The RICS are well aware that the industry has been infected with many abuses of their system and by the use of comparables this has perpetuated the abuses until it has virtually established a Norm of high rent and rating valuation.
The serious weak link in this could be the FMT which nobody has queried in depth.
People have appealed against the calculation of FMT and had the assessment reduced, thereby affecting the rent demanded.
I raised the issue previously to gauge opinion and it was surprising how few people had viewed the issue of FMT logically.
Having just discussed some outrageous rent demands by landlords, in respect of the BII PIRSS (Pub Independent Rent Review Scheme) with aggrieved tenants in the order 20-33% where their businesses turnovers have dropped conservatively by 25% in the last two years, the FMT’s that the increases were supposedly based, bore no relation to reality and would appear to be based on a desire to regain the lost discount on the tie generated by the recession on the part of the landlord.
This raised the question of the capacity needed by brewers etc to meet theoretical demands set by the FMT across the board, which may well enter the realms of fantasy, in the difference between reality and speculation for convenience.
Theoretically if you take the overall running costs of the business annually, plus your stock purchased, you should arrive at a figure, which when deducted from total sales and other income directly derived from the pub would leave the amount of the divisible split for rental valuation.
The fact that the Pub Co’s do not allow a basic wage for the tenant and partner is highly contentious and has to be included in the net profit, in theory allowing the Pub Co to claim half the tenants wages if a 50/50 divisible split is used.
The Brooker case has raised serious comment and thought on the 50/50 divisible split as a figure.
For mathematical convenience, we will assume a 50/50 split of the divisible balance.
Using this method you may well find that your rental level comes out to say 6% of your gross turnover, but in fact your actual rent equates to 15% of your turnover.
Assuming a turnover of £200K your rent would equate to £12K but in reality is £30K.
If you then take the proportion of wet and dry purchases say 70% and 30% against a notional purchase figure of £100K (assuming a GP of 50%).
(One of the cases that I viewed, the turnover was £112K, rent £26.4K with a 30% increase demanded by the Pub Co.)
The actual wet purchases figure equates to £70K, if you now multiply that by the actual rent divided by the theoretical rent 30/12 =2.5 and multiply that by the £70K, you have a theoretical sum for wet purchases £175K.
If that were the case the brewers would have to more than double their capacity.
The pubs that I have viewed in the last few weeks all fall into that category.
This would appear to leave the FMT calculations by a number of Pub Companies as unattainable and almost certainly impossible to supply.
Whether the divisible split is 35/65, 40/60 or 50/50 is incidental, the assumption by various surveyors and BDM’s that a Pub should be purchasing say two and a half times the stock that it does when there is no market for that volume, but if you add all the over calculations, the suppliers could never hope to meet that requirement.
It would be interesting to see how much theoretical over capacity has been forced on tenants in a small regional brewery, if the over estimation is within 10% across the board, this may be acceptable, if it is over 15% this is unacceptable.
It may take a few minutes to grasp the gist of this argument, but it is worth thinking about, a number of knowledgeable people in the industry agree with my thinking.
The major problem is that the majority of valuers or BDM’s look at individual pubs and not the effect collectively, they also ignore the fact that business is finite and not infinite.
For those with freehouses it raises some interesting excuses from Rating Valuers and in respect of my pubs they have had to work it out from my actual figures rather that using comparables, to my advantage.
This is aimed at being a very simple exercise to raise questions to your BDM on how fallible and hopelessly inaccurate the present system is.
At the end of the day how out of touch virtually all Pub Co valuers are in what they are demanding, since they have failed to view the overall picture.