Statements of Assumptions in Business Environment Order Instructions: It is not a good day at Floggitt and Fleessam Chartered Surveyors.
The senior partner, Charles Protimeter is in a bad mood. His graduate assistant, Willie Floggitt BSc Est Man (University of Westminster), grandson of the founder of the firm, is off sick with an attack of dry rot and their most valued clients, HOSPESTAN INVESTMENTS (H.I), have acquired a large Edwardian block of flats from the receivers of Blenkinsop Holdings (in voluntary liquidation). Cameron House is on five floors comprising the following;
Fifth floor; 10 x 1 bed flats, 5 x 2 bed flats.
Forth floor; 10 x 1 bed flats, 5 x 2 bed flats.
Third floor; 10 x 3 bed flats.
Second floor; 10 x 3 bed flats.
First floor; 10 x 3 bed flats.
Ground floor; 10 x 1 bed flats, 5 x 2 bed flats.
Basement; 400 square metres of storage; could be converted subject to normal approvals being obtained.
All of the 2 and 3 bedroom flats are let to rent controlled tenants who have the current fair rents agreed by the rent officer 4 years ago of;
3 bedrooms £350 per week inclusive,
2 bedrooms £250 per week inclusive.
Similar flats let under AST’s are being agreed at £700 and £800 per week respectively.
All of the 1 bedroom flats are let on Assured Shorthold Tenancies at a current rent of
£2000 per calendar month inclusive. The general level of rents in the area for similar properties on AST’s is circa £ 2500 exclusive.
Mrs Cymbal the tenant of Flat 17 (3 bed) and Bert Smedley the tenant of Flat 15 (2 bed) are not happy as the landlords have applied to the Rent Assessment Committee (RAC) to have the fair rent increased by an average of 20 % as they (H.I.) have recently spent
£ 660,000 on exterior repairs and the installation of a new carpet to the common parts.
Jocasta Grimeley-Ffiennes is Chairwoman of the tenants association, a practising Barrister and a formidable opponent. She is of the opinion that the rents for all of the one bedroom flats is excessive and is referring the matter to the RAC for their determination of same. She has a 2 bedroom flat held on a 99 year lease from 24/4/1988, with a ground rent of £300 increasing by £100 every 33 years.
The prevailing market values for well-modernised flats in well-modernised blocks are as follows;
3 bedroom circa £ 1,550,000
2 bedroom circa £ 975,000
1 bedroom circa £ 675,000
You must therefore produce:-
1 A enfranchisement valuation for the flat of Jocasta Grimeley-Ffiennes
2 The valuation of the freehold interest as at the hand in date.
This will involve a fully annotated first view and second view valuation.
MAKE ANY OTHER ASSUMPTIONS THAT YOUR REQUIRE; THESE MUST BE STATED.
Performance criteria are;
The legal principles involved
Statements of assumptions
Explanatory adaptation of calculations
The layout and logical progression
Mathematical accuracy
Conclusions reached.
Statements of Assumptions in Business Environment Sample Answer
Introduction
As the business environment continue to become more competitive and dynamic, diversification by most of the business people has become inevitable for them to be successful. Hence, there has been considerable need to make investment in areas that seem to have long-term returns. Investments in real estates have proved to be one of the best long term business incentives (Schuck, 2003). In the current world a number of investors have established multibillion estates that have proved to be the most paying venture with a lot of long term benefits to the owners. The majority of the investors in real estate ventures have made use of the available space in the air by constructing flats thereby utilizing the available free air space (Rotkowski et al, 2012). Despite the high amount of initial capital needed to establish the flats, their benefits have proved to be long term, majority of them passing their benefits to the next generation. The process of leasing and giving out at freehold has a number of legal procedures that need to be settled between the parties involved during the process of establishing an agreement. The same applies when it comes to letting out rooms or flats for tenants to rent (Merriman, 2012). There are a number of legal procedures that need to be followed both by the tenants and the landlords that ease their future coordination. A number of cases and other problems always emerge between tenets and landlords or landladies when the property owners reverse to increase the amount of rent to be paid by the tenants (Meade, 2010). In this paper a statutory valuation report on the matters concerning Floggitt and Fleessam Chartered Surveyors and their client Hospestan Investments is conducted together with an enfranchisement evaluation for the flat of Jocasta Grimeley-Ffiennes as well as the valuation of the freehold interest as at the particular hand in date.
However, prior to performing the actual enfranchisement valuation for the flat of Jocasta Grimeley-Ffiennes as well as the valuation of the freehold interest as at the hand in date it is essential to consider the case at hand. Hospestan Investments (HI) has purchased a large Edwardian block of flats from the receivers of Blenkinsop Holdings in a voluntary liquidation. This particular storied building is named Cameron house, and the Hospestan Investments have resorted to rent it out to tenants at different calculated rental charges. It has five floors; the fifth floor has 10×1 bed flats and 5×2 bed flats. The fourth floor has 10×1 bed flats and 5×2 bed flats while the third floor has 10×3 bed flats. The second floor has 10×3 bed flats while the first floor has 10×3 bed flats. The ground floor has 10×1 bed flats and 5×2 bed flats. This is due to the fact that the prevailing market values are not in line with what they are paying as rental charges for this particular residential premises they are occupying.
Statements of Assumptions in Business Environment and Enfranchisement valuation for the flat of Jocasta Grimeley-Ffiennes
In order to make sure that the enfranchised valuation for the flat of Joscasta Grimeley-Ffiennes is effectively done the standard procedure of valuation will be used with the necessary assumptions being applied where necessary to enable amicable completion of the evaluation. For instance, the 2 bed room flat has a freehold lease of 99 years with 72 years presently left on the lease, a ground rent of £300 annually envisaged to be increased by £100 after 33 years and an estimated freehold value of £975,000.
- i) Calculating the term
In this scenario it is considered that the freehold interest generated from the flat from leasehold tenants is an investment mainly because the money of the freeholder is usually tied up in the flat ownership and a rent is subsequently received in return. However, the yield of the freeholder is regarded as the resulting value from the division of the rent by value of the interest. For a long period of time this concept has been in application and it is equivalent to the concept to that of interest received by individuals’ accounts on investment societies since an investor’s rate of interest that is received on their money is also referred to as the yield. In most cases, the yield expected by the freeholder can be determined through enfranchised valuation through a step by step procedure that is essential for deducing the final freeholder interest or value for their investment and in this particular case the case of Joscasta Grimeley-Ffiennes’s flat. However, the years of purchase used in the calculations are obtained from the valuation tables in order to make sure that the value of the freeholder is calculated in course of the lease and at the same time there is an assumption of the yield to be 6.5%.
Annual ground rent is given as £300
Years Purchase for 33 years @ 6.5% (a reference from valuation tables) is 12.83
This means that, the term is £300 x 12.83 = £3,849
The figure provided by the calculation represents the compensation which is due to the freeholder for his or her rental income loss over the period that is remaining for the lease to expire. This means that, £3849 is taken as the current value of the right to receive £6.25 annually for the remaining 72 years for the lease to expire. This implies that it is not realistic for the multiplication of the annual ground rent by the number of years that are remaining for the lease to expire.
- ii) Calculating the first reversion
Considering that this flat is within the modern segment, and then the next step will be to value the modern ground rent. The whole valuation is carried out at the date of claim and values are not projected forward in time. Therefore, the valuer look for the land’s value on which the house stands at the date of the Notice of Claim. This means that the valuer has to carry out the assessment of the value of the flat on the freehold basis. As a result, the value of the rent is then provided in terms of future income, which is, receiving the modern ground rent based on a future point which in this case is considered to be 99 years time:
Present freehold vacant possession value of the house = £975,000
Site value taken as 33% of that value £975,000 x 33% = £321,750
Modern ground rent taken as 5.5% of site value £321,750 x 5.5% = £17,696.25 pa
Years Purchase for 66 years, @ 5.5% 16.932 = £299,632
Purchase value of £1 in 33 years @5.5% = 0.2175
So the first reversion is £299,632 x 16.932 x 0.2175 = £1,103,458
iii) Calculating the second reversion
In addition to modern ground rent capitalisation over the next 72-year period remaining in the lease, there will be calculation of the value of the reversion at the end of this period and added on to the formula for the calculation of the price. This is referred to as the second reversion and its calculation is done using the standing house value (the flat value as it exists currently) and based on the fact that it’s full potential has not been developed. In most cases, this lowers the flat value compared to the first reversion. Hence, when this is applied to the above figures, calculation of the second can be done as shown below:
Standing house value £975,000
Purchase value of £1 in 72 years @ 5.5% 0.015 £110,710
The purchase price for the freehold is therefore the sum of the values of the term and the first and second reversion.
£3,849 + £1,103,458 + £110,710 = £1,218,017
The valuation of the freehold interest as at the hand in date
In this scenario, there will be calculation of the value of the freehold interest at the hand in date of the flat which is carried out in accordance with the laid down standard procedure. Edwardian block acquired by Hospestan Investments (H.I) has five floors in addition to the ground floor with the following specifications:
- Ground floor; 10 x 1 bed flats, 5 x 2 bed flats
- First floor; 10 x 3 bed flats.
- Second floor; 10 x 3 bed flats.
- Third floor; 10 x 3 bed flats.
- Forth floor; 10 x 1 bed flats, 5 x 2 bed flats.
- Fifth floor; 10 x 1 bed flats, 5 x 2 bed flats.
Hence, the valuation of the freehold interest as at the hand in date can be calculated on basis of the details provided for this scenario. However, the calculation shall take two main steps in order to make sure that the valuation is succinctly done:
Step 1: calculating the term
This calculation will be done based on the assumption that they are all leased under the Assured Short hold Tenancies (AST’s) terms which are £250, £700 and £800 per week for 1 bed room, 2 bed room and 3 bed room respectively. This was followed by the summation of the total number of each type of rooms in order to make sure that the calculations are done separately and eventually summed to provide the final sum. The calculations are as follows:
Total Ground rent for 1 bed room flats of £250 x 30 flats = £7500 per week (Assured Short hold Tenancies)
Total Ground rent for 2 bed room flats of £700 x 15 flats = £10,500 per week (Assured Short hold Tenancies)
Total Ground rent for 3 bed room flats of £800 x 30 flats = £24000 per week (Assured Short hold Tenancies)
The ground rent figures obtained from the above calculations are then multiplied together with the years of purchase, which is a multiplier obtained from the valuation tables or determined by the valuer and in this scenario 6 per cent is taken as the multiplier rate. However, upon obtaining the purchase figures the calculations can be done as follows:
Years Purchase for 72 years @ 6% is 12.433
So,
1 bed room flats: £7500 x 12.433 = £93,248
2 bed room flats: £10500 x 12.433 = £130,547
3 bed room flats: £24000 x 12.433 = £298,392
Step 2: Calculating the reversion
1 bed room flats: Current value of the flats = £1,550,000 x 30 flats
= £46,500,000 (the leaseholders’ current interest).
2 bed room flats: Current value of the flats = £975,000 x 12 flats
= £14,625,000 (the leaseholders’ current interest).
3 bed room flats: Current value of the flats = £675,000 x 30 flats
= £20,250,000 (the leaseholders’ current interest).
Legal principles involved
In the real estate, the law recognizes different types of property that are involved that are related to land and anything tangible to the land in question (Black, 2004). The law of contract is one of the most common laws that are applicable to real estate housing. There are a few ways that can bring about consummation of the agreement relationship between two gatherings included in the land business. For the situation where there is no reasonable date of ending the agreement, the entryways are constantly open for arrangement between the occupant and the house proprietor on the most proficient method to end the agreement.
The law of sale of products can likewise be material when the property being referred to has been sold. The issue being referred to is identified with the offer of products law since the proprietorship has been gone from the proprietor to the purchaser (Black, 2004). The perplexity at the library showcase made Holt to accept that the book he is purchasing is fit as a fiddle. The offer of merchandise law obliges that the dealer ought to pass products of good quality to the purchaser so that the purchaser can get quality for his cash (Benjamin, 2003). For this situation, Holt accepted that he was obtaining a book in great quality in agreement to the value citation. Since he has been given the book he never expected to purchase, Holt has a significant case against MacPherson. In his case, Holt can contend that the property went to him by the merchant was not comparing with the portrayal he gave for the property as per the offer of good law. Also, the offer of products law requests that the property went from the merchant to the purchaser ought to be fit for reason and this was not for this situation of Holt and MacPherson. MacPherson is subject under the offer of merchandise law which obliges that the nature of products went to the purchaser ought to relate to the specimen that was placed in the library show. In such manner, Holt should have been given a sensible chance to contrast what he needed with purchase and what he has been given as the real item to evaluate whether the products have any imperfections. This accord the purchaser an opportunity not to be tricked into purchasing merchandise that does not mirror the measure of cash paid on them (Ardem, 2005). Hence, MacPherson is at risk for passing products which are not of the right amount to the purchaser.
Statements of Assumptions in Business Environment Conclusions
Investments in real estates have proved to be one of the best long term business incentives. In the current world a number of investors have established multibillion estates that have proved to be the most paying venture with a lot of long term benefits to the owners. Majority of the investors in real estate ventures have made use of the available space in the air by constructing flats thereby utilizing the available free air space. In the case of Hopsestant Investment, the process of increasing the rental charges by the landlord to the tenants, the law requires the landlord to prepare a formal document to the Rent Assessment Committee (RAC) who has to come in. According to the law, the landlord is only allowed and given the opportunity to increase on the rental charges if the particular dwellers or occupants were on a short hold agreement.
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