Property Value with Tenant

[classicm]

I have a commercial property with a sitting tenant and the tenant wants to buy the property.

It is a factory unit of 17,500sq ft with offices, a derelict factory building of 6400 sq ft(used as storage currently on a licence to occupy free issue at present and not part of the lease, but this would be part of the purchase) and the overall site is 1.25 acres in Prudhoe, Northumberland with good access roads.

The lease is secure and the rent is £36,000pa with a revue (upwards only) in 2015. The lease runs to 2020 (8 years or so left of a 15 year lease).

The main building (17,500 sq ft) is in reasonable condition and I am currently upgrading the roof to a fully insulated type at a cost to me of £100,000.

I dont want to sell myself short, and there are no other properties similar anywhere nearby (heavy industrial) to compare.

Are there any rules of thumb to assess the property value based on the rental value?

I was looking to sell at £500,000 but the tenant was looking at nearer £350,00.

My view was that the value of the lease (in terms of rent) is at least £300,000.

Can anyone help with some advice?

[MrJohnnyB]

Without knowing the tenant strength, the terms of the lease, the state of the local market, the age of the building it is impossible to get an accurate answer. So many variables effect the yield.

The answer could be either £350,000 or £500,000 or more or less from the information you have provided

[classicm]

Thanks, I see that it is a difficult 'guess'.

The tenant is strong and it is difficult to gauge the local market. The buildings are both 1960.

I was going to approach a local agent and test the market that way, and I guess that would be a better gauge.

I was looking at the return on investment as a gauge to the property value, but I suppose the value is what the market dictates.

Thanks for taking the time to reply.

[Always Problems]

One of my tenants has asked to buy the premises I rent her. And has offered £X. If I sold and invested the money at 2% I would only get 45% of the rent I am getting at the moment. And my accountant said I would pay a third of it in Capital Gain Tax. Which would reduce any invested income from 45% to 30%.
Tenants should take finantial advice before they make silly offers.

[MrJohnnyB]

Thanks, I see that it is a difficult 'guess'.

The tenant is strong and it is difficult to gauge the local market. The buildings are both 1960.

I was going to approach a local agent and test the market that way, and I guess that would be a better gauge.

I was looking at the return on investment as a gauge to the property value, but I suppose the value is what the market dictates.

Thanks for taking the time to reply.

I was referring to the return on income. The investment method basically makes you apply an all risks yield which takes into account the tenant strength, repairing covenants, lease terms and the like. You can also value via term and reversion and so on. But most of these require a detailed knowledge of the market. If you want a more precise answer, contact a Surveyor who specialises in commercial property to act in between the parties to produce a figure that is actual OMV.

[rentreviewspecialist]

In my experience, there are several ways to sell to a tenant. For example, you could obtain a surveyor's report on market value(s) which you can both work off, or quote the price you want and offer suggestions on how the tenant could justify paying that price! The latter is done by reminding the tenant that it could afford more because it could sell the business as a going-concern and grant a lease at a higher rent in conjunction with sale of the business.

There are two market values: 1) as an investment, and 2) assuming vacant possession. Although the landlord cannot sell with vacant possession, the tenant would be able to do if once it becomes the landlord.

As for expecting more just because the net proceeds for the landlord would if reinvested result in a lower return, with respect, that cuts no ice. The market value is what it is so if it wouldn't make sense to sell financially then don't sell. [A few years ago, for a client, I recommending pruning the portfolio of high-yielding investments (10% plus) because I suggested they'd gone ex-growrh, would likely be problematic to re-let and if my client were to sell before that became obvious some mug (inexperienced investor) would be sure to overpay. Spot on!)

[classicm]

Thanks for this.

I have put it to my tenant that for the remainder of the lease they will pay circa £300k over the next 8 years in rent and I would still own the property (which is freehold). If they pay £500k to buy they would not have the rental cost and would own the asset. If we take the 8 year model as an example, then if the property had a market value in 8 years of £500k (and I appreciate that there is simply no way of really knowing that) the tenant would still have returned a profit on the deal.

[bandontherun]

your approach is spot on. hope you manage to agree something. Do you own this personally or in a limited company?

[classicm]

Well, a long story but I do own the property personally. I had a business that needed relocating very quickly and the property was only available for purchase within a 2 week window so the only way to do the deal quick was to buy personally. Although not the most tax efficient way, it saved the business.

Thanks for your reply.

[MrJohnnyB]

Have you assessed what your Capital gains liability will be? Surely this will have some impact on your likelihood of sale? Also have you factored in the tax you pay on the rental income?