2020/NO.02 - From the Archive
Fair Maintainable Trade
The heart of the nationally accepted profits test rental valuation, is the starting point of the Fair Maintainable Trade. This should represent the trade that can be sensibly forecast in the future for the Reasonably Efficient Operator (REO). Time and again we see estimates of ‘future potential’ well in excess of the trade currently being achieved in the pub concerned. Aside from the ludicrous definitions of what the Pub Cos actually contend is REO status, the simple question arises that if the estimate of future Fair Maintainable Trade is out of sync with the current trade, that automatically assumes that the current tenant is not up-to-scratch, i.e. not of REO status.
We are yet to find any rent review negotiations that clarifies in even the smallest details as to why any particular existing tenant is not of REO status. It is not acceptable just to airily wave the assumption around that "you could do much better" without quantifying why and how the existing trading operations do not satisfy REO status.
It is a question of direct proof which the Pub Cos, and indeed most major Brewery Companies, duck under specifically because they are almost always over-estimating future potential and Fair Maintainable Trade. Phil Dixon's article in the Publican's Morning Advertiser archive echoed exactly this point of which we have been promoting for years.
FMT is the obscenely used title for making wildly speculative estimations of a business’s future business, to ensure that the rental levels confirm the freehold investment values to satisfy bank borrowings, disregarding the viability of the premise.
Reasonably Efficient Operator
REO another totally misinterpreted title, Phil Dixon quotes the dictionary explanation or Reasonably Efficient as a moderate operator, not a retail genius or Michelin Star Chef. Of which the majority of pub owning companies seem to demand these days as an REO.
Once again, the key to the issue is that single word 'reasonable' which we have always emphasised means middle-of-the-road, nothing special, and not exceptional. Looking at some of the highly fanciful suggested levels of Fair Maintainable Trade, not borne out by any undisputable evidence, makes some of the Pub Co Rent Assessment Proposals complete works of fiction and nothing more than their opinion. i.e “just trust me, we know what we are talking about.”
It was not always like this, the old brewers knew exactly what their market share in an area was, if one pubs business went down another would go up, their FMT’s collectively throughout their estate would possibly estimate 6-7% increase in brewed products.
The Royal Institution of Chartered Surveyors (RICS) have often turned a blind eye in allowing the manipulation of their Valuation Guidelines by their members, who are above rebuke or forfeiture of their professional membership. The RICS Valuation Committee under a certain Pub Co friendly chairmanship removed the previous RICS Red Books guideline that the existing business should be taken into consideration when calculating FMT. This allowed any surveyor working for a Pub Co and its followers to put any figure they liked on FMT with little to no justification, hence the massive over valuing of freeholds to raise further funding to buy more pubs whilst totally ignoring the pubs viability.
Most surveyors have not run pubs, they have little idea of a pubs potential or true viability, tied into local knowledge, they use cherry picked comparables, unfortunately these surveyors are in a majority and very influential in RICS decisions.
It was pointed out that a pubs existing business is its market share at that time in an area, any growth is often at the expense of another pub, or pubs. The market is shrinking, in fact it is nudging towards freefall for many pubs, the trading conditions that many people sign up to are pure fantasy land off the back of Pub Co aspirations. It has been said if all of the FMT’s were added together we would need treble the brewing capacity, which we all know is not reflective of the market movements.
Can the REO Reflect an REO?
We should have said "can the Reasonably Efficient Operator reflect a Robustly Excessive Overbid?".
We have had a couple of clients who have purchased leasehold interests with less than a year before the rent review date. The Pub Co field staff have ceased upon the fact that in each case a substantial and enthusiastic premium was paid for the leasehold and also that the business plan lodged with the Pub Co for the purposes of the granting of assignment were, shall we say, colourful in the estimation of future trade. It is, after all, only human nature to ‘big-up’ the future trade in order that the assignment is easily granted.
In most cases, the enthusiasm for future trade has not been borne out by on-site circumstance, evidence and regard to the recession, which was under-estimated and is still continuing to bite.
We consider that the best evidence of Reasonably Efficient Operator status, should have as its starting point, the last three years' trade accounts (if available) for the previous operator.The fact that the new operator in each instance is embarking on a substantial development spend to redecorate and theme in their own personal style, that does not necessarily mean that the REO status of the previous occupier should be ignored or forgotten. The fact that a business plan is overly-enthusiastic, it should not be held as evidence of REO status and it is not correct to press that point home in the justification of a wildly inflated estimate of Fair Maintainable Trade.