The Industry has to change radically.
Some ideas to think about, submitted to the MA Forum 17th June 09.
Existing turnover has to be a key factor in any rental or freehold calculation, it is the pub’s or businesses market share at any time.
To ignore it leads to a totally false valuation.
Taking a new lease or tenancy.
1. The rent should be a percentage of existing turnover.
2. 4% on a lease with a tie, at the worst 25/75% discount, lessee/landlord, full FRI lease (Suitable for all brewery tied estates)
3. 5% on a tenancy with a full tie, small brewers (On a 200 Barrel pub a small brewer will make at least £50K on the tie) External maintenance and internal structural by Brewer, internal decoration by tenant.
4. 6% on a lease totally free of tie, full FRI
5. 3-5 year rent review with leases
6. 1-5 year rent reviews on tenancies
7. All improvements by landlord to be assessed for one year on impact on turnover and reviewed back at the end of the year, the effect that it has made on the business and % calculation brought in for the remainder of the rental period any over or under to be reimbursed over the remaining rental period and revert to normal % at next rent review.
8. Any structural improvements by the lessee are not to be the cause of a rent increase until the next review and the normal % will prevail
9. If there are no turnover figures to assess a rent then a sensible estimate should be made for the first year with any adjustments being made at the end of the year in either direction without causing financial hardship, that % rent will continue until the next rent review.
10. The % figures may appear low by current standards but they are in line with rents when virtually all pubs were profitable and viable.
11. Pubs should be viable at 35-40% of maximum take and not breaking even at 80-90% maximum take.
12. By lowering rents, leases will be worth serious money and enhance property values in the long term.
13. By lowering rents lessees and tenants will have a serious long term career opportunity
14. All failures are reputed to cost Pub Co’s £30K in lost revenue, lost continuity and overheads.
15. By bringing the rental assessment in as a percentage of turnover, it is totally identifiable and the need for convoluted humbug to assess future rents is finished. It removes the RICS from the equation and valuers who have no intimate knowledge of running a pub and fail to understand market share.
16. Arbitration will be virtually a thing of the past, it should all come down to reasonable negotiation.
17. All lessees deal direct with the suppliers that are not their own brewer, any discount is paid retrospectively to the landlord one month in arrears.
18. Lessees could achieve 28 days credit which will help their cash flow.
19. By dealing direct with suppliers this removes the present situation of extended credit by Pub Co’s with minimal credit to their lessees, in addition the failure of a major Pub Co will create a domino effect with disastrous consequences.
20. The present RICS Valuation System ignores existing turnover and assumes that the available business is infinite, it is finite and any increase in trade is at the cost of another business, no projected improvement of business should exceed 15% and even less in the present climate.
21. No Pub owning company should have more than 2000 pubs and should not be financially connected to any other company in any shape or form, the same with the directors, they cannot be on more than one Pub Company if the total number of Pubs in the various companies exceeds 2000. I would have preferred 1500 pubs. The present market has been totally dominated and dictated to by the major Pub Co’s because of financial and commercial pressure.
22. A number of licensees are against having their turnovers disclosed, but if they want fair rents this has to be an essential. The turnover is the key factor not the net profit, if the rental % is higher we get into audited accounts, profitability and return to the present mess in a different form. Audited accounts are always in arrears, turnover is not.
23. By using % for rental valuation and existing turnover, the licensee gains benefit from his efforts, if there is a low turnover at the start he enjoys the benefits of his diligence until the first rent review, the landlord enjoys the increased rent at the first review.
24. By using turnover as the basis for rental calculation e.g. £200K turnover would equate to a freehold valuation of £250-300K by the old yardstick of 1.25-1.5 times turnover. Free of tie, if a landlord is sensible he is in a position to negotiate far better discounts than a sole operator, he can then offer his lessee say £180 per barrel discount and pick up between £30-£50 additional discount retrospectively from the brewer on a £200K T/O = £12K rent on a rough barrelage of 150 a further £4.5K plus giving a return of £16.5K plus which equates very favourably with commercial rates. These calculations change dramatically with any form of tie or tenancy assuming that a Pub Co’s discount at present is £220 plus, the brewers can afford to sell the beer to Pub Co’s and make a profit, if they sell it direct to their tenants, the profit has to be in the region of £250 per Brewers barrel.
25. All Pub owning companies will squeal at these percentages, but the options are a clear straight forward method of rental calculation, leases and tenancies will have greatly enhanced valuations, we therefore have better quality demand for them in terms of licensees and we will have a long term career opportunities for most would be licensees, not a select few.
26. The freehold values will be linked to viability and not speculative figures, banks and mortgage companies will start loaning money on freeholds and leaseholds and the industry will get back on it’s feet.
27. If the industry values are based on profitability growth rather than Spiv Banking or a near Ponzii scheme, the financial sharks will get out of the business.
I have tried to cover most of the issues from my perspective, the majority of Pub Co thinking has become short term over the last ten years, lessees are expendable and they now realise that the cost of an evicted or failed lessee is too much.
The present financial crisis is in danger of becoming terminal for a number over valued and over borrowed Pub Co’s from the small to the very large.
The keys to the situation are the licensees, if the trading conditions can be set up to be viable and profitable, long term training and business awareness made available for all, we have a better quality licensee who will invest in his business and property and make it a long term career, this benefits both landlord and tenant.
Any comments would be appreciated.