Monthly Archives: July 2009

Pub Rental Valuation some thoughts


Pub Rental Valuation some thoughts and worth reading.

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.






First Experiences of a Very Naive Pub Owner Part 6

A couple of hunting stories that I have just been reminded about.

The first was at a particularly busy meet of the Exmoor Foxhounds at the pub. The hunting was not considered to be particularly good in our piece of Exmoor because of the raging East Lyn River and the very steep wooded slopes, consequently the pub was doing a roaring trade with nobody particularly interested in anything other than a token hunt at closing time.

The bar was packed and an array of young horsey girls were holding the more lively horses the rest were tied to the railings.

There was an almighty crash and the main door flew open and a full size horse barged straight in looking for his owner who was standing at the bar. The horse being substantially larger than most people had obvious right of way and headed for Tom nursing a pint of beer, Tom continued drinking and the horse stood there for the next hour in a packed pub. I was concerned in case the call of nature took it’s turn, because there was no way that it could ever have got into the Gents Toilet.

The second story was that we were very honoured to be invited to a Hunt Cocktail Party at oneof the local Manors. My Wife and I went like Lambs to the Slaughter to this beautiful old Manor House. Cars everywhere the place was packed, inside it was like the Emergency Wrad in a large hospital, we had never seen so many collectively damaged people in a confined space, crutches, plastered arms and anything else that could be plastered, black eyes etc.

The Hunt must have tested the medical profession to it’s extreme limit. The injuries had absolutely no effect on their ability to drink and whatever medication they were on, it was a complete disabled riot, the food was terrible and great fun.

For the Anti Hunt Brigade it would have been a terrific advert to ban hunting, the cost to the medical profession far outweighed the smoking problems.

A conclusion to  my speeding ticket incident that I received before I bought the pub had an unusual twist. I was standing in the bar about eight months later on a dull Winters evening and a couple came in.

The man asked me if I remebered him, which I did not, he said that he was the policeman that gave me the speeding ticket. He was a customer so I had to be polite and asked him how he was, he replied that he had been off work with a bad back ever since he had given me the speeding ticket. I jokingly said that my mother was witch and my father was warlock and got a blue effigy out and stuck pins in it and we all laughed.

I saw him three months later and he was in a plaster cast, I had got a second speeding ticket in Bristol and I told him that I had got the blue effigy out again and had stuck some pins in it and that another policeman would be in a plaster cast. He smiled and had a guarded laugh.

Since he was not working he became a regular customer, he was off work for the whole of the time that the endorsement was on my licence and he said to me when he went back to work that he didn’t know whether I was joking, but he would never risk giving me a speeding ticket again.

He also ensured that he became a very regular customer, he wasn’t sure what might happen if he went somewhere else????

We survived for four years with the total madness of Exmoor, the pub was successful, the bizarre antics of customers and almost unbelievable stories, were the same but slightly different each year.


My brother-in-law left the Merchant Navy and decided that he wanted to buy the pub and after due negotiation we settled on a deal, much to my Wife’s relief since we had four young children and a fifth on his way.


The rigours of late night drinking with the farmers and working flat out during the day, made me wonder whether I was verging on becoming an alcoholic.


I declined any form of alcohol for two weeks and had absolutely no side effects, much to my relief.


We then retired to Cornwall for a year before buying some more pubs and crazy businesses, I am sure that I will remember the odd humorous story to insert in this epistle and I hope that you have enjoyed our antics on Exmoor. I personally think it is something everyone should do, my Wife disagrees of course.

RICS and the Licensed Industry

A colleague of mine wrote this for the Morning Advertiser Forum, in my opinion totally correct. As a former member, many years ago, I am apalled at their total disregard for any constructive comments made, correspondence sent to them, which they completely ignore. Their comments made about the Findings of the BEC Report into Pub Co activity show what little regard that they have for their activities within the industry, which in my opinion are seriously flawed.


RICS are an enigma. They are a closed secret society who answer to no one. Should you ever have cause to complain against an honorable brother you will hit a wall so high and wide it would be seen from orbiting space craft. Solicitors will chase you from their offices and hoover as soon as you have left.

Start with this link. They have only had an Ombudsman service for 2 years. Notice the fee for RICS complaint adjudication is a mere £150. Why so much for our vaunted mediation/arbitration proposals?

Next port of call should be here.

Read the Annual Report, it’s 28 whole pages long.

Here is a plan. The rents are based on RICS rules. Were you told this? I doubt it. Why don’t we all complain about the RICS formula that has been foisted upon us without reference?


Pub Co Viability

The press this weekend stated that Punch assets were supposedly worth £267m above a debt level of £4.4bn and a cause for concern.

Doubtless all the other major Pub Co’s are similarly affected for the reasons that have been well aired on this site.

Punch and Enterprise are possibly talking to Fair Pint, a major step in the right direction, I hope many other Pub owning companies may also talk to Fair Pint, it is vital to get a consensus of views and arrive at a pragmatic result to benefit all parties, otherwise we achieve nothing.

However if Punch’s financial situation is as bad as that indicated, what can they offer, they would appear to have very little leeway to make concessions, likewise most of the other major companies if the City reports and comments are correct.

My personal view is that there has to be a major change in corporate policy which is based on pub profitability and viability.

Over renting causes under investment by the lessee, mass dissatisfaction and short term careers, which suits nobody.

We have to get back to long term career licensees, not expendable ones and all the ensuing problems.

Forget inflated freehold valuations for corporate borrowing and packing company balance sheets to impress shareholders.

Get back to really running a retail leisure business, have BDM’s who are trouble shooters and can get the best out of lessees and understand the markets and demand for products.

The majority of large Pub Co’s have totally screwed up the industry for short term gain, if they want to stay in the business, it’s back to basics and long term profitability by growth, sadly I don’t think too many companies will be able to handle it.


Pub Co’s facing reality

RE: Should pubcos go free of tie?

I read all these articles by the so called guru’s and knowledgeable writers in the trade papers, most would appear to have been totally indoctrinated by the existing system without questioning the logic of the situation.

If you are tied and totally focused on the current leasing and tenancy system you have no opportunity to get involved with a straight commercial rental or leasing agreement.

The rents that are being continually being pushed higher and higher are in my opinion way in excess of any straight commercial rent for a business with restricted trading ability, add in the profit from the tie and it is money for old rope for the landlords.

The Pub Co’s major mistake was not expecting a recession and not making adequate provision, they now have to work to their lessees ability to make profits, which is even harder because most lessees have been unable to invest in their businesses because they have been screwed at every turn with unsustainable rents and the draconian extent of the tie.

Punch’s net worth is just £267m over debts of £4.4bn from this weekends press, how many other companies are the same to a greater or lesser degree. Profitability has to come from sales of either property or products depending on your bias, the property as we all know has been totally over valued by a bunch of compliant, incompetents. Punch’s deficit would appear to be too great to recover from trading and the estate so over valued with a net worth that will cause every banker involved to be running for his ring fenced pension.

But the true enormity is that we have a massive sub prime in danger of occurring through corporate stupidity and business naivity by the so called Guru’s and Whizz Kid’s of the industry.

You either have sensible rents and no tie or low rents and a partial tie and both sides have to make money, not both sides paying the bankers for forced loans to survive and corporates paying for over valuing.

The years of experience gleaned by sailing close to the wind and listening to the honeyed words of bank money lenders, occasionally at a younger age when common sense did not prevail has cost me dear on a number of occasions.

I am hopefully somewhat wiser and for the first time the recession would appear to have not touched me too significantly, but when I see the so called directors of Public Companies within the industry rushing head long over the financial cliff like the proverbial lemmings, almost every pub owning company has been inflicted with this lunacy.

Enterprise are going to change their ways, Punch are deep in discussions, Greene King are addressing the problems etc get real you guys the system is seriously flawed by greed and a bunch of surveyors who know nothing about running pubs, turnover or market share.

Your only real chance for long term survival is by profitability by your pubs ability to trade better than all the others.

If you want the best operators give them great trading conditions so that they invest in their businesses and generate profitable sales, don’t screw them. Sell off your non profitable pubs and keep the freehouse market buoyant, if you have low rents and profitable pubs the leases are then worth serious money and you attract  the good operators. If you have the occasional failure you can capitalise on the sale of the lease.

Running good pubs is easy, you Pub Co’s make it difficult.