2021/NO.03 - The accepted method of the calculation of rent during the continuation of the pandemic is to adopt the last known pre covid-19 accounts (generally 2019 but some early 2020) and then make an allowance for caution looking forwards. There are two very distinct schools of thought which produce very different results.
METHOD A
This is the prime route promoted by the POBs for the very good reason that it will produce a highest possible rent result. A proposed rent-free period is quoted for either three or six months. This makes the assumption that after the rent-free period all will return to the level of the accounts used as the basis for Fair Maintainable Trade (FMT). In other words, you go back to the 2019/20 trading profile pre Covid-19. We totally disagree. The trade will not return to those pre Covid-19 days anytime soon. For sure in the fullness of time there will be a return to a semblance of normality, but not back to the same level. Then comes the valuation detail…
Make the assumption that the calculated Divisible Balance (gross profit less all expenses) is £140,000. The standard tenant’s rental bid pre Covid-19 is taken as 50%. Rent result £70,000. Then apply three months’ rent free or £17,500. Cast that over the five years until the next rent review or £3,500 per year and the net rent is now reduced to £66,500. Divide that into the original Divisible Balance of £140,000 and this then represents a 47.5% rental bid.
METHOD B
This recognises that life will not readily get back to anything like normal and reflects the tenants caution of the gentle build-up of trade over the next five years. No profit for quite a while then recovering into some form of profit.
Take the same divisible balance of £140,000 and apply a conservative tenants rental bid of 40%. Rent now becomes £56,000 or £10,500 less than the rent-free period method adopted by the POBs.
The POBs and their sympathetic ‘experts’ in Independent Assessment referrals ALL follow Method A. This makes the unrealistic assumption that all will go back to just as it was pre Covid-19 after the rent-free period. This cannot be remotely credible but is still being sold as having the support of the market (?). What is more disturbing is that some of the ‘big firm’ Independent Assessors (no names for tact sake) are wedded to the rent-free period Method A as their line of adopted logic. No great surprise then that these IAs are the ‘go to’ people of choice if the POBs are asked to recommend an appointee for the job of Independent Assessor. Hardly surprising. We have been monitoring all of our referrals and those of colleague firms to an Independent Assessor procedure. The tenant’s rental bids determined by free thinking IAs seem to be settling out at just over 40% with some sub 40%.
If you are entering into a MRO rent referral on your own, you might like to send the chosen Independent Assessor a copy of this Newsletter and ask him directly if he is favouring the POB by a choice of Method A. That is precisely what it does.