Question

• Arrol is the tenant of a High Street shop in a UK town. The lease has three years unexpired at a rent of 230,000 on full repairing and insuring terms with five year rent reviews. Twelve years ago they carried out improvements with the written consent of Chadwick, the landlord. The improvements cost 320,000, and the landlord agreed to reduce market rent by 20% at each review. The current market rent of the premises on FRI terms is 320,000pa.
• Arrol has approached Chadwick and asked to surrender their interest in exchange for a new lease because they are trying to sell the business and the potential purchaser has concerns about the lack of security of the short unexpired term of the current lease.
• Chadwick is prepared to offer a 20 year lease with rent reviews every five years, the initial rent until the first review will continue, reflecting the value of the improvements. Thereafter the rent will be reviewed to market rental values. Advise Chadwick on a reasonable rent for the first five years of the lease, giving detailed calculations to support your recommendation. Clearly state all assumptions made.
• Your client, a leading financial institution, is considering purchasing a prime office building in central Manchester. The property was let 19 years ago on a 25 year FRI lease with 5 yearly upward only rent reviews. The property is for sale at 20,000,000 (net of cots) and the current rent passing is 1,200,000. Your client is considering purchasing this property and requires an investment appraisal of this opportunity. The financial institution's target rate of return is normally 10%.
• The building is now 20 years old and after discussions with your client it is anticipated that the property will be refurbished when the lease ends. Refurbishment is expected to take 1 year at a current estimated cost of 2,000,000, although this figure is forecast to increase at 1.8% p.a. They anticipate that they will have to offer a one-year rent free period to attract a good tenant and their maximum holding period will be 10 years.
• Recent analysis by the research department suggests that rents are forecast to grow at an average of 3% p.a. for prime refurbished property in this location. Exit yields for prime property are estimated at 4.75% (similar to yields on current prime buildings). It is anticipated that rental depreciation for the subject property will be in the region of 1% p.a. Refurbished buildings are let for the equivalent of 1,750,000 p.a. while this building would achieve 1,400,000 p.a. in its current condition.
• Prepare investment analysis of this property and advise your client accordingly. You should take account of costs in your analysis and these are typically on the purchase (5% of purchase price), sale (5% of sale price), rent review (5% of new rent), and management (10% of rent payable).