Practice Notes

Approved for Publication 03.08.2004

COMMERCIAL PROPERTIES COMMITTEE

Practice Note 17

REVALUATION 2005

VALUATION OF LICENSED PREMISES,

PUBLIC HOUSES AND LICENSED RESTAURANTS

1.0 INTRODUCTION

1.1 Use of Practice Note

This practice note should be used for the valuation of Public Houses and Licensed Restaurants in all locations.

1.2 Types of Licence

The types of licence which can be granted are as defined in Schedule 1 of the Licensing (Scotland) Act 1976.

In addition to premises with public house licences, licensed restaurants also operate under Restaurant (Table) Licences and Refreshment Licences. It should be noted that a planning restriction may limit a property with a public house licence to use as a restaurant only.

The Law Reform (Miscellaneous. Provisions.) (Scotland) Act 1990, section 49 introduced Children's Certificates, which permit pubs and hotels to admit children where meals are served .

The number of licensed restaurants in Scotland has continued to grow over the last 5 years. Many of these establishments operate under public house licences, and with public houses themselves offering good quality food, the distinction between the two types of subject has become increasingly less clearly defined. It is therefore appropriate for this Revaluation to have a single practice note which covers both.

1.3 General

Over the recent past, public house investment by the main operators has been concentrated on city and town-centre establishments with a distinctly identifiable brand, or concept pubs.

2.0 BASIS OF VALUATION

The subjects covered by this practice note should be valued by application of the comparative principle, as follows:-

2.1 Public Houses

Subjects operating as public houses should be valued using the percentages of turnover contained in Appendix 1 to this note, which should be applied to the "hypothetical achievable turnover" or "fair maintainable turnover" excluding VAT.

The figure of turnover adopted should represent the annual amount considered to be maintainable as at 1st April, 2003, having regard to the physical nature of the property and its location as at 1st January, 2005, on the assumption that the premises will be operated by a competent publican seeking to maximise profits by responding to normal trading practices and the effects of local competition.

2.2 Licensed Restaurants with Public House Licence

Most subjects of this type should be valued as detailed at 2.1 above.

In certain cases, e.g. restaurants offering drinks as a subsidiary element to food sales, it may be appropriate to value these in accordance with 2.3 & 2.4 following.

2.3 Licensed Restaurant with Restaurant (Table) Licence

If the subject has a restaurant licence as defined in Schedule 1 of The Licensing (Scotland) Act 1976, the value should be calculated in accordance with local evidence for the type of property in which it is located.

2.4 Licensed Restaurant with Refreshment Licence

Subjects with a refreshment licence as defined in Schedule 1 of The Licensing (Scotland) Act 1976, should be treated as follows:-

The value for these types of properties should be in line with restaurants with Restaurant (Table) Licences. If local evidence shows that the level of value should be different when compared with surrounding commercial subjects, an appropriate amendment to value may be made.

3.0 CLASSIFICATION

The differences between categories of establishment have become less clearly defined and the rental evidence which is available confirms that situation.

The rental evidence does not support any differentiation between different types of property, irrespective of the age, type and style of premises.

An adjustment for other factors not reflected in turnover may be appropriate. (See note 2 of Appendix 1).

4.0 RENTAL ANALYSIS

Rental analysis has been undertaken in accordance with Basic Principles Committee Practice Note 1.

For analysis purposes the turnover considered was that for the previous year or the nearest accounting period to the year of the rent or rent review, and adjustment was carried out in accordance with the procedure described at 5.0 below which should be used in the valuation process to arrive at Hypothetical Achievable Turnover.

5.0 ADJUSTMENT OF TURNOVER

5.1 Income From Liquor On Sales

Take at 100%.

5.2 Income from Liquor Off Sales

In the minority of public houses which do have identifiable and significant levels of off-sales (say in excess of 10% of total turnover), where it can be shown that there is a low level of profitability, it may be considered appropriate at the valuation stage to reduce these sales by up to 50%. Such instances should, however, be the exception rather than the rule.

5.3 Income from Cross-Counter Tobacco Sales

Where a breakdown of turnover has been provided, and these sales can be clearly identified, the relevant income should be taken at 20%.

5.4 Income From Food Sales

All food income up to £35,000 should be ignored.

The next £35,000 should be taken at 75%, and anything over £70,000 at 100%.

In exceptional circumstances, where a restaurant offers a premium à la carte menu and operates with specialist staff and high running costs, it may be appropriate to take all food turnover in excess of £35,000 at 75%.

5.5 Income From Machines

An analysis of the turnover returns supplied by independent operators indicates that a net machine return of up to 3% of total turnover is normal, whereas analysis of the larger operators' returns averages in the region of 6% of total turnover.

It is the larger operators' contention that their higher figures are achieved as a result of their machine specialists' expertise in monitoring trends and their corporate buying power, enabling them to regularly update equipment. While the independent operators may have some degree of similar ability, the results of analysis tend to support the larger operators' case.

In order to ensure that significant amounts of net machine income are not disregarded, a sliding scale should be adopted, as follows:

5.6 'Other' Income

Take at 100%.

5.7 Entertainment Costs

If a specific admission charge is made to cover the cost of providing

entertainment and there is a surplus of income over expenditure, the surplus should be taken at 100%.

If, however, either expenditure exceeds income from admission charges or expenditure on entertainment is not offset by admission charges, and the expenditure incurred is seen to have increased turnover, the following approach should be adopted.

The larger operators contend that spending on entertainment costs within their companies is closely monitored to ensure that where a suitable return in the form of a satisfactorily increased turnover is not being obtained, they take action to cease the provision of entertainment.

Analysis of entertainment costs shows that most operators will spend on average approximately 3% of their total turnover on entertainment costs, and therefore expenditure for this item should be treated as follows:-

Door stewarding costs are the norm in urban locations and should not be allowed as entertainment costs, being considered as one of a range of operating costs which requires to be met in certain locations.

6.0 VALUATION

6.1 Percentages To Be Applied & Recommended Approach to Valuation

Using the turnover figures from the year prior to the year of the rent being set, an analysis relating all rents to adjusted turnovers was carried out, and the appropriate percentages to be applied to adjusted turnover are contained in Appendix 1 to this practice note.

It should be borne in mind that while actual turnover figures will have been provided, and these are, in the vast majority of cases, likely to be adopted in order to arrive at a valuation, it is nevertheless the hypothetical achievable turnover (or fair maintainable turnover) which should be used if the actual figures are considered to be 'suspect' or not representative of the hypothetical situation.

6.2 Valuation Of Extensions to Existing Establishments

In order to estimate the increase in value which might be achieved as a result of an extension having been added to an existing establishment, the reduction factors contained in Appendix 2 may be applied to the floor area of the premises in order to arrive at a rate per square metre of reduced area, which can then be used as a guide.

A strictly arithmetical approach should , however, be treated with extreme caution, as the hypothetical achievable turnover in relation to any property is not necessarily proportionate to floor area.

6.3 Valuation of Establishments Where Turnover is Not Known

In the absence of any indication of the anticipated level of turnover, the hypothetical achievable turnover should be estimated by comparison with other similar properties.

7.0 OTHER FACTORS

7.1 Hours Of Opening

With extensions to permitted opening hours being fairly commonplace, it should be assumed that publicans (and therefore the hypothetical tenant) will seek to maximise turnover by opening during the hours which generate the maximum income.

The turnovers used in the analysis reflect that position and no adjustment for opening hours is therefore required.

7.2 Over or Under Performance

As noted at 7.1, it should be assumed that every publican, or hypothetical tenant, will seek to maximise the potential turnover of a public house.

No adjustment to turnover should be made solely on the grounds that a particular brewery company occupies the property, nor should the level of popularity of the products on offer give rise to any adjustment.

Where there is clear evidence that the actual turnover is considerably different from the hypothetically achievable turnover by comparison with similar surrounding properties, an adjustment to the supplied turnover may be appropriate.

7.3 Pricing Policy

Generally, no adjustment should be made to the level of turnover applied to a particular licensed premises simply because the operator's pricing policy permits the sale of liquor at lower prices than those offered by competitors, on the basis that the hypothetical tenant could do the same.

Analysis of the rental evidence did not show that pricing policy had any effect which merited special or separate treatment of establishments selling their products at lower prices than competitors.

7.4 Opening Period

Where a property is new, or has reopened, the initial turnover may be enhanced for the duration of a 'honeymoon' period, and may warrant a downward adjustment, in order to reach the hypothetical achievable level of turnover. The duration of any recognised honeymoon period should be individually assessed according to the particular circumstances.

Similarly, it may be the case that during an initial opening period trade is still building towards the hypothetical level of turnover, and an upward adjustment may be appropriate.

1. Happy Hours, Promotional Discounts, Sponsorship of Football/Darts Teams

No adjustment should be made to reflect alleged reduced profitability resulting from such activities, since it is assumed that any such instances are part of the operator's efforts to maximise his/her turnover.

7.6 Relationship With The Valuation of Hotels

Valuers should ensure that the values calculated for licensed premises maintain an identifiable and logical relationship with hotel valuations in their areas.

APPENDIX 1

2005 REVALUATION - PERCENTAGES TO BE APPLIED TO ADJUSTED TURNOVER

In the absence of local evidence which is sufficient to merit a variation, application of the following percentages is recommended:-

Note:

APPENDIX 2

2005 REVALUATION - LICENSED PREMISES REDUCTION FACTORS

GROUND FLOOR FACTOR

With separate accesses and separate service bar. Public Bar 1

Lounge Bar 1

Where no separate access e.g. Lounge enters off Public Bar

Public Bar 1

Lounge Bar 0.9

Where lounge has no separate service Bar Lounge Bar 0.7

DANCE FLOOR AREAS 1

OR FUNCTION HALL ETC.

As 3+4 above, depending on access and bar service facilities 1.0 - 0.7

STAIRS, ENTRANCE VESTIBULE (OF MODEST AREA)

AND PASSAGES Nil

Note however that where the Kitchen area is open to and integral

with the bar then that area should be taken at 1.

Although generally off sales should be taken at 1, consideration

may have to be given to quality, extent, access and location.

Although offices situated within the premises occupied for the

purposes of the administration of that property alone should be

ignored, office accommodation used for other commercial purposes

or not occupied solely in connection with the premises in which they

are situated should be valued in comparison to other commercial offices.

ACCOMMODATION ON OTHER FLOORS

As for ground floor, but with consideration being given to a reduction

factor where quality, extent, access and location are deserving of such.

It is anticipated that where a good quality restaurant is solely situated on a

first or basement floor, a reduction factor of 1 will apply. 0.5 - 1

In the case of public houses, a reduction factor of 1 will only be

appropriate in exceptionally good circumstances.

Where the main part of the premises is on the ground floor, a reduction

factor from the range shown of less than 1 may be adopted,

if considered appropriate.

An appropriate reduction factor should be applied, having regard to

quality, extent, access and location. Up to 1