the great rating rip off - the irrv · by granting this status, tegova is endorsing the importance...
TRANSCRIPT
www.irrv.netJune 2009
ISSN 1361-1305
TO LET
INS
IDE
: Th
e green
energ
y and
rating
link
// Focu
s on P
oland
// Ratin
g an
d tech
nolog
y
Tom Dixon and Gordon Heath analyse the turmoil in the rating system
The great rating rip off
2009
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Annotated Rating Legislation (2009 update)
Author: Ed Slater IRRV
The Institute is pleased to announce that the 2009 update of its Annotated Rating Legislation has now been published. It is produced in a set of four loose-leaf volumes, and contains all primary legislation relevant to rating together with the currently applicable regulations and orders to the date of publication in 2009.
All amendments brought about by statute and statutory instrument between 1989 and 2009 have been made to the text, and legislation repealed, revoked or ceasing to have effect is so indicated, as appropriate, throughout.
This publication, as updated in 2009, will be maintained by regular updates in the years to come.
An electronic PDF version is also included.
To order online please visit the IRRV website: www.irrv.org.uk or send an email to: [email protected]
PRICE:
£495.00(PLUS VAT AND £7.50 P&P)
Annotated
Rating
Legislation
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June 2009 ISSN 1361-1305
IRRV ValueRManaging Editor John Roberts
Editorial Director Celia Mather
Editorial Assistant Annie Jennings
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Designer Anja Linke
Publisher Helder Dantas
IRRVChief Executive
David Magor, OBE IRRV
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© IRRV 2009. Reproduction in whole or in part of any article is prohibited without prior written consent. The views expressed in this magazine do not necessarily represent the views of the Institute. While all due care is taken regarding the accuracy of information, no responsibility can be accepted for errors. Any advice given does not constitute a legal opinion.
IRRV Council: IRRV President Julie Holden IRRV MCMI CMg; Senior Vice-President Geoff Fisher FRICS (Dip Rating) IRRV; Junior Vice-President Kerry Macdermott IRRV; Phil Adlard Tech IRRV MInstLM MCMI; Alan Bronte FRICS IRRV; David Chapman IRRV; Tracy Crowe CPFA IRRV; Barbara Culverhouse IRRV CPFA; Carol Cutler IRRV; Tom Dixon RD BSc (Est Man) FRICS IRRV; Pat Doherty CPFA IRRV; Ian Ferguson IRRV; Richard Guy FRICS (Dip Rating) IRRV MCIArb; Richard Harbord MPhil CPFA FCCA IRRV FIDP FBIM FRSA; Mary Hardman IRRV FRICS MCMI; Gordon Heath BSc IRRV; Caroline Hopkins IRRV; Brian Jeffrey IRRV; Roger Messenger BSc (Est Man) FRICS IRRV MCIArb; John Roberts IRRV; Eric Rose FRICS IRRV; Graham Ryall FRICS IRRV; Kevin Stewart IRRV MAAT MCMI; Angela Storey Tech IRRV MCMI; Bob Trahern IRRV; Julie Trahern IRRV; Allan Traynor FCCA IRRV
04 Editorial/VOA news
05 VTS update
06 Olympic update
07 Fisher’s findings
08 VOA focus
10 Valuer opinion
12 Cover storyTom Dixon and Gordon Heath analyse the current turmoil in the non-domestic rating system
16 Rating and technology
18 Automated valuation models
21 CPA update
22 IRRV international
24 Rating Diploma focus
28 Valuation modelling
31 Legal update
Contents
“Just remember that the 2010 revaluation is based on April 2008 rentals, which were already falling 18 months later” p12
IRRV International Conference23 - 24 June 2009Warsaw, PolandSee www.irrv.net for details
When you have finished with this magazine please recycle it.
_VALuER_www.irrv.net
Andrew Hudson has left the VOA, after close to five years as Chief Executive, to join HM Treasury as Managing Director of Public Services and Growth.
Andrew left the Agency in March to take up his new role, in which he has responsibility for the control of all public spending, developing efficiency and excellence in public services, and fostering stronger economic growth.
David Park, Deputy Chief Executive, becomes acting Chief Executive pending the appointment of Andrew’s successor.
New moves
he European Group of Valuers’ Associations’ (TEGoVA’s) Recognised European Valuer scheme is designed to maintain, enhance and harmonise valuation standards and
the valuation profession in Europe. The Institute is proud to be part of this process, and is honoured to be the first UK-based professional body that is authorised to award the formal designation of ‘Recognised European Valuer’.
By granting this status, TEGoVA is endorsing the importance of the Institute’s role in the valuation profession. ‘Recognised European Valuer’, and it’s designation, REV, provide individual practising valuers in each member country with a well-defined indicator of qualification and experience, with the aim of assuring clients of their valuation proficiency.
Any practising valuer belonging to a TEGoVA Member Association, or an individual valuer of a valuation company which is a member of a TEGoVA member association, may make an application. In the UK those applications must be made to the IRRV.
The Institute will carry this responsibility with pride, and will ensure that the valuation profession is given the status it deserves in our challenging society.
Never before has the role of the valuer been more important. The slow recovery of our economy is dependant upon a thriving
property market, and the adoption of REV will speed this recovery. D
T
There have been a string
of customer service
successes for the VOA,
with the South London,
London Central,
Newcastle, St Albans
and South West Groups,
all achieving the Cabinet
Office’s prestigious
Customer Service
Excellence Award.
Independent
assessors visited a
number of locations,
considering a full
range of evidence, and
spoke with a number
of customers, including
billing authorities,
representatives of the
rating profession, council
taxpayers and non-
domestic ratepayers.
Andy Booth, the
VOA’s Head of Customer
Service, said: “The Groups
all had in common a
strong customer focus
and desire among
staff to continuously
improve, and this is what
impressed the assessors.
“I firmly believe
the number of VOA
offices with an award
for Customer Service
Excellence will increase
over the coming months.”
VOA success
The 1 April marked the completion of the transition of functions of The Rent Service to the VOA. The former Rent Service provided a range of valuations for local authorities in England and fair rent determinations for landlords. The VOA will now carry out these functions under the renamed Council Tax and Housing Allowances Directorate. Craig Whiteley, project manager for the transfer, said: “It is very encouraging that as the VOA approaches its centenary our remit has extended and we have welcomed new staff, new functions and new customers. We are justifiably pleased that we have been entrusted by government to take on this important and successful additional role.” D
Service transitions
The Recognised European Valuer scheme puts the Institute in an invaluable position, says David Magor
a step in the right direction
➦David Magor, OBE IRRV, is Institute Chief Executive
VOA news is brought to you by the Valuation Office Agency press office
04_Editorial VOA news
ith the end of every financial year comes the
opportunity, if only for a few minutes, to sit back and reflect over the various achievements made during the past 12 months and the challenges we have steered through. This is particularly important for us as we start to think about preparing our annual report to Parliament, reflecting on our journey as we move closer towards our goal of improving customer service, and our journey has not been easy, particularly playing our part within the government’s High Performance Property agenda.
With a number of office leases coming to an end and having reviewed our portfolio of London offices, we have had to consolidate our estate, which has required us to vacate our office locations in Durham, Weston-Super-Mare, Winchester, Croydon, Harrow and our head office in Angel (Islington). Our London operation is now focussed in our Whitechapel office, which we have enlarged to incorporate the head office function as well as the growing administration. The Durham administration has moved to Preston while the administration previously carried out in the Winchester
and Weston offices has been divided between our existing Plymouth and Whitechapel administrations. It is important to stress that the office closures have not affected the provision of local hearings, and our clerks continue to ensure that hearings are be held locally in appropriate venues.
The consolidation of our estate has brought about some positives. It has forced us to standardise processes and provided the drive through which to develop a more flexible workforce, which has been achieved by offering tribunal taking staff in the closed offices remote working opportunities. We have retained the knowledge and experience of existing staff while creating a core group of professionals who are geographically located and readily on hand to provide a front line service to Valuation Tribunals. We believe that the benefits arising from these closures will greatly contribute towards both standardising and enhancing the service we strive to provide to our customers, which will prove particularly important as we move towards a single valuation tribunal in England.
As part of our customer service agenda, we have also been pursuing electronic communication. When working with representatives of the professional bodies, in February, we implemented
an electronic communication process that now permits a ratepayer’s representatives to receive various statutory notices issued by a valuation tribunal in electronic format. This represents a major step forward in our customer service aims, and a big tick in the box in terms of an objective we set ourselves last year.
The end of a year also provides an opportunity to reflect on workload. This year we have seen an overall reduction in workload compared to previous years:u 1,490 tribunals were held (1,732 in 2007/8);u 85,128 cases have been listed (148,852 listed in 2007/8), of which 49,713 cases were settled prior to a hearing;u 2,806 appellants attended hearings (3,589 in 2007/8); andu 14,452 total decisions issued of which 3,834 were decisions on fully argued cases (23,377 in 2007/8 of which 4,594 were as a result of argued cases).
The next 12 months will inevitably come with its own hills to climb, but we are still on schedule for introducing a single Valuation Tribunal for England on 1 October 2009, and our focus for the forthcoming financial year will be to ensure that processes are firmly in place so that the new tribunal can carry out its statutory function with minimal disruption. D
➦Tony Masella is Corporate Director at the VTS. Email him at: [email protected].
gov.uk
W
u strategy as a ploy – a strategic manoeuvre, designed to outwit a competitors or opponents, for example, publicising your successful fraud prosecutions.
Put it on your New Year wish list!
_VALuER_www.irrv.net
Changesfor the betterTony Masella reflects on a challenging year of change and progression and looks forward to the next 12 months in the tribunal world
VTS update_05
In 2007, following the July 2005 decision for London 2012 and the compulsory purchase orders, the Olympic Delivery Authority (ODA) began work on the “Dig Demolish and Design” programme (including the removal of electricity pylons), moving to “The Big Build” stage, now with construction of the “Big Five” venues. See the webcam at: www.olympics2012.com for more information.
Despite the slowing of regeneration elsewhere in the UK due to the recession, the Olympic and Stratford City construction work proceeds apace. The Olympic workforce has grown to over 4,000 and is likely to reach 9,000 at the peak of construction work in 2010.
The recent International Olympic Committee visitors were pleased with progress, with the Olympic Main Stadium advancing construction, the wave shaped roof of the Acquatic Centre emerging, and the foundations going in for the Velopark, which comprises the Velodrome and BMX circuit.
The Olympic Village has also been started, with the first of 11 residential blocks for the Olympic athletes, as has the Media Centre, both scaled down in size and with injection of government funding from the Olympic contingency fund, following private debt funding difficulties.
Construction works continue on the various bridges, the new perimeter security fence and the refurbishment of the Waterways.
Spring 2011 is planned for the opening of the 1.4m square foot Stratford City shopping centre. Construction of Westfield Stratford (adjacent to the Olympic zone) is well advanced, including a John Lewis anchor store of 240,000 square feet. See: http://uk.westfield.com/stratfordcity for further information. The new DLR Stratford International to Canning Town link is set to open in summer 2010.
After the games – 2013 Legacy master-planning proposals have been out for consultation with www.legacy-now.co.uk. With housing representing 65% of the total development, the Legacy Masterplan Framework’s preferred options are expected to be published in summer 2009, with the planning application and development briefs submitted to the ODA in the autumn. These will no doubt reflect revision as a result of the recession, but the further Stratford City commercial and residential plans are already well developed, and Crossrail is due to arrive in 2017 with a Stratford station. D
Four years of progress
When W P Ryan took the reins as President of the fledgling Rating Surveyors’ Association (RSA) in 1909, I’m sure he hoped it would endure. I doubt he imagined that in its centenary year the membership would reach a peak of over 400 and the aspirations that drove its formation would be just as relevant and undiminished.
That’s not to say the Association doesn’t face some serious challenges. The firms and organisations from which it draws its membership are facing the worse trading circumstances for a generation, and like the population, rating surveyors are ageing. However, as our politicians point out, “with adversity
comes opportunity” and as professional work takes on a new shine among those who previously considered it dull, rating is becoming an attractive and stable career path for young valuers.
The primary function of the RSA is to work with the various bodies responsible to improve the business rates system.
The Association marked its 100th year by holding a celebratory dinner at Christchurch College, Oxford attended by 150 members and guests. It also commissioned a new chain of office for the President and appointed some new honorary members, including David Magor and Peter Scrafton.
President Mark Higgin presents a snapshot of one hundred years of the RSA
Our new RSA PresidentAt the March AGM, the RSA appointed Mark Higgin, Rating Partner at Montagu Evans LLP, as its President for 2009/10. John Elcox of Matthews and Goodman became Vice President.
Mark says: “It is ironic that as the RSA marks its 100th year, the subject of rates is rarely out of the news, which emphasises the relevance of the work it does on behalf of its members and their clients.” D
Centenary celebrations
Ph
oto
s co
urt
esy
of
Ric
ha
rd G
uy
“The primary function of the RSA is to work with the various bodies responsible to improve the business rates system”
➦Geoff Fisher is Senior Vice President of the
Institute and a professional
consultant at Strettons Chartered Surveyors
➦Mark Higgin FRICS IRRV is President of the Rating
Surveyors’ Association
The 2012 games are approaching. Geoff Fisher provides an update on olympic activity
RSA focus06_Olympic update
Association held a Centenary Dinner at Christ Church College, Oxford, on 25 March 2009 to celebrate 100 years of the RSA (see photo right).
Further afield, TEGoVA, The European Group of Valuers’ Associations, held its Spring conference in Seville, Spain, from 21 to 23 May 2008. The conference was chaired by Roger Messenger, and attended by IRRV President Julie Holden. See www.tegova.org for more information.
IRRV Valuers will be addressing the IRRV/IPTI International Conference in Warsaw on 23-24 June 2009. Among them are Tom Dixon on “Calibration to Market: Valuation in Tax Administration”, Geoff Fisher on “An International Perspective of Compulsory Purchase”, and Paul Sanderson on “Coping with Recession”. Further coverage of the event can be found on page 22 or for more information, visit: www.irrv.net/international2009.
The Christians in Property talk on 24 April 2009, was presented by Jeremy Marshall, CEO of Hoare & Co, on “God and the Credit Crunch”. For further information or to view the Christians in Property podcast, visit: www.christiansinproperty.org.
The formal merger of the Rent Service with the Valuation Office Agency on 1 April 2009 appears to have gone smoothly, but there are rumblings about the grouping of locations for Local Housing Allowances (LHAs) – “beacon” rentals are assessed for LHA payments to private tenants. It is understood that the Rent Service’s review of BMRAs is being queried by Cambridge, Ribble Valley councils and others, as to whether the rental area should include surrounding towns. There is also concern over the LHA scheme’s rising costs.
The 9th National Rating Day was held on 21 May 2009 focusing on Preparation for the 2010 Revaluation (including the economic context) with many IRRV member speakers. For more information, see: www.cptevents.co.uk
In an article in the Estates Gazette (April 2009), Charles Partridge advocated the transfer of the responsibility for collection of rates from local authorities to HMRC and for rating law and practice to the Treasury (from DCLG).
Compensation updateA key part of the Statutory Compensation Code is that the claimant receives Statutory
Interest on the compensation calculated from the Valuation Date, albeit that it is only calculated on a simple interest basis, and is subject to tax.
The rate of interest is prescribed at 0.5% below the bank rate, which is revised quarterly, but with the rate now reduced to 0.5%, the interest rate from 31 March
2009 is nil! Hopefully the government is reviewing this situation.
Crossrail The Crossrail Act 2008 contains compulsory powers for acquisition of property (and subsoil easements) along the west to east line across London. Works are now starting initially around Tottenham Court Road Station, which is to be rebuilt.
Financing is still a problem, with Section 106 contributions sought on major office developments, and the proposed Supplementary Rate for London likely to raise money for the project.
Recent Lands Tribunal decisions on compensation include:u Fayle v Sefton Met. B.C (ACQ-359-2008): includes an interesting discussion on the award of costs; andu Sadiq ad Hashmi v Stoke-on-Trent City Council (LCA-316-2008): useful review of Sec. 10A Land Compensation Act 1961 (Disturbance for owners).See www.landstribunal.gov.uk/judgmentfiles for more information.
The Compulsory Purchase Association is holding its popular Annual Conference on Thursday 18 June 2009. D
➦Geoff Fisher IRRV is Institute
Senior Vice President and
Professional Consultant
at Strettons Chartered
Surveyors East London, and can
be contacted at: gfisher@
strettons.co.uk
Issue 13 of The Valuation Tribunal Service Newsletter (January 2009) includes the announcement of the new National President, Professor Graham Zellick, and summaries of Valuation Tribunal (VT) cases of interest, council tax appeals concerning the use and supply of evidence, and the rateability of a garden/tearoom attached to a dwelling.
Rating cases of interest include the consideration of disability allowances on a shop, the 2005 list Rateable Value (RV) of a warehouse where the agreed rent appeared to be below the 2003 market rental value, and incomplete offices where no Completion Notice has been served. See www.valuation-tribunals.gov.uk/newsletters for further information.
The VTS has moved to Black Lion House, Whitechapel Road (near Aldgate East Station) where offices are also located for various areas in the East and South Regions. VTS Corporate Director Tony Masella has been co-opted to the IRRV’s Law Research and Education Committee.
Recent Lands Tribunal Decisions on rating include: u Leda Properties Ltd v Howells VO (RA/62/2006), a 2000 List appeal concerning a “first generation” computer/data centre; andu the appeals of Kendrick VO (Ratepayer Serviceair (UK) Ltd) (RA/59/2007) concerning the value of VIP lounges at Heathrow Airport, following events on 11 September 2001 in New York. The Lands Tribunal determined that the New York events were not physically manifest to qualify as ‘material changes of circumstances’ under the Local Government Finance Act 1988 Sch.6, para 2(7)(d).
Allen Evans BSc MRICS Dip Rating ACIArb IRRV (pictured below), a Director of Hammond Philips, has been elected as the 2009 chairman
of the Rating Diploma Section, and will be chairing the Rating Diploma Annual Conference on 10 September 2009, as well as taking forward the new modular examinations.
The Rating Surveyors’
Geoff Fisher compiles the latest important dates and events affecting those in the valuation profession
News and views
_VALuER_www.irrv.net
Fisher’s findings_07
08_VOA focus
arious rating commentators, and some surveyors specialising in rating, are suggesting the current economic climate provides an opportunity for retailers to challenge their existing
rating assessments, and achieve rate savings. Being open and transparent about its
working practices and approaches to valuation is key for the Valuation Office Agency’s (VOA’s) aim to provide a high quality valuation service for rating. Ratepayers and valuers should therefore understand what can and cannot be considered for rating valuations and, in particular, how changes in the numbers of vacant shops in a locality may, or may not, affect rateable values.
As we know, non-domestic rating is a tax on property values using rental value as the measure. The valuation officers of the VOA are the people responsible for valuing rateable property. They are professional valuers whose job is to accurately assess the rental values of property in accordance with the statutory basis for rating. In this they are no different from a surveyor acting for a landlord or tenant in agreeing a rent review. The job for the landlord and tenant surveyor is to decide on the rent for the property, following the terms of the lease at the review date – the task for rating it is to decide the rent of the property on the statutory basis.
For the present rating lists the date of valuation is 1 April 2003, but this does not mean everything about a property is taken at that date. That simply would not work. It would not take account of a newly built property, an extended property or a property that was part demolished after 1 April 2003. It would clearly be absurd for the rateable value of a property still to include
➦Patrick Bond is Deputy Director
of Rating with the Valuation Office Agency
V
Patrick Bond looks at the valuation of shops for rating and the impact of vacant properties on rating valuations
A closed shop?
_VALuER_www.irrv.net
VOA focus_09
the value of a part that had been demolished. To avoid this, the statutory scheme asks the rating valuer to take some things about the property and its surroundings as they now are, and imagine the property being like that back in 2003. So if a property has been extended, the question the valuer has to answer is what would the extended property have been worth back in 2003? Similarly if a property is part-demolished, the valuer has to ask what it would have let for, as it stands, had it been like that back in 2003?
The same exercise applies if there are physical changes in the locality, such as the building of a shopping centre on the other side of town or, indeed, if other property nearby becomes vacant. The valuer has to ask what the property’s rental value would have been back in 2003 had the change, whether it is the building of the shopping centre or the greater number of vacant units, occurred back in 2003.
The changes that can be taken into account and looked at as they are now, rather than how they actually were in 2003, are known as Material Changes of Circumstance (MCCs). Broadly, they are physical in nature. They include the use and occupation of other properties in the locality, the mode and category of occupation of the property and physical changes to the locality, or those changes that are physically manifest in the locality.
Where there is an MCC it is possible to challenge the existing rateable value by making a formal proposal to alter the rating list. Nowadays this can be done online at www.voa.gov.uk as well as using the traditional paper form. If there are more vacant shops in a high street it is likely this will be an MCC so the valuation officer will be able to accept the proposal as validly made. However, just like the rent review surveyor who is bound to value in accordance with the terms of the lease, the valuation officer, or any other valuer making a rating valuation, must follow the terms of the statutory scheme and, in particular, the rules about what is taken as it is now and what as it was in 2003.
The statutory scheme requires the valuer
to imagine the shop as it now is with all the physical changes that have occurred to it and its surroundings since 2003, and decide how these changes would have affected the rent back in 2003. It is a valuation back in 2003, not a valuation today, so the valuer is looking at 2003 rental values as set in the 2003 world, when the events of the recent downturn in the economy had not occurred or even been thought of. Current economic factors are not taken back to 2003 – instead it is the economy and demand for shops in 2003 that is considered.
Would the existence of a number of vacant units on the high street back in 2003 have affected rental value at the time? The answer could be yes or no. That is for the valuer to consider and form an opinion. It might be the units would have very quickly let in 2003 at prevailing values and, it follows, no reduction in rateable value is appropriate. It might be that the numbers would have been sufficient to cause prospective occupiers to pause, think carefully and decide to make lower bids. It all depends on the circumstances and facts of the individual case. In high streets with good 2003 demand it is difficult to see that values would have been affected because the now vacant units would have let quickly.
Reductions in rating assessments following proposals based on current economic circumstances and the vacancy of shops are certainly not automatic. The downturn in the economy is not, in itself, a factor that the rating valuer can consider – only physical changes can be considered. Economic change happens during the five-yearly cycle of revaluation and affects property values year on year, sometimes month by month. Property values do not rise or fall at a constant rate, but differentially, as some types of property becomes more or less popular, or a locality becomes more or less sought after. It is this differential movement which is the important factor taken into account by revaluations. In England and Wales there is a five-yearly pattern of revaluations and the next revaluation in England and Wales comes into effect in 2010 at 1 April 2008 values and economic circumstances. If rateable values were changed, perhaps month on month, as rental values rose on a rising market or fell on a decline, there would be, in effect, a continual revaluation that would not provide certainty for businesses in knowing their rates liability and would also be very expensive to administer.
So, the statutory framework certainly allows the existence of vacant shops to be considered, but within the restrictions imposed by the rating assumptions. Whether there will be an effect on rateable values will depend on the facts in any particular locality.
The VOA’s commitment to increasing the openness and transparency of the rating system helps businesses become more aware of the options that are open to them. This assists valuation officers in maintaining fair and correct rating lists and is ultimately in the interest of all concerned. D
“If there are more vacant shops in a high street it is likely this will be an MCC”
10_Valuer opinion
nergy Performance Certificates (EPCs) on commercial properties are not working. The certificates were introduced with the intention
of reducing carbon emissions from commercial property, but if they are to have the desired effect – or even just retain credibility – something will have to change.
The government has made a commitment to reduce UK greenhouse gas emissions by 12.5% between 2008 and 2012. There is a longer term target of at least 80% by 2050. With non-domestic (commercial) buildings accounting for 25% of the UK’s total CO2 emissions, the effective use of EPCs is imperative if these targets are to be achieved.
EPCs have been mandatory in England and Wales on almost all commercial properties on the market since January 2009, but take-up has been poor. The certificates are intended to inform purchasers and tenants about the energy efficiency of buildings and allow them to make informed comparisons. However, few are motivated to pay attention to the information provided.
There are potential fines of up to £5,000 for the non-provision of an EPC. But Trading Standards has not yet been particularly active in policing the system. As a result, many properties continue to be marketed without an EPC. The EPC is only commissioned when solicitors for the acquiring party require the EPC as a condition on exchange. So if tenants and purchasers are to start insisting on EPCs as part of their decision-making process, there needs to be a much greater financial incentive for them to focus on the energy performance of the buildings that they are considering. The certificates will only have their intended effect if they are linked to real costs and savings.
One suggestion that has been muted is for EPCs to feed directly into the calculation of non-domestic rate (NDR) bills.
The current rating system actively discourages carbon reduction measures. Any increase in rental value attributable to a “greener” building is reflected by an equivalent increase in rating assessment and higher bills for the occupier. The Valuation for Plant and Machinery (England) (Amendment) Regulations 2008, means that the Valuation Office Agency has to ignore the capital cost of certain micro-generation plants installed after 1 October 2008 to the date of the subsequent revaluation. This is however only a minor concession, applying for a very limited time, to very small-scale projects. Much more radical thinking is required if we are to
➦Paul Stevens BSc (Hons) MRICS IRRV is a commercial property valuer and rating surveyor with Stratton Creber
Commercial. Contact him at: [email protected]
E
Paul Stevens explores the potential links between business rates and green energy performance
Green rating
_VALuER_www.irrv.net
Valuer opinion_11
a ‘stick’! But reductions in rates bills for the most efficient buildings, combined with increased bills on the least efficient buildings, could achieve this. There are alternative ways in which the stick and carrot can be applied to the introduction of carbon reduction measures, but a link to NDR appears to be one of the more simple approaches.
The other impact of insufficient financial consequence from a poor energy performance rating has been a lack of concern about the accuracy of assessments. Despite the efforts of some of the accreditation bodies to enforce standards, a focus on the cost of the report rather than its accuracy by those commissioning EPCs has driven down fees to a level that is not sustainable. This attitude is perhaps understandable, given
achieve energy saving targets.The introduction of a scheme which
offers discounts on rates bills to the occupiers of those buildings with the best energy ratings, and penal rates on the least efficient properties, would provide incentives to both landlords and tenants to undertake carbon saving works. Occupiers would see rates bills fall as the result of works, and would benefit from reductions in energy bills. Landlords would potentially benefit from increased rents and capital values on properties which could show demonstrably lower costs.
Any suggestion that will result in EPCs having a real impact on carbon emissions is likely to meet with resistance from those who currently have the least efficient properties. A ‘carrot’ needs to be included in any proposals as well as
that the introduction of EPCs formed an element in “the perfect storm”, which impacted on the commercial property market, coinciding with falling demand, funding difficulties and increased costs from vacant property rates.
Increasing the benefit of carbon reduction measures on the costs of occupation would help to focus the attention of potential owners and tenants on the accuracy of the energy assessment. It would also mean that more meaningful consideration is given to the associated recommendations report. They would start to insist that vendors provide EPCs, allowing them to make comparisons between buildings as part of the decision making process. The energy performance of a building would become of increasing relevance in review negotiations and valuations.
If the financial implications of EPCs are to be increased to improve their effectiveness, then current ambiguities in the system also need to be eliminated. At present, apparently arbitrary decisions, like the description of the use to which a space is put, can have a disproportionate impact on the energy performance rating applied to a building. These issues need to be resolved in order that faith in the accuracy of assessments can be retained.
We must also consider the concern that EPCs only relate to the theoretical use of a building by a hypothetical occupier, which allows comparison between units but means that EPCs bear no relation to the actual energy use of a building. As a result, even the best A-rated building can waste huge amounts of energy if windows are left open, heating systems are incorrectly set, or lights are left on overnight.
Display Energy Certificates (DECs) however reflect the actual energy use of the building. They were introduced under the same legislation as EPCs, but currently only apply to properties of over 1,000 square metres, which are occupied by publicly funded bodies and open to the public. There are proposals for the requirement for DECs to be extended to properties from only 250 square metres. If however they were to be extended to other publicly accessible premises, they could result in dramatic savings in the amount of energy wasted.
DECs are reviewed annually. They must be displayed in a prominent position and therefore provide a very real incentive for occupiers to review their practices, employ energy saving systems and demonstrate their green credentials.
If we are to achieve the stated targets for carbon emission reductions, there needs to be radical changes, which will always be met with resistance. They will only be effective if they are seen to be credible. D
“The current rating system actively discourages carbon reduction measures”
Green rating
hile the rest of the world is tackling the continuing maelstrom of toxic debt, the English rating system seems fated to endure a
continuing regime of toxic management.The ‘April Fool’ of the Chancellor’s
statement regarding the alleged relief for 2009 rate bills is the latest (this was written before the Budget!) farrago to hit an already seriously endangered tax.
The origins of the present crisis lie in the dramatic increase in the empty rate charge, first mooted in 2007. As with all the worst legislation, this was introduced instantaneously and without consultation, although there was consultation on the consequent ‘Alice in Wonderland’ anti-avoidance proposals, which happily have not yet seen the light of the day. In penalising those ratepayers whose properties are empty, whether they are tenants, landlords, or owners, the government misconstrued, deliberately or otherwise, the Barker and Lyons reports, by seeking to impose a tax
which has no validity in either theory or practice. Indeed, the cost to the taxpayers of the number of businesses which are being forced into bankruptcy by a tax levied against premises which are not producing, and cannot produce, an income is almost certainly costing more than any revenue actually collected. The onset of the financial crisis and a prolonged prospective depression only underline this fallacious extension of an already twisted tax base. The related ‘relief’, for one year only, of premises with a rateable value of less than £15,000 was a mere sop to the small business organisations to prevent a consorted campaign to abolish empty rates altogether.
Then came the ports fiasco. Whatever the technical rights or wrongs of seeking to identify hundreds of new and substantial hereditaments with, in many cases, six figure assessments halfway
through a rating list, back dating the financial accrual for three and a half years is unacceptable. None of those facing the new liabilities had any reason to expect a liability at all, let alone a backdated one, and it does not take a financial genius to work out that the majority of business plans would be unable to sustain such a blow. While the matter is still being pursued by the Treasury sub-committee and through the courts, this will be of little comfort to those hundreds of businesses facing the vast financial imposition which this review has created. In a pathetic endeavour to head off a public relations disaster, the government has come up
W
The English rating system is in chaos and, despite promises to the contrary, the government is doing nothing to address the problems, says Tom Dixon
12_Cover story
The great rating rip offToxic taxation
with the worst of all possible solutions in a muddled series of regulations which may or may not allow deferment of some of the payment. The Treasury does not seem to realise that in financial terms a company facing such a bill will probably still be trading while insolvent, since it has no hope of achieving settlement of the rates liability within its projected business plan. Again, the proposals are leading to large-scale closures which will, in turn, generate financial penalties for
the taxpayer, not least the accumulative payment of unemployment benefit. The measure has also generated an estimated additional £700m liability on
local government itself, which will have to be met from general taxation.
The next Treasury abuse was in the manipulation of the annual indexation increase on the national rate multiplier. For no particular reason, the legislation provides that the April uplift will be based on the cost of living index (CLI) in the previous September, although the legislation gives the government a discretion not to increase by the full amount of the indexation. It so happened that the September 2008 CLI increase was an aberrant month, as it took into account substantial cost increases in
foodstuffs and the oil price, among a number of other inflationary factors. This produced a figure in the region of 5%, which is far higher than any other monthly total during the last rate year, and more than twice the current rate. The obvious move in the light of current economic circumstances was no uplift whatsoever, and this was pressed on government from all sides. However, the Chancellor refused to contemplate any such adjustment over the months and weeks leading up to the issue of the new rates bills on the 1 April. Then, much after the eleventh hour, and when all the rates bills had been printed and issued, a u-turn was made in a statement possibly released hours prematurely on 31 March. This superficially appeared to reduce the percentage increase from 5% to 2%, and indeed was hailed as such by a number of national newspapers, not least the Daily Mail, which claimed a victory in their campaign to save small businesses. To our embarrassment even some professional advisers congratulated the government on its last minute burst of commonsense.
However, closer study indicated that nothing could be further from the truth. What in fact is proposed is a potential deferment of 60% of the 5% increase over a period of two years, such deferment being itself deferred until at least September, and then only available on demand. The cost of this exercise in wasted rates bills, legal action that will be necessary where current rates bills are not paid, and the administration of the deferment scheme, will be millions to provide very temporary relief of no more than the odd hundred pounds or so to most businesses.
The national non-domestic rate was originally introduced to give certainty to businesses. However, it is now faced with so many amendments and additions that no certainty remains. Business Improvement District schemes are already adding percentages to many rates bills, and this will be considerably exacerbated by the introduction of the business rate supplement scheme in 2010 which will effectively enable various public authorities to surcharge on top of the national rate multiplier, in many instances, without any reference to democratic scrutiny.
In reality, this means many ratepayers will be faced with a tax rate of over 50% in the pound. It remains to be seen whether those businesses still solvent in 2010 pay their bills or decide that enough is enough.
To cap it all, just as the Valuation Office Agency is poised to produce the first draft of the 2010 Rating List, with all the crucial issues for decision which that will
require, both its chief executive and deputy chief executive are leaving their posts. How the management board at HMRC have allowed this to happen is beyond belief. *
➦ Tom Dixon is an IRRV past President, Council member, and a senior partner with Sanderson Weatherall
_VALuER_www.irrv.net
Cover story_13
wrote about increasing empty rates to 100% from April 2008 and limiting the industrial exemption from empty rate to six months, in Valuer about 18 months ago. At the time, the government promoted it
as “good for business” because it would reduce rents and make more property available for small businesses.
I suggested that the empty rate exemption for small hereditaments with rateable values below £2,200 should be increased to below £15,000. This has now been implemented from 1 April 2009, for one year only because, according to the government, it will be “good for small businesses”. I would like to take the credit, but somehow I doubt that the Minister is an avid reader of my articles! At the time, my points were that it “might solve the issue of a property losing small business or rural relief” and that “as by definition most rate income is from large ratepayers, the loss of yield should not be too great”.
Recently, the issue of the ports having their assessments split back to 2005, creating many new backdated liabilities, was dealt with by allowing the arrears to be
spread over eight years. However, to avoid the issue of state aid, this applies to any new or split assessment backdated by more than 33 months on or before 31 March 2010.
One related problem that was discussed in the House of Lords debate on new rate demands was the issue of technical insolvency. Many businesses have said that, despite the ability to spread payments, they will have to add this liability to their balance sheets, making them technically insolvent. The outcome will depend on the level of existing assets and liabilities, when the backdated rates bill was received, and the directors’ reasonable expectations of being able to meet their liabilities as they fall due.
With inflation at around 5% in September 2008, the multiplier was increased accordingly from April 2009, by which time inflation had dropped. Despite many calls for the increase to be reduced, the solution was to announce a rate payment deferral scheme in England, with the Welsh Assembly and Scottish Parliament likely to follow. The misleading headlines suggesting that the rate increase had been reduced by 60%, only led to disappointment, as it was merely a deferral of payment – and a pretty small one at that.
To put it in context, if a ratepayer’s bill in 2008/9 was £10,000, it will be £10,500 in 2009/10. Under the rate payment deferral scheme, the ratepayer need only pay £10,200 in 2009/10 and can pay the deferred £300 over the following two years.
This, however, misses the real impact of the scheme, which is to benefit those ratepayers in England that are losing all transitional relief from April 2009. Previous schemes have run for all five years of the valuation list and some properties had transitional base liabilities at the start of each new list. By having no transition in 2009/10, any transitional scheme will have a clean start in 2010.
It was always known that a relatively small proportion of ratepayers would have large increases in liability from April 2009 when transition ended. But the theory was that they had four years to plan it. Nobody
The issue of rate hikes is still not resolved. Gordon Heath suggests that frequent revaluation and generous transitional relief would be a move in the right direction
I
Of no great relief
14_Cover story
anticipated that it would coincide with the sharpest recession since the 1930s. The result is that a few ratepayers are facing increases measured in hundreds, even thousands of a percent. Rather more are facing increases between 10% and 50% this year. They will be helped by the payment deferral scheme, despite possible technical insolvency, but it is instructive to look at an example.
Consider a public house with a transitional rate liability of £26,000 in 2008/9 and a full rate liability of £35,000 in 2009/10, an increase of 35% (this is based on a real example, with the numbers rounded for simplicity). The rate deferral scheme will mean that the ratepayer will pay £29,600 in 2009/10, a 14% increase, but will have to pay £2,700 extra in each of the two following years. What might happen as a result of the revaluation? Assume that the rateable value increases but a generous transition scheme limits the increase to 5%. This will result in a 5% increase above the full liability of £35,000 in 2009/10. Therefore the ratepayer will be paying £36,750 plus a deferred £2,700, a total of £39,450 in 2010/11, which is a massive 33% increase over £29,600.
Last November, Tesco chairman Sir Terry Leahy made a plea for the revaluation to
final salary pension schemes. However, when it comes to postponing the revaluation, “he would say that, wouldn’t he”, given that the revaluation is likely to hit the retail sector.
The purpose of a revaluation is to rebalance the tax liability. It does not increase the overall liability nationally. So while postponing the revaluation might help the retail sector, it will harm other ratepayers who should be enjoying reductions. We need a revaluation and in the current economic climate we need a generous transitional relief scheme. It would be better to fund it through the multiplier, rather than penalising other ratepayers through transitional surcharge. But this would require a greater supplement on the multiplier in the first year, because the Treasury wants it to be self-funded. However, this rule has been broken, by allowing two schemes of business rate deferral. Can common sense now prevail and allow a transitional scheme which is self funded over five years?
Five years is too long between revaluations, which is why we need transition. So how about two years? Remember that the 2010 revaluation is based on April 2008 rentals, which were already falling 18 months later. The only solution that comes close to meeting such a rapidly changing market is a move
to annual revaluation. Leaving aside the practicalities, it completely destroys one
of the big advantages of the current scheme, the ability to predict
future rate liability, which is why some ratepayers are
calling for the revaluation to be postponed.
My advice to ratepayers taking advantage of the rate payment deferral scheme is to be careful. Until the regulations are in place, the current year’s rate must be paid in full. Billing authorities will be inviting ratepayers to opt into deferring 60% of this year’s increase in July or August.
The scheme is just a deferred payment arrangement and does not
affect liability. When we see the regulations, any failure to pay is likely to result in a loss of the ability to defer payment and recovery for the full year’s charge.
Large ratepayers throughout London can look forward to an extra 5% business rate supplement, to pay for Crossrail, in 2010. On
top of any other increases. London, it seems, has an infinite capacity to be taxed that has been flatly rejected elsewhere, as demonstrated by the congestion charge. Perhaps the business rate supplement will also be rejected elsewhere. D
be postponed, while also calling for a cut in the multiplier and a review of business rates. This was echoed recently by Stephen Robertson, Director General of the British Retail Consortium, who pointed out the combined effects of the revaluation, loss of empty rate relief and the introduction of business rate supplements. I sympathise with many of the points made and am a great admirer of Leahy, particularly in his support of Tesco’s final salary pension scheme. There are certainly lessons for a government whose policies have helped destroy many
➦ Gordon Heath BSc IRRV is an independent revenues consultant. Theviews expressed here are purely personal. Contact him at: [email protected]
_VALuER_www.irrv.net
Cover story_15
human input error, and this is particularly true where the work is repetitive. A fully electronic system only requires staff in the VOA to check a proposal (appeal) on receipt for validity, or to correctly identify the hereditament if the submitted proposal is unclear to the VOA computer system.
The use of agreed protocols has automatically reduced the number of proposals (appeals) received by the VOA that are unclear and need a manual investigation to enable the VOA to properly process the document. It has, at the same time, significantly reduced the time spent in trying to resolve incorrectly entered data, with the elimination of input errors significantly reducing the requirement to check data or rectify mistakes.
Agents previously had to monitor every proposal, ensure that the VOA had actually received it, and all the communications had to be logged, entering programme dates, the date of the valuation tribunal, etc. This was expensive in man hours, prone to input error and required the storage of all documents as issued by the VOA. The introduction of
urveyors are well aware that the laws and practice of non-domestic rating (NDR) have evolved almost continuously since it was first introduced by the Poor Law Relief Act of 1601, with
changes coming about through a combination of legislation and court decisions.
The valuation process has become very sophisticated as valuers follow and adapt to market practices and regulations to control the minutiae associated with alterations, appeals and payment. Surprisingly, until very recently, the communication medium used to support this tax, which now raises close to £20bn per annum, had only progressed from quill pen and parchment to typewriters and word processors via pen and paper. The system was inefficient, slow, subject to human error, expensive and, as it used vast quantities of paper, unacceptable in today’s green world. Put simply, it was no longer fit for purpose.
The Royal Institution of Chartered Surveyors (RICS) saw the need, following the introduction of the 2000 Rating Revaluation to develop e-communications in the arena of rating appeals. Supported by the IRRV as well as the Rating Surveyors Association (RSA), it approached the Valuation Office Agency (VOA) to establish whether the agency saw mutual benefit in exploring the possibilities arising from the rapid advances in IT and the power of the internet. It transpired that the VOA had already started work on the development of a suite of programs designed to enhance the data available to ratepayers for the 2005 Rating Revaluation, including the publication of Summary Valuations and the ability to lodge appeals against the 2005 list assessments via the VOA website. A grant of £20,000 was made available through the UK government’s Invest to Save initiative for an in-depth study of the potential benefits.
The December 2003 report identified that, with the introduction of electronic communication, specific savings in the region of £10m per annum might be expected to be achieved. This would come about through economies in staff time, postage, paper and storage, as well as improved efficiency through greater accuracy in both the VOA and rating agent’s information. The opportunities to achieve these came about, in part, because approximately 94% of all NDR appeals by number, and 98% by value, are dealt with by agents.
Changing the method to an electronic medium brings immediate savings as highlighted earlier. However, the biggest improvement has been in operational efficiency. Any manual process is subject to
➦Charles Partridge is Director of Lambert
Smith Hampton
S
The rapid advance in technology has removed the inefficiencies of paper-based communication and improved the working processes for rating valuation, says Charles Partridge
No more papering over the cracks
16_Rating and technology
e-communication has automated and vastly enhanced this process. While it is difficult to be precise, the savings and efficiency gains in an agent’s office should broadly replicate those experienced by the VOA. Before the changes agents had to monitor every proposal, ensuring that the VOA had actually received it.
While electronic communication between the VOA and agents became operational on 1 April 2005, communication between the agent and the Valuation Tribunal Service (VTS) continued to be on paper. The VTS is a far smaller organisation than the VOA, and for a while a lack of resources prevented the development of further electronic communication. This has now been addressed and, from the end of November 2008, all proposals administered electronically on the VOA were dealt with electronically by the VTS. This method covers all communications between the VTS and individual agents, except for the formal decisions of a tribunal which will continue to be sent in hard copy through the post. This is necessary because the grounds on which a tribunal reaches a decision following a formal hearing are normally very extensive and do not lend themselves to automated electronic communication. Hard copies of the VTS’s decisions will continue to be posted to agents for the foreseeable future. However, they are also published in electronic format and are available to download.
The pace to introduce further electronic developments is understandably controlled by financial constraints in both the public and private sectors. The VOA and VTS are working to further enhance the electronic system and this move is understandably impacted by financial constraints in both the public and private sectors. Plans are in place to enhance the system’s operational efficiency and to make it compliant with both the PISCES and UPRN protocols.
When the three professional bodies, the VOA and VTS embarked upon the introduction of electronic communication, they anticipated major financial savings. These have been achieved, with estimated cash savings throughout the profession in excess of £15m per annum. However, these pale into insignificance when compared, not only with the consequential improvements in operational efficiency, but more importantly, with opportunities to add value to the advice and service provided to clients from the increased accuracy of a computer database automatically populated with the latest information.
This article first appeared in the February-March 2009 issue of the RICS Commercial Property Journal and has been reproduced with the journal’s kind permission. D
No more papering
“The pace to introduce further electronic developments is understandably controlled by financial constraints in both the public and private sectors”
over the cracks
_VALuER_www.irrv.net
Rating and technology_17
Exploratory data analysis and MRAModels generally used sales from January 2002 through June 2005. Data were imported to SPSS v13, in which modelling exercises were performed in preparation for passing the data to the spatialest software for completion of the process.
Data formatting and cleanupAs in most modelling exercises, once imported, the data was then reformatted in various ways to expedite modelling. Labels were assigned to categorical variables; out-of-range data were identified and corrected or excluded (eg, sales before 2002 or construction year prior to 1700); sale year and month were extracted from sale date; and resales were identified, in which case only the most recent sale was retained.
Preliminary time trend analysisInitial attempts to identify outliers were frustrated by wide variations in price over the 42-month modelling period. Consequently, a preliminary time trend analysis was performed by regressing sale price per square metre on sale month (one to 42) and extracting the indicated rates of change. Tests were made for variations in price trends between private- and public-built housing, as well as among the three domestic property subclasses (detached, semidetached, and terrace), although only one rate of change was deemed sufficient in the majority of market areas. Price trends in the various market areas ranged from 0.5-1.5% per month, with the largest trends observed in coastal areas and areas of high population growth.
After sales were adjusted to the required valuation date (1 January 2005), outlier analyses could be more meaningfully conducted. The mainstay of this analysis was a graph of sale price against habitable space, colour-coded by subclass for each neighbourhood. Outliers were flagged and removed. Although well less than 1% of sales were removed in any market area, this process served to eliminate the potentially most problematic sales prior to modelling.
Base, exploratory and final modelsThe Lisburn pilot study had revealed that multiplicative models were clearly more accurate; hence they were used for the entire project.
The first model developed in each market area was a base model that incorporated variables for habitable space, property type, grade, construction era (based on year built ranges), neighbourhood, location (urban, suburban, rural village, and rural district as applicable), and time of sale. The time variable was segmented into two ‘splines’ – one for public-built and one for private-built housing – although, as was the case with preliminary time analyses, differences were typically small and in most cases discarded in final models. In addition, base models included binary variables for first-time sales (new construction) and beacon properties. The latter served to adjust for any differences in capital value proxies observed between sales and beacon valuations, which generally proved to be small or statistically insignificant.
➦Erin J. Montgomery, D. Phil., is a deputy principal statistician of the Northern Ireland Statistics and Research Agency who works in an outposted capacity in Land and Property
Services(LPS) in Belfast, Northern Ireland
➦Robert J. Gloudemans is a mass appraisal
consultant and partner at Almy, Gloudemans,
Jacobs & Denne, Phoenix, Arizona
18_Automated valuation modelsPart two
Robert Gloudemans and Erin Montgomery continue with the second of a three-part article on the methodology behind the domestic revaluation in Northern Ireland. This month they focus on the benefits of spatialest software
adjusted to the valuation date and the model rerun a final time without the time variables.
The final coefficient of dispersion (COD) is 11.0. Note the similar medians for the sale and beacon properties, indicating that their appraisals are centered near market value as of the valuation date to which sales prices were adjusted. The somewhat higher COD for the beacons likely indicates that they represent less typical properties for which the market is comparatively thin.
After final sales ratio testing for equity among each property group, the MRA model was saved and applied to the universe of target properties in SPSS. Although not the final values for rating (assessment) purposes, these values served as an important comparison with values calculated in subsequent analyses.
SpatialestThe spatialest software is a statistical geographic-oriented comparable sales program, developed by Causeway Data Communications (CDC) of Northern Ireland, that can work with SPSS to produce value estimates rooted in both an underlying MRA model (either additive or multiplicative) and the most comparable sales (or beacons) identified for each subject property. Comparability is defined on both physical similarity and geographic proximity, with the user assigning a relative weight to each.
Interface with SPSSAlthough MRA models were, of course, based on sales and beacon properties only, all target properties in AO were downloaded for valuation with SPSS. Therefore, the data files saved at the termination of MRA modelling for each market area contained both sold and target properties. These files were saved in “dat” format for input to spatialest. Coefficient files were also saved in the same format, again for input to spatialest. These two files constituted the starting point for valuation with the spatialest software. Importantly, the data files contained x-y coordinates for use in determining geographic proximity. *
Next, additional variables were added for storeys, heating type, repair/condition, relevant site-positive and site-negative features (which differed among market areas), ancillary areas not included in habitable space, garages, sewer/septic, water, power, difficult access (yes/no), and outbuildings. Several iterations were run to identify the optimal variable set and re-specify or constrain any misbehaving variables. Also, at this point, the worst outliers (typically only about 0.1% of cases) were identified and excluded. Based on rates of change indicated by the time variables, sales prices were
“The spatialest software ‘linearises’ values for a categorical variable such as grade or neighbourhood into weights based on their respective coefficients”
_VALuER_www.irrv.net
Automated valuation models_19
Property characteristic weightsA universal problem in comparable sales algorithms is determining weights to assign to each property characteristic (living area, neighbourhood, grade, garages, and so on). The spatialest software assigns these weights optimally based on a consideration of beta values for each property characteristic. Essentially, the spatialest software ‘linearises’ values for a categorical variable such as grade or neighbourhood into weights based on their respective coefficients and runs a “shadow” model to determine the beta weights for the consolidated variables (one per characteristic). These beta weights determine the relative weight of each characteristic in comparables selection.
Comparables selectionFor each subject property, spatialest also determines the geographically closest sales within a specified radius. The user has the option of determining how much weight to assign to physical similarity and geographic proximity (eg, 50% to each or 75% to one and 25% to the other). Selected comparables are adjusted for differences from the subject property based on MRA coefficients. Since sales have been time-adjusted, sale date is already accounted for.
The selection process can also be controlled though comparable rules in which the user limits the search to properties with specified characteristics; for example, consider only detached homes when finding comparables for detached homes and consider only era two, three and four homes when valuing era three homes. Of course, such filters can result in failure to obtain the specified number of comparables for many subjects, in which case the user must relax the criteria and perform another search for subjects that failed to obtain the required number of comparables on the prior iteration.
In this case, 10–12 iterations were typically required for each market area, and the process produced considerably better and more defensible comparables than if properties were not stratified. This process is further aided by the implementation of valuer-created “estate codes,” whereby
respectively, and one to five represented age bands, with one denoting oldest properties (built pre-1919) and five denoting
youngest properties (built post-1990). With the specified comparability criteria, there were 16,848 out of 30,190 “target” properties valued in the population (55.81%). For these properties, spatialest could find the required number of comparables (three) within the given radius (4,000 meters). By the termination of iteration 10, all but 44 of the target properties in the market area considered by the model had been valued. These 44 properties were those for which spatialest could not find at least three comparable sales (or beacons) given any of the user-specified comparability criteria. VLA valuers subsequently handled these properties individually.
The final model estimates produced by spatialest were then subject to a smoothing algorithm developed within the VLA modelling team. This was necessary to ensure that, for example, all physically identical properties within the same small street were given the same appraisal value. This was not always the case with the unsmoothed spatialest model estimates. The value of a particular property based on, say, three comparable sales may have been different from the value of an identical property at the other end of the street because its value was based on a different set of three comparables. The smoothing algorithm proved very effective in overcoming this difficulty, helping to maximise the defensibility of the list value produced.
The third and final part of this article, which first appeared in the Journal of Property Tax Assessment & Administration, Vol 5, No 4, 2008 (a joint publication of International Association of Assessing Officers and International Property Tax Institute) will appear in the September issue of Valuer. D
neighbouring contiguous groups of streets containing properties with a high degree of physical similarity are assigned a common estate code value. The spatialest selection process is therefore bolstered still further by insertion of an even more micro-location factor than neighbourhood.
Figure 3 shows the criteria used in the first iteration of a model that required a total of 10 iterations to complete. Iteration one allowed property to be valued using only comparable sales with the same estate code. Additional comparable rules specified that property types one and four (private- and public-built detached homes) could use sales of either of these types as comparables, and similarly for property types two and three (private-built semidetached and terrace homes) and property types five and six (public-built semidetached and terrace homes). Comparable rules of the same ilk were also in place for the ‘subera’ variable where D, S, and T represented detached, semi-detached, and terraced properties,
“A universal problem in comparable sales algorithms is determining weights to assign to each property characteristic”
20_Automated valuation models
Peter Scrafton calls for an end to recent nonsense as he examines the legal implications of Spirerose Ltd v Transport for London
n the March issue of Valuer, I wrote of the facts of the above case, its progress through the system, the result, and of the powerful Court of Appeal which
decided it. Now, I want to look briefly at the legal issues. This is needful, even though the decision of the Lands Tribunal was essentially on the facts, as it is appropriate to consider the route taken by the Court.
The ratio of the decision is that, where there is a reasonable prospect of a planning permission at the valuation date, then it is also probable, applying the civil standard of proof, that permission would be granted, as in the no-scheme world, an owner would be expected to do what might be necessary to look after himself, by making the appropriate planning application. He could also assume that the planning authority would decide it according to policy.
Paragraph 66 of the Tribunal’s decision, which discusses the requirements of Rule 2 (sale in the open market by a willing seller), and holds that, if the statutory hypothesis assumes that planning permission would be available, says: “...on the assumed hypothesis... there would not at the date of valuation have been a mere prospect of planning permission. There would have been a determined planning application granting permission…”
Paragraph 70d explains how this approach differed from that of assessing hope value: “Whether planning permission would have been granted in the no-scheme world is to be determined by reference to the decision that a
reasonable planning authority would have made. By contrast, hope value is to be assessed by reference to the view that the market would have taken as to the prospects of achieving planning permission.”
The Tribunal valued the site on the basis of the planning permission which it believed would have been available, rather than on the (lower) “hope value” basis contended for by Transport for London (TfL), made on the basis that there would have been no actual permission, but only a “very good prospect”, subject to such uncertainties as would have been perceived by the market (para 134).
It is appropriate to examine the manner in which TfL’s arguments were rejected by the Tribunal, and by the Court. Citing Porter v Secretary of State [1996] 1 EGLR 10, TfL contended that the question of planning permission was “probabilistic, not deterministic”, and that the valuer should assess the chance of the grant of planning permission at the valuation date, and not whether permission would be granted at that date. The Tribunal held that such may be the character of the approach taken by the Courts in assessing the measure of damages (compensation) on the basis of “reasonable foreseeability”, it is not the route to be taken in the determination of compensation for compulsory purchase. Assumptions arising under the
Act or under Pointe Gourde are to be applied as facts, and not the subject of the test applied by the Courts in cases where the Act and Pointe Gourde do not apply.
Having considered the issue in Porter (an injurious affection case brought under s7 of the 1965 Act) the Court declared that there were important policy issues at stake in the instant case. First, the 1961 Act contains an apparent legislative intention to create a statutory code within which the principles of Pointe Gourde were to be assimilated (para.20), and that (at para.65) it must be accepted that, where the statutory assumptions apply, the probability of a planning permission becomes a certainty.
They went on to hold that, where a claimant was unable to take advantage of the statutory assumptions because of an anomaly in the provisions fixing the date of consideration, then they would interpret the no-scheme rule so as to remedy the anomaly rather than extend it. It was also plainly desirable that there should be consistency in the assessment of compensation for compulsory acquisition of land in materially similar cases, whether or not the statutory assumptions applied.
Emphasising the point at paragraph 66, the Court held that the statutory policy reflects the common assumption that policy and practice has obvious merit in simplifying the task of valuation for the purpose of assessing compensation. It reduces the likelihood of disputes and litigation, promotes compromise, and saves costs.
Concluding that there were powerful policy considerations to support the Tribunal’s decision, the Court went on to draw the attention of Parliament to the need for the drastic reform of the compensation system, whether at one fell swoop (as recommended
by the Law Commission under Carnwath LJ’s chairmanship) or piecemeal (see Greenweb).
It’s time that someone in government or Whitehall picked this issue of reform out of the “too hard” pile, and faced up to the matters requiring action. D
ending the
➦Peter Scrafton IRRV FCIArb, Solicitor, is
Vice Chairman of the Valuation Faculty
Board and Immediate Past Chairman of the
Compulsory Purchase Association. Email:
I
_VALuER_www.irrv.net
CPA update_21
nternational delegates will be assembling with IRRV members in the glorious city of Warsaw, Poland, this month for the 2009 International Conference, held in
association with the International Property Tax Institute (IPTI) and in co-operation with the European Property Institute.
The Institute is no stranger to Poland after a very successful international seminar on compulsory purchase compensation was held there in July 2008.
The theme of this year’s International Conference, which takes place on 23 and 24 June at the Marriott Hotel, is ‘Land value capture in urban development – the role of property tax in local finance’.
As attention increasingly shifts towards the need for public, capital investments in local infrastructure, so does attention shift to the problems within the current climate. These investments require local finance, which is traditionally obtained from additional values in private property, which is created by public investments in local infrastructure. This financing has been hit hard in the current economic crises. And therefore so has the issue of urban development. The International Conference aims to evaluate and contribute to this current and growing issue.
The Conference will be opened by Institute President Julie Holden and Tom Johnstone, Chair of the IPTI Board of Advisors, and will feature various presentations from professionals across the globe, including policy makers and local property tax specialists. Institute speakers already announced include IRRV magazine regulars, Carol Cutler and Richard Harbord on assuring effective administration; Geoff Fisher, who will be presenting an international perspective of compulsory purchase; Tom Dixon, offering his expertise on valuation in tax administration, and Barbara Culverhouse with an international perspective on poverty.
An up-to-date programme of the event, which details the key speakers and presentations over the two days is available from the homepage of the IRRV website (www.irrv.net), along with a booking form and information about both the Institute’s and IPTI’s involvement in this year’s highly anticipated International Conference. D
I
Fast facts u The population of Poland is estimated as 38.1 million, making up 0.57% of the world’s population;u Warsaw is the capital city of Poland, with a population of around 1.8 million;u the majority of Polish citizens are Roman Catholic; u Poland borders the Baltic Sea, Russia, Lithuania,
Belarus, Ukraine, the Slovak Republic, the Czech Republic and Germany; u although Poland has been a member of the European Union since 2004, the national currency is still the zloty (£1 is currently equal to around 5 zlotys); andu German, Russian and English are Poland’s secondary languages.
Food & drinku Poland’s national dish is bigos – also referred to as the hunter’s stew. Recipes vary but it generally contains white cabbage and a variety of cuts of game meat; andu Western drinks such as gin, brandy and wine are available in Poland but can be very expensive as they are imported. Instead, the country is famed for its huge variety of vodka and home-brewed lager.
an international attractionOn the eve of the International Conference, Insight previews the conference agenda and delves into the history of its venue, Poland, and the Polish capital, Warsaw
22_IRRV international
What to see...u The upside-down house in Szymbark, northern Poland, was created by architect Daniel Czapiewski;u the Warsaw Barbican – one of the few remains from the walls which encompassed Warsaw;u the market place, situated in the Warsaw old town, which has been restored back to its 17th century façade and houses many cafes, restaurants and boutiques around a square;u Powazki Cemetery – over 60,000 graves in a complex of cemeteries. The graves hold the bodies of both soldiers and civilians who were slain in WWII, the Battle of Warsaw, the Invasion of Poland and the September Campaign;u the mountains of Zakopane are popular during the ski season, which runs from December to March;u sun-worshippers flock to the Baltic coast in the summer months; andu Poland hosts a variety of festivals throughout the year.
an international attractionDid you know?u Poland is the ninth largest county in Europe and the eighth most populated;u in 2008, a survey by Globalization and World Cities named Warsaw as the 35th most expensive city in the world to live in;u the National Library in Warsaw was the world’s first public library – opened in 1747; andu Poland has produced six Nobel Prize winners in the fields of physics, literature and peace.
Poland – the past, present and futureThe city of Warsaw dates back to the 14th century, when it was a quaint fishing village. In 1413, Warsaw, which borders the Vistula River, became the capital of Mazovia (a historic region which sits on Poland’s Masovian Plain) and during the 16th century, under the ruling of King Sigismund III, the city became the capital of the Commonwealth and the Polish Crown.
Various forces attacked Warsaw in the middle of the 17th century and by the late 18th century Poland was divided between Russia, Prussia and Austria – it was not until 1815 that Warsaw
became the capital of the Polish Kingdom. Poland regained its independence from Imperial Russia in 1918.
Warsaw progressed massively in the early 20th century when universities, bridges, transit and sewer systems were formed.
During World War II, the city was virtually destroyed and around 500,000 people were killed when rebellious groups, including the ‘Jewish Ghetto’ arose. Despite vast regeneration and reconstruction of Warsaw, which began in 1945, the damage inflicted to the buildings can still be recognised.
Poland is now an affluent and economically successful
country with varied financial options available to investors, and joined the European Union in 2004.
Warsaw houses some of Europe’s tallest skyscrapers and is the home to major universities and government seats. Tourism is booming, with both the contemporary new town and the architecturally rich old town drawing tourists in throughout the year. Industry is also prevalent, with the industrial leg of the city comprising both electronics and high-tech mechanics. The Warsaw stock exchange has also proven to be one of the most promising trading sectors in Europe, with more than 300 companies listed.
_VALuER_www.irrv.net
IRRV international_23
a state of disrepairStephen Thomas calls for businesses to be given a break in difficult times
ndrew Warde contributed an excellent article in the March issue of Valuer, concerning situations where owners of property seek deletions
of assessment while works are carried out.I have to disagree, however, with his
(and the Valuation Office Agency’s (VOA’s)) view that the Rating (Valuation) Act 1999 now means that, where a property is undergoing works considered to be repair, which render the building incapable of beneficial occupation, those works should be disregarded.
Case law has been established that properties should be valued rebus sic stantibus for the perfectly rational reason that it would be unreasonable to have different assessments for identical properties purely as a result of them being in different states of repair. The majority of cases affirming the principle that disrepair should be ignored for rating purposes (unless it would be uneconomic to do so) concerned residential properties, previously valued to gross value. One could easily understand why this principle was established, considering the number of identical properties in many of our residential streets. Wexler v Playle was, perhaps, the classic example. It would clearly have been unacceptable to have to entertain appeals purely as a result of one property being in a different standard of repair to its next-door neighbour.
There is a great deal of difference between a property being in disrepair and a situation where works are actually taking place which render occupation impossible. In the latter situation I do not believe that the 1999 Act was intended to mean that one should ignore those works and pretend that they are not actually taking place. Yet this is exactly the interpretation the VOA is taking. To make matters worse, especially in this time of economic downturn, the VOA appears to be increasingly of the view that works previously always thought of as refurbishment or improvements now constitute “repair” and should therefore be disregarded.
Having worked in private practice in London for over 30 years, I cannot recall, until last year, an instance where I was unable to delete an assessment in the Rating List that was incapable of occupation, regardless of whether the works were agreed to be repairs, improvements, refurbishment or alterations. The simple question has always been “is this hereditament capable of beneficial occupation”? And if this was not the case, it was deleted, which has always given landlords assurances when undertaking works to a property, that empty rates should or should not be factored into development appraisals.
The Rating (Valuation) Act 1999 was a direct result of Benjamin v Anston, but was intended only to “secure that the assumption as to the state of repair reverts to that established by the case law prior to 1990”. I take this to mean that an assessment shouldn’t be deleted purely as a result of the property being in
“The sad facts of the matter are that landlords do not deliberately keep properties vacant, they will only vandalise their own buildings because they are at the end of their tether”
A
24_Rating diploma focus
a state of disrepairdisrepair. Despite the change in the law in 1999, we continued to agree with the VOA’s deletions of assessments while works were taking place and nobody at the Agency ever mentioned the 1999 Act – until recently.
The Rating (Empty Properties) Act 2007 increased empty rates to 100% and brought vacant industrial buildings into the empty rate fold from 1 April 2008. Since the new legislation was introduced, the VOA has issued new Practice Notes, requiring valuers to be far more diligent in considering requests for deletions – despite the fact that the 1999 Act has been on the statute book for nearly nine years. Why wasn’t this Practice Note issued in 1999? The answer must be that the VOA has been put under pressure from the government to tighten up on appeals seeking deletions since the abolition of empty rates – and the VOA is using the Rating (Valuation) Act 1999 to overrule rebus sic stantibus and obey their employer’s instructions.
The VOA is now of the view that any works actually taking place in a building which, in their view, constitute repair, are deemed to have been carried out, i.e even if occupation is impossible they will deem, in effect, that the works are not actually taking place.
This is clearly nonsense, and I would urge all ratepayers to resist invitations by the VOA to withdraw appeals in such situations.
The government’s determination to resist the calls of the property industry to relax the new 100% empty rates has forced many landlords to carry out so called “constructive vandalism”. We all know that some buildings are incapable of being let at any price, usually because the occupier would still be responsible for the payment of rates. In order to rid themselves of a large empty rate liability, many landlords are seeking to render their properties incapable of occupation by stripping their buildings back to the bare bones.
What, I ask, is wrong with that? Why should landlords be asked to pay the equivalent of occupied rates on buildings they cannot let at any price? After all, rates were introduced originally as a tax on occupation – not on ownership.
Yet the VOA will now suggest that, if in such situations, the property could economically be put back into an occupied state, it should be assumed under the 1999 Act, that those works will be deemed to have been carried out.
The sad facts of the matter are that landlords do not deliberately keep properties vacant, they will only vandalise their own buildings because they are at the end of their tether, and the last thing they want to hear is that the government (via the VOA) resists their cries for deletions because the 1999 Act is being interpreted incorrectly.
If the government wishes to outlaw constructive vandalism,
it should legislate and not ask the VOA to do its work for them.
o begin with, it is useful to look at why revaluations are necessary, before going on to look at the importance of
dates and to what extent, if any, the current market conditions can be taken into account. The second part of this article considers the practical issue of how to analyse rents where the key evidence includes significant inducements, either by way of rent-free periods or capital payments.
Revaluation and the importance of datesWhy revalue? “Rating seeks a standard by which every hereditament in this country can be measured to every other hereditament”, said Lord Pearce in Dawkins (VO) v Ash Brothers and Heaton Ltd (1969). The object of a revaluation is to ensure this standard is maintained, rebasing property values so that they reflect current market conditions, while at the same time maintaining a fair level of assessment. There were revaluations in 1956, then 1963 and 1973 before a big gap until 1990, when the current five-yearly cycle started. Revaluation 2010 will therefore be the fifth in the modern series of regular revaluations, following on from the previous period of intermittent revaluations.
Rating is a tax based on the annual value of property, but experience tells us market rental values change over time in both absolute and relative terms, going down as well as up. Values for different property types move at different rates, as do values in different localities. Regular *
Revaluation in a recession
TThe latest offering from the Rating Diploma Holders reviews some of the issues involved in compiling a Rating List in the current climate, and how these difficulties might be resolved
_VALuER_www.irrv.net
Rating diploma focus_25
➦Stephen Thomas is Partner and Head
of Rating at Montagu Evans
revaluations are essential to make sure the tax base is re-tuned to the level of present day rents and current relativities so as to ensure a fair distribution of the tax burden between ratepayers.
The Valuation Office Agency (VOA) is currently in the middle of preparation work for the 2010 revaluation. This involves the enormous logistical task of revaluing 1.79 million non-domestic properties with a current total rateable value of £51.4bn in the local and central rating lists, resulting in a tax yield of approximately £22bn a year for England.
For any revaluation there are two dates that are significant, and it is very important to have a proper understanding of them. They are first, the Antecedent Valuation Date [AVD], which for the 2010 rating list is 1 April 2008, and second, the Compilation Date or Material Day, which is the 1 April 2010.
The antecedent valuation dateThe concept of an AVD is very recent when we look at the long history of rating. Historically, there was no set valuation date but this caused problems in times of inflation. The wonderfully named case of Ladies’ Hosiery & Underwear v W Middlesex Assessment Committee (1962) concerned a shop that was similar to, but built after, the comparables. As a consequence it had been valued higher than these other properties. The ratepayers wanted their assessment brought into line with the others on the grounds of fairness, but admitted that it would have let for a rent equivalent to the rateable value. The court held that “correctness must not be sacrificed to uniformity” and dismissed the appeal.
Another problem was to ensure that all rating valuations across country were consistent with evidence at one date. In K Shoe Shops v Hardy (VO) & Westminster City Council (1983) the House of Lords confirmed the valuation date was 1 April 1973, the date the rating list came into force, even though the evidence which supported the list had been gathered over the previous year or two. While the
VO eventually won that case it did highlight a difficulty that could potentially crop up in every list.
To overcome the problems identified in K Shoes we now have an AVD which, at present, is set two years before the coming into force of a new rating list. This enables the VO to gather and analyse the rental evidence at the AVD and then have time to build up their valuation schemes and apply these to all properties by the date of the compiled list.
The compilation dateAs properties change over time, it is important to establish the exact date that the physical circumstances of the property are taken into account. This is the Material Day. At the introduction of a new rating list this date is the same day as the new list comes into force. For the 2010 revaluation the compilation date is 1 April 2010.
The importance of the Material Day is shown in the Local Government Finance Act 1988 (LGFA 1988), schedule 6, para 2(7), which lists those factors that can be taken into account at the material day. Broadly speaking, these are all of a physical nature, such as the state of property and state of locality. All other non-physical factors are to be taken at AVD. These would include the state of economy, interest rates, fashions and level of values.
At a revaluation therefore the following assumptions have to be made:u rental values are as at the AVD;u physical matters contained in schedule 6, para 2(7) LGFA 1988 are as they are at the compilation day;u all other matters not mentioned in para 2(7) are taken as at the AVD; andu that general market value changes between 1 April 2008 and 1 April 2010 cannot be taken into account, but physical changes can.
Present situationWhat relevance does all this have for the 2010 revaluation? A proper understanding of these different dates is critical, and particularly so in the current economic climate.
We are now in recession, but what exactly was the economic position at the AVD on 1 April 2008? With all that has happened in the past year it is important to be reminded that the Bank of England base rate was 5.25%, the Stock Market FTSE 100 was at 5,701 and Northern Rock had been nationalised on 18 February. On 26 July, The Estates Gazette headlined: “Incentives up as interest on the wane.” The prospects for property were not great but not that bad either.
So what has happened since AVD? On 10 April the Bank of England base rate was reduced to 5.00% and on 21 April, Bank of England and Treasury pledged emergency funding to banks. On 1 May a Bank of England report said that the “worst of the credit crisis may be over”, I wonder who wrote that? In September 2008 we had “melt down week”, with the collapse of Lehman Brothers on 14, Lloyds coming to the rescue of HBOS on 17, and then on 19, US officials were said to be working on a plan costing billions of dollars to help rid US banks of their bad debts. It was only on 21 October that the Governor of the Bank of England, Mervyn King, first used the “R word” – recession! On the 6 November the Bank of England cut the base rate by 1.5%, and as I am writing this, the base rate stands at an all time low.
In the author’s opinion, when doing a revaluation the Valuation Officer is required to stand at the AVD, looking forward in the light of what has happened up to that instant. He must make reasonable assumptions as to what might happen in the future, and from these assumptions come to a view on what rental deal a willing landlord and willing tenant would agree for a property on that date. Bear in mind that the landlord in this scenario cannot put off the decision until another day because of uncertainty, and neither can the tenant. They cannot wait a bit longer for the market to settle. The deal has to be done on that day.
The “64-thousand-dollar question” now before us is to what extent can, and indeed should, the VO reflect economic events that
26_Rating diploma focus
have taken place after the AVD? It is submitted that he should not, but it is suggested that it will be virtually impossible for any VO not to be influenced (either consciously or unconsciously) to some extent by events over the past few months, even though they have taken place after the AVD and were probably unforeseen as at the AVD.
An example from the 1990 ListA useful illustration of how the various dates interrelate, and the importance of what needs to be considered at what date, can be found when looking a the situation in the City of London in the 1990 list. The AVD for that list was 1 April 1988, when the economy was booming and office rental values in the City were at their peak. By 1992 values had fallen dramatically because of low demand and a greater supply due to new construction entering the market.
To what extent, if any, could this be reflected in the rating assessments of these properties? The assumptions in schedule 6 para 2(7) meant any effect of recession on rental values after AVD had to be ignored as they were not physical. However, the change in amount of modern floor space was a physical factor and therefore could be taken into account. It was eventually agreed that had the extra floor space, on the scale experienced, been in existence at AVD, then this would have resulted in lower rental values – minimal for modern offices, but more substantial for older offices.
Analysing the Rental EvidenceWhat then is the impact on the current property market of recent events? There is uncertainty, companies are retrenching, and demand for property is falling, resulting in reduced transactions and values and landlords willing, even eager, to concede incentives in order to obtain new lettings.
Incentives make evidence more difficult to analyse and convert
to the statutory terms required in a rating valuation. Many new rental deals are structured so as to keep the headline (or contractual) rent high to protect the landlord’s reversionary interest. So we have transactions taking place that are laced with capital contributions, stepped rents and rent-free periods. Other incentives can include shorter leases/flexible lease terms, break clauses, two ways rent reviews and service charge caps.
These all need to be adjusted to the equivalent of a constant rent under the rating hypothesis.
Incentives in detailFrom the landlord’s perspective, incentives are a one-off payment to secure a letting on a long lease and maintain investment and
loan values with the benefit of an enhanced rental flow, and thus should be amortised over the whole length of the lease. The tenant’s view is that the rent is subject to review in five years time, and the rent free benefit should be discounted only to the first review.
Guidance on the adjustment of rents can be found in the RICS Valuation Information Paper No. 8: The Analysis of Commercial Lease Transactions. The VOA also covers the subject in some depth in Volume 4, Section 5 of its Rating Manual, which can be found on its website (www.voa.gov.uk). There is also a very interesting Scottish case, Morrison E F (GP) Ltd v Central Scotland Assessor [2004], which concerned retail units in a factory outlet centre where the issue was the correct rate per metre squared to be adopted. The Lands Tribunal
for Scotland examined in great detail how to analyse the rental evidence to reflect rent-free periods and inducements, and made various recommendations.
RICS VIP No 8 and para 5.6 deals with the time over which the incentive should be amortised: “It will be recognised that the landlord will usually contend for the longest time, such as the full term of the lease, and the tenant the shortest time, such as the first review. The valuer’s decision has to be a judgement between these conflicting claims having regard to the overall effect of the all the incentives, anticipated rental growth and knowledge of the market, motivation of the parties and what, in the real world, the valuer believes might be achieved in an open market letting
on the hypothetical terms.”In the author’s opinion this
is simply a statement of the obvious and not very helpful. Far better guidance was given in the old RICS Guidance Note 4: “It is suggested that inducements should usually be evaluated over the period until the term end, or (if earlier) the rent review or break clause, following the time when the open market rental value assessed on the given lease rent review terms, is no longer exceeded by the headline rent.”
When adjusting rents for incentives it is therefore essential to estimate the projected rental growth. If growth prospects are poor then the market rental value may well not exceed the headline rent at the first review, and the amortisation period would need to be extended.
As a compromise, it is now often agreed to amortise incentives over ten years, i.e. to the second review – see the Morrison case.
In reality there is no “correct” approach. The adjusted or virtual rent produced from an amortisation is still not necessarily the market rent for rating purposes. What is sought is what the tenant would have been happy to pay as an annual rent, but without the rent-free period. Ultimately, the valuer needs to stand back and look and use professional judgement. D
“The ‘64-thousand-dollar question’ now before us is to what extent can, and indeed should, the VO reflect economic events that have taken place after the AVD?”
_VALuER_www.irrv.net
Rating diploma focus_27
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28_Valuation modelling
Calculating the term length To start the development of the table, we will initially look at how we can calculate the length of the term. In working out the length of the term, three possibilities exist:u the property is currently let at the FRV;u the property is not let at the FRV; oru the property went to FRV in an earlier period – we need to check this so as to insert a “blank” in this case, otherwise an error message would be displayed.
If we start and look at the formula in cell E97:
IF(C97=”FRV”,””,IF(COUNTIF($C$92:$G$92,C92)=0,””,COU
NTIF($C$92:$G$92,C92)))
The formula is based on an ‘IF’ statement (IF(Test, True, False)). Actually we need to use a “nested IF statement”, which is essentially two IF statements: IF(Test, True, IF(Test, True, False)).
The test element checks to see whether the property is currently let at its FRV (C97=”FRV”). We need to perform this test because if the property is currently let at its FRV there would be no term as such. If we find the property is let at the FRV, then insert a blank (“ ”) and if the property is not let at its FRV, then we need to calculate how long the rent is going to be received for.
Valuation preparationHaving determined the cash flow to be valued (Table of net income (7)) we now need to derive a formula that will determine:u the number of terms required;u the income for those terms and the reversion; andu the length of each term.
While this is simple to do manually, it is difficult to implement in a spreadsheet, though it can be achieved in a number of different ways. There are potentially 25 different combinations, numbers of terms, and rental patterns that need to be catered for. Essentially we are aiming to produce a table that provides certain information (see ARY approach (8) table, below).
In addition, we need to make a provision to put blanks into cells where there are less than four terms and a reversion, so as to ensure the displayed information is clear and the table not littered with 0’s or error messages.
To do this we use the COUNTIF function. This function will count the number of cells which satisfy a given criteria. The format of the function is COUNTIF (range of cells, criteria). In our case the range of cells (C92:G92) represents the net income for the whole five years. The criteria is (C92) – the rent we are trying to find. Essentially the function will give the answer to “how may times does the rent in cell C92 appear in the range C92 to G92”? The first use of COUNTIF is to check whether the rent we are looking for actually does appear in the list, i.e. equals zero. If it does equal zero, this means that the FRV was reached in a previous period. If it does equal zero (i.e. we do not find it) then we enter a blank (“ ”).
The second COUNTIF statement deals with the situation where the rent will be in the list and the result of this statement will be the length of the first term.
If we now move to Cell E98, the basic structure of the formula is the same, however we need a way to exclude from the range the number of cells (the length of the previous term) we found from the calculation in the row above. To do this we make use of the OFFSET function.
The OFFSET function allows you to start a formula from a varying position. In our case we want to find the next rent that will be paid after the first term, and to find how often it will be received.
Freehold valuation In the previous article Peter Brown covered the setting up of the data required to undertake the valuation and the conversion of that data into a table of net income which would form the basis of the valuation.
In this article he will cover the development of the actual valuation model. Some of the formulas used in this article are long and complex, introducing a number of new functions, as well as error checking.
ARY approach (8)Term Income YearsTerm 1 £89,200 1Term 2 £97,800 1Term 3 £146,820 1Term 4 £152,840 1FRV £158,000
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_VALuER_www.irrv.net
Valuation modelling_29
Freehold valuation ➦Peter K Brown is Professor of Property Taxation at Liverpool
John Moores University and is programme
leader of their MSc Commercial Property
Management and Property Development
programmes
C92. In cell D97 we could have simply used =C92, but again the offset function has been used, as it will be in the rest of the cells. For the rest of the column we need to check:u did the rent reach the FRV in a previous period – if so, enter a blank;u otherwise find the next rent payable after the previous term; andu whether an error is produced as a result of the formula because there is a blank in an earlier row as a result of achieving FRV in an earlier period.
D98 =IF(ISERROR(IF(E97>=5,””,
OFFSET(C92,0,E97))),””, IF(E97>=5,””,OFFSET(C92,0
,E97)))
The first part of the IF statement checks to see whether the result of the formula produces an error, and if it does, it enters a blank (“ ”). We check the error by using the function ISERROR.
The ISERROR function takes the form =ISERROR(value)
If there is an error the result will be TRUE, otherwise FALSE.
So in the above formula, IF(ISERROR(IF(E97>=5,””, if the “ISERROR(IF(E97>=5” is TRUE then insert a blank (“ ”), otherwise an error message would appear. If there is no error then evaluate the formula.
The IF statement is used to see whether the number of years in column E is greater to equal to five, which stops entries being made after the FRV has been reached. If it is, then the cell is left blank, otherwise the offset function will insert the next rent receivable based on the length of the previous term(s). *
The OFFSET function takes the following format:u OFFSET (reference, rows, cols):-u reference is the cell reference where you want to start – in our case C92;u rows refers to how many rows you wish to move – in our case we wish to remain on the same row, hence 0; andu cols refers to how many columns you wish to move – in our case we start at cell C92 and want to move one column (E97) as that is the length of the first term.
Our formula is as follows:
E98=IF(C98=”FRV”,””, IF(COUNTIF($C$92:$G$92,OFFSET(C92,0,E97))=0,””, COUNTIF($C$92:$G$92,OFFSET(C92,0,
E97))))
The formulas in E99 and E100 follow the same pattern but in the OFFSET formula the cells are increased to have regard for the length of the previous term(s). Note there is no formula in cell C101, as by definition this must be the FRV, given the five-year rent review pattern.
Note – the full formulas used for this element are shown on the accompanying spreadsheet as a text box for easy reference.
Calculating the term rent The next stage of developing the table is to be able to associate the right rent with the right term. In addition we also need to deal with the situation where a formula would result in an error – this will occur when the FRV was reached in an earlier period.
D97 =OFFSET(C92,0,0)
Regardless of whether the property is let at FRV, the rent for the first period will always be
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30_Valuation modelling
Note – the full formulas used for this element are shown on the accompanying spreadsheet as a text box for easy reference.
Calculating the descriptive text We now need to develop a formula to work out how many terms there are to be valued or whether there has been a reversion to FRV.
We need to check the following:u is the property let at FRV (i.e. there are no terms)? If so, enter FRV;u if the property is not let at its FRV then which term are we valuing. In which case, enter the appropriate text; andu if the property has already reached FRV in a previous period, insert a blank to stop any error being displayed, or spurious text and numbers.
For cell C97 the formula simply has to deal with the choice of finding whether the property is let at the “FRV”. If it is, then FRV is inserted, otherwise “Term 1” is inserted.
C97=IF(C58=”FRV”,”FRV”,”Term 1”)
For the remainder of the cell C98:C101 we need a formula to check for the three conditions outlined above.
The table above (Yield choice (9)), is to allow the user to enter the appropriate yields. It simply uses the results from table 8 to produce the text and numbers.
The valuation While the valuation itself is quite straightforward, its implementation into a spreadsheet is not. We could have a basic model with four terms and a reversion, and leave some of the terms blank if they were not required. This in my opinion is not satisfactory, and can lead to confusion.
As a result, we need to be able to use formula to display the right number of terms for the valuation. This will require the use of a series of IF statements again. In fact almost all the cells will require the use of the IF statement.
Looking at the various elements of the valuation:u term/reversion title – we need to check whether it is the “term” or the “reversion”;u income – need to check whether income needs to be displayed (was it the FRV the previous period? – in which case don’t display anything) and what that income should be;u YP – needs to check whether we require:
s YP perp;s YP for a number of years;s YP for a number of years deferred;s YP perp deferred; ands a blank – as the term before was at FRV.
(We need to ensure that the right text is used to describe the element being valued, as well as working out the actual YP figure); andu term/reversion value – we need to check if the previous term was at FRV in which case we need to put in a blank, otherwise we need to multiply the rent by the YP.
The spreadsheet which accompanies this article (which can be found on the IRRV website: www.irrv.net) contains the valuation laid out in a traditional manner and also shows the formula for each column as text and with additional explanations.
In the third part of the article, in September’s issue of Valuer, we will undertake the same valuation, but this time adopting the Equivalent and Equated Yield approaches. D
Yield choice (9)Term Income YieldTerm 1 £89,200 8.50%Term 2 £97,800 9.00%Term 3 £144,240 9.25%Term 4 £149,400 9.50%FRV £158,000 9.75%
“The OFFSET function allows you to start a formula from a varying position”
than one element of the claim, as this was not formally dealt with in the original agreement following the first reference.
A.L.E.R.T. Activities Ltd v Dwr CymruValuation of strip of land acquired for water pipeline.
Messrs F Saxton & Sons v Secretary of State for TransportValuation in respect of injurious affection to agricultural land as a result of the construction of the M6 Toll Road, arising out of the change in level of the water table as a result of the construction, and the effect that it had on the use of the land. Tribunal found that the land affected had been reduced in value by 25% as a result of a change in level of the water table.
Ali v Greater Manchester Passenger Transport Authority The valuation of a forecourt outside three shops.
Fayle v Sefton MBCThe valuation of house – use and reliability of comparables.
RESTRICTIVE COVENANT CASESRe Brighton & Hove City Council’s application (LP/14/2007)Application by the council for modification of a covenant to allow the development of 16 houses was objected to by surrounding occupiers. The issue before the Tribunal was whether the occupiers were entitled to the benefit of the restriction contained in the covenant – the Tribunal found they were not.
Re GPB Construction Ltd’s application (LP/56/2007)Application to modify covenant restricting development to one house per plot. The applicant sought to modify the covenant to allow for the construction of a further three properties in accordance with the grant of outline planning permission – allowed by Tribunal.
Re S.J.Woodward’s application (LP/32/2006)Application for the discharge of a covenant, restricting development to one bungalow on a plot to allow the erection of two semi-detached bungalows. The applicant did not attend the hearing - application dismissed under rule 49(1) of the Lands Tribunal Rules 1996.
Re A.J & H. Coates’s application (LP/15/2007)Application for modification of a covenant to allow the development of two pairs of semi-detached houses. Allowing the modification, the Tribunal considered that the modification would not injure the objector, nor
➦Peter K Brown is Professor of Property Taxation at Liverpool
John Moores University and is programme
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Management and Property Development
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was any compensation payable in respect of the modification.
Re Bathurst Ltd’s application (LP/13/2007)Application for the modification of a covenant restricting the use of the property to a single house so that a second house could be built. Issue of status of objectors – were they individual objectors in their own right or members of the resident committee, and the effect on the proceedings. Tribunal allowed modification.
Shire Barns Developments LLP’s application (LP/17/2006)Application for modification or discharge of covenant to allow for the development of an additional bungalow in the grounds of an existing bungalow. Tribunal rejected the modification on the grounds that its removal would cause injury to the objector.
COmpulSORy puRChASE CASESScholes v Kirklees Council (LCA/203/2008)Reference to Tribunal (preliminary issue) as to whether the Tribunal has jurisdiction in respect of Part 1 Land Compensation Act 1973. The matter has previously been referred to and determined by the Tribunal, and this reference was made on the same grounds. The Acquiring Authority contended that as the matter had already been determined, the Tribunal had no further jurisdiction, other
Will the Budget affect property professionals?
Capital gains taxThe tax rate remains at 18% with the annual exemption updated to £10,100 (£5,050 for Trustees).
Inheritance taxThe threshold is £325,000 and the tax rate remains at 40%, but legislative changes will extend agricultural and woodland relief to property owned in the European economic area.
Landfill taxThe tax rate increased to £40 per ton. Government has announced a review and published a consultation paper.
Stamp duty land taxThe £175,000 limit below which tax is not payable will continue until the end of the calendar year, when the limit will return to £150,000. Other changes to the tax have been announced with regard to leasehold enfranchisement and shared ownership schemes.
Valued added taxThe rate of tax will remain 15% until the end of the calendar year when it will return to 17.5%. Changes have also been made to simplify the option to tax in respect of land and buildings.
Other proposals:u enhanced first year capital allowances;u extra support for loss making businesses;u spread the payment of business rates over three years as a result of the uprating of the UBR or the ending of transition;u the establishment of a Strategic Investment Fund; u pilot city-regions (Leeds and Manchester) to better integrate all aspects of economic regeneration across the region;u insolvency package;u tax simplification measures;u measures to unlock housing development sites that stalled due to funding issues; andu measures to introduce carbon budgets and other energy efficiency measures. D
Cases and concerns Peter Brown delivers his quarterly update of case law and examines how the Budget will be affecting property professionals
_VALuER_www.irrv.net
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clean.indd 2 06/05/2009 15:30:47