Week 7 (Part B) - Term and Reversion rent free and stepped rent PDF

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KA5019 Applied Valuation Term and Reversion (Part B) Traditional Investment Valuation

YP Single Rate    

Also known as Present Value of £1 per annum. Money receivable in the future is worth less than money available now. We need to discount the future sum to arrive at the Present Value. The further into the future we have to wait to receive an income, the lower its PV will be.

Term and reversion example one: Term and Reversion Wellbar Central, 36 Gallowgate, Newcastle upon Tyne NE1 4TD -

6 th floor office 4,542 sq ft Sky (Tenant) 10 year lease from Oct 2019 Upwards only rent review (Year 5) Passing rent £170,325 p.a. Market Rent £204,390 p.a. ARY 6%

Term -

Passing Rent YP Single Rate @ 6% for 4 years Market Value of the Term

£170,325 per annum 3.4651 £590,194

Reversion -

Market Rent YP in Perp @ 6% Present Value of £1 @ 6% for 4 years

£204,390 per annum 16.6667 0.7921

Market Value of the Reversion £2,698,267 Market Value £3,288,461 Say £3.29m

More complex Cash Flows Here are some examples of how the cash flow can become more complex: -

Introducing rent free periods Stepped rents Void periods Refurb costs

Rent Free Periods Example One: 16 – 18 New Bridge Street, London -

2nd floor office 3,250 sq. ft Let to Perception Research 5-year lease from January 2020 6 months’ rent free £89,375 per annum ARY 7%

In the case of a rent-free Period of six months the landlord won't receive half of the yearly rent so only 45,000 of the £90,000 passing rent will be received in the first year.

Example Two: 16 – 18 New Bridge Street, London -

2nd floor office 3,250 sq. ft Let to Perception Research 5-year lease from Oct 2018 Passing Rent £89,375 p.a. Market Rent £90,500 p.a. 6 months’ rent free offered ARY 7%

So because the six-month rent-free period has been offered at the end of the lease we show this at the next reversionary point. So in this case we would use the passing rent of £89,375 on multiply this by a YP single rate at 7% for three years given was a total market value of £234,534. Now we need to consider the reversion, so we take our new market rent of £90,500 Stepped Rents Example: Unit 4A, Barking Business Centre, Barking, East London -

GIA 2,596 sq. ft Let to Shopfitters Ltd 3-year FRI lease from Jan 2020 ARY – 10.5% Year 1 - £19,000 p.a. Year 2 - £23,000 p.a. Year 3Rent)

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£25,000 p.a. (Market...