset management activities in running a portfolio?

• Acquisitions
• Disposals
• Refurbishments
• Change of Use
• Improving Service Provision
• Re-Structuring of leases, e.g. marriage value
• Cutting Costs
• Securing Income

Factors that impact the value of an investment?

• Location
• Planning consent
• Build quality
• Lease terms
• Covenant strength
• Security of income
• Yields – market conditions
• Sustainability

What is the weighted average unexpired lease term?

• The average lease term remaining to expiry or lease break across the investment portfolio, weighted by rental income.

What is a DCF?

• A method of estimating an investment’s current value based on the discounting of projected future revenues and costs.
• Explicitly identifies growth assumptions rather than incorporating into yield
• Uses equated yield/IRR
• Choice of equated yield based on gilt edged stock, additional margin of approx 2% to allow for additional risks/inefficiencies of property
• WACC

How do you run an investment appraisal?

• Consider cost of purchasing building/demise
• Assess refurbishment costs
• Consider void periods and cost of void – business rates, s/c costs, marketing
• Consider rental levels and growth rates
• Consider exit yield – use in-house sector yields
• Look at IRR – does it beat your hurdle rate (7.4% GLF)
• Compare NPV to other investments

How do you deal with VAT costs in an appraisal?

• For valuation you always have to include them – VAT on acquisition costs
• Internal investment appraisal if you can claim VAT back you would not put VAT in cashflow
• Might still have to include it for marketing costs.

How can your project be viable when NPV is 0?

• You will have factored profit into your cashflow already.

How do you judge the viability of a project?

• Payback – how long to repay initial outlay
• NPV – given rate of return, does the project add value (NPV > 0 add value)
• IRR – does project beat your target rate of return

Tell me about different types of investment returns

• IRR – discount rate that produces NPV = 0. Is IRR greater than hurdle rate?
• MWRR – Money weighted rate of return – Same as IRR – interest rate that equates the sum of all realised cash flows and capital value at the end of a holding period to the initial capital value at the beginning of the holding period.
• TWRR – Time weighted rate of return – geometric mean of the rates of return achieved over each sub-period in the holding period – performance analysis for fund/asset as used by IPD. Used to benchmark against IPD.
• Earnings per share = Net earnings after tax / no of shares issued
• Current ratio = Current assets / current liabilities
• Return on total assets = Operating profit / total assets

What is IPD?

• Investment Property Databank
• Offers performance analysis for owners, investors, managers and occupiers of
  real estate.

What would your strategy be if you have to deal with a large vacant office building and wanted to turn it into residential use?

• First I would get advice with planners. Then do residual appraisal.

Other

What are the use classes?

• Town and Country Planning (Use Classes) Order 1987

 

Use Class	Use	Change Permitted?
A1 Shops	Goods, cold food, hairdressers	To A1 + flat
A2 Financial/Professional Services	Banks, accountants	To A1 or A2
A3 Restaurants/Cafes	Sale of food and drink – consumption on premises	To A1 or A2
A4 Drinking Establishments	Pub, wine bar	To A1, A2 or A3
A5 Hot Food Takeaway	Hot food for consumption off of premises	To A1, A2 or A3
B1 Business	Offices not financial/professional	To B8 (only up to 235m2 floor space permitted)
B2 General Industrial	General industry not in B1	To B1 or B8 (only up to 235m2 floor space permitted)
B8 Storage or Distribution	Storage, distribution	To B1 (only up to 235m2 floor space permitted)
C1 Hotels	Hotels, guest houses	No change permitted
C2 Residential Institutions	Residential accommodation for provision of care	No change permitted
C2A Secure Residential Accommodation	Prison, young offenders institutes	No change permitted
C3 Dwelling Houses	For individuals, families	Subdivision into more dwelling houses not permitted
C4 Houses in Multiple Occupation	By not more than 6 residentis as house in multiple occupations	To C3
D1 Non residential institutions	Clinics, health centres, nurseries, school	No change permitted
D2 Assembly and Leisure	Cinema, Dance halls, swimming pool, art gallery	No change permitted
Sui Generis	Hostels, launderette, taxis, scrap yard, theatres, fun fairs, casinos	No change permitted

What are empty business rates?

• Empty Rates Act 2007 abolished relief for vacant commercial building from 1 April 2008
• Now:
  • Empty properties held by charities, empty listed buildings, community sports facilities are exempt
  • Impact on the market:
    • Increased number of appeals
    • Owners considering constructive vandalism
    • Less market activity with occupiers not moving
    • Demolition of vacant redundant buildings
    • Greater incentives to tenants
    • Less speculative development

• Office, retail – rate relief for 3 months
• Factories/warehouse –rate relief for 6 months

What VAT is payable on Land and Property?

• Seek professional advice – complex area
• Supply of new (3 years) commercial building – standard rated 20%
• Old (> 3 years) commercial property – exempt from VAT
• VAT is charged on rent when property owner chooses to charge VAT – able to recover VAT on their costs.
• Occupiers not able to reclaim VAT (charities, financial services) have to pay VAT on rent – occupiers registered for VAT can reclaim it

Position relating to VAT?

• If a commercial building has redevelopment potential it is usually wise to register it for VAT in order that VAT on building works will be recoverable.
• Opting to tax changes an exempt supply to a taxable supply

When would you not opt for VAT on a property?

• If you knew that it was going to be occupied by a tenant that could not reclaim VAT. Eg a charity.

What VAT is payable on Parking Facilities?

• Basic position – parking is standard-rated i.e. VAT applied on all parking
• Exceptions:
  • Parking with dwellings – exempt if let together with dwelling, it is reasonably near to dwelling and it is same landlord and tenant.
  • Parking with commercial – if close/within complex of commercial property and same landlord and tenant treated as a single supply with commercial property and so follows the same status as the commercial property.

What is a capital allowance?

• Tax relief for business assets
• Able to write off the cost against taxable income of the business