Section 18(1) and diminution in value
Worked example 1: diminution of value, no supersession
A purchaser who plans to undertake all the dilapidations within a 6-month period before seeking to actively market and let the property in its 1990s specification at a market rent of £60.00 per sq. ft. while allowing for a 9-month marketing void. It would expect to attract a new tenant of mediocre covenant strength on a short 5-year lease term with tenant break at the end of the third year, subject to an initial 6-month rent-free period.
Valuation A - compliant state | |||||||
---|---|---|---|---|---|---|---|
Ground to fifth floor (offices) | 10,000 sq. ft | @ | £60.00 psf | £600,000 | |||
Initial yield (VP): YP perp | 5.25% | @ | Years purchase | 19.04762 | |||
Sub-total | £11,427,571 | ||||||
Less lease transaction costs | |||||||
Letting fees | 10% | £60,000 | |||||
Legals/lease conveyancing | Fixed | £7,500 | -£67,500 | ||||
Less void costs | |||||||
Marketing void: 39 weeks [9 months]: | £450,000 | ||||||
Empty rates: 26 weeks [6 months] (allowing 3 months empty rates) - RV £400,000 x UBR £0.487: | £97,400 | ||||||
Rent free: 26 weeks [6 months] | £300,000 | ||||||
Unrecoverable insurance: annual premium | £11,250 | -£858,650 | -£926,150 | ||||
£15,000 - 39 weeks [9 months] | |||||||
Sub-total | £10,502.421 | ||||||
Less purchaser costs | |||||||
Legal; agents; SDLT (5.75%) | -£554,760 | ||||||
Total | £9,947,661 | ||||||
But say | £9,648,000 | ||||||
Check valuation: | £965 psf |
Valuation B - in actual condition | |||||||
---|---|---|---|---|---|---|---|
Ground to fifth floor (offices) | 10,000 sq. ft | @ | £60.00 psf | £600,000 | |||
Initial yield (VP): YP perp | 5.25% | @ | Years purchase | 19.04762 | |||
Sub-total | £11,428,571 | ||||||
Less cost of works | |||||||
Dilapidations | £25 psf | £250,000 | |||||
Preliminaries | 10% | £25,000 | |||||
Contractor's overheads and profit | 9% | £22,500 | |||||
Contract administration | 11% | £27,500 | |||||
CDM coordinator | 1% | £2,500 | |||||
£327,500 | |||||||
VAT | 20% | n/a | |||||
Sub-total | £327,500 | ||||||
Profit/risk to purchaser | 15% | £49,125 | |||||
Cost of finance (over half works period) | 6% | £4,913 | -£381,538 | ||||
Less lease transaction costs | |||||||
Letting fees | 10% | £60,000 | |||||
Legals/lease conveyancing | Fixed | £7,500 | -£67,500 | ||||
Less void costs | |||||||
Works void: 26 weeks [6 months]: | £300,000 | ||||||
Marketing void: 39 weeks [9 months]: | £450,000 | ||||||
Empty rates: 52 weeks [12 months] (allowing 3 months empty rates) - RV £400,000 x UBR £0.487: | £194,800 | ||||||
Rent free: 26 weeks [6 months]: | £300,000 | ||||||
Unrecoverable insurance: annual premium £15,000 - 65 weeks [15 months]: | £18,750 | -£1,263,550 | -£1,712,588 | ||||
Sub-total | £9,715,984 | ||||||
Less purchaser costs | |||||||
Legal; agents; SDLT (5.75%) | -£528,310 | ||||||
Total | £9,187,674 | ||||||
But say | £9,188,00 | ||||||
Check valuation: | £919 psf |