Existing turnover has to be a key factor in any calculation, it is the pub’s market share. The Turnover should be based on the VATable turnover declared, plus any other sources of income directly attributable to the premises i.e. accommodation, catering which may be separated and run by a legal secondary business which is non vatable, this needs legally defining in any lease or agreement.
The argument that a tenant may buy out or pocket some of the turnover reducing the VAT totals can easily be overcome, by having a clause that any dispute of false accounting to reduce the fair rent figure or obvious buying out can be very easily resolved by notifying the Customs and Excise and Inland Revenue of your suspicions. Having been subject to a malicious phone call to the IRS and a subsequent investigation, I would not wish it on anyone. The other point is that any proven investigation the tenant could well be made bankrupt and evicted giving the property back to the landlord. Hopefully none of this should apply with a fair system in place.
Taking a new lease or tenancy.
1. The rent should be a percentage of existing turnover, a point that is consistently ignored by valuers is that the existing turnover is the Pubs market share at that moment of time, any growth is at the expense of a neighbouring business, whose rent should be reduced, the use of Comparables only serves to ratchet rents upwards. It also serves as a lazy, soft and totally inaccurate method of calculation of a future rent.
2. 4% on a lease with a tie, at the worst 25/75% discount, lessee/landlord, full FRI lease 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 internal decoration by tenant.
3. 6% on a lease totally free of tie, full FRI. However the landlord is in a far better position to negotiate a multiple operator discount and should be able to offer the facilities of higher discount to the lessee, the remainder of the discount paid to the landlord retrospectively a month later.
4. 3-5 year rent review with leases
5. 1-5 year rent reviews on tenancies
6. 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.
7. 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. It is very much in the landlords and the lessees interest to improve the business, since they both benefit.
8. 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.
9. The % figures may appear low by current standards but they are in line with rents when virtually all pubs were profitable and viable.
10. Pubs should be viable at 35-40% of maximum take and not breaking even at 80-90% maximum take.
11. By lowering rents, leases will be worth serious money and enhance property values in the long term.
12. By lowering rents lessees and tenants will have a serious long term career opportunity
13. All failures are reputed to cost Pub Co’s £30K in lost revenue, lost continuity and overheads.
14. 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.
15. Arbitration will be virtually a thing of the past, it should all come down to amicable negotiation.
16. 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.
17. Lessees could achieve 28 days credit which will help their cash flow.
18. 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.
19. 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.
20. 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.
21. 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.
22. 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.
23. 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, if that all makes sense.
24. 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.
25. 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.
26. 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.
27. By having low rents and fair discounts we attract the best operators, rather that misfits and unsuitable people, which is what is happening at the moment.
28. By having the tenants dealing direct with the suppliers the paperwork debt mountain and admin staff is wiped out.
29. BDM’s would be come serious business advisors rather than debt collectors and the need for so many would drop, they would be advisors on training issues and the whole operation should become a partnership to everyone’s benefit.
Some concerns have been expressed by RICS Surveyors on my thoughts.
A lessee/tenant who is using a valuable site to under perform through bad practice or lethargy creates a serious problem for the landlord. The real answer is in training and selection by the Pub Co, all new lessees/tenants should be put on at least a years tenancy with instruction before being acceptable for a lease, as they used to moving from a training pub to a promotion pub, in this case they would qualify to take a new or existing lease.
It is not cost effective to have an unmotivated lessee , by taking people with no experience and limited training it represents a continual risk for any company leasing businesses.
If a substantial figure has been paid for a lease very few lessees would allow the business to run down because their capital asset would be seriously reduced.
Another possible incentive would be a small percentage reduction in rent on achieving various levels of wet sales per quarter.
For those Surveyors who deal in rent negotiation, the loss of rental disputes etc would be far outweighed by the increased leasehold values and sales and corresponding levels of commission, with leases at figures far in excess of the rock bottom prices at the moment because of high rents it would mean that the fees would be paid on time rather than trying to get fees from a struggling tenant with limited funds.
The lower the percentage rent the higher the lease value taking the turnover value, the freehold would have a realistic valuation and banks would loan to both lessee and landlord.
The landlord wants a genuine high freehold value, the tenant wants a high leasehold value, the moment that percentages move above 6% both these values appear to decline. At 12% all lower end pubs are struggling and suffer from lack of tenant investment, anything above that is seriously detrimental to all valuations and trading. The tenant has to feel that by investing in the business he is benefitting himself not just the landlord, likewise the landlord the same in investing in the premises.
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