Commercial Property

Commercial Property

Rental Values

Shops and commercial premises:

 

There are two methods of determining the rental value:

• Using the market value, depending on the tenant's potential capacity to pay: revenue per m² of the area for sale and gross operating margin.
• According to the criteria established by Article L 145-33 of the Commercial Code: by comparison, the principle being that the tenant and the owner are not linked. The rental value is calculated on the basis of the price (reference prices), but a price is not a value. The price is tied to a context, it is subjective by nature. The value is determined on the basis of prices, but it must be objective.

The rental value under the Commercial Code is applied when the lease is <65/>renewed or revised, but it is also possible to derogate from it. The law does not define the rental value, merely the criteria for determining it.
The market does not define the rental value, but the rental value is a result thereof.<72/> With ever changing markets and lease charges and conditions impacting rental values, as well as the value of intangible assets and premises, consulting a specialist is vital! Each expert assessment includes:

• Study of the location
• Description of the premises
• Analysis of the lease
• Search for comparative elements
• Weighting of the surface areas
• Estimation of the rental value in relation to the market and/or the Commercial Code,

Eligibility study:
During the lease: there are two ways to increase or decrease the rent 1/ Art. L.145-38: a material change in the local commercial factors which has given rise to a change in the rental value of more than 10% 2/ Art L.145-39: a change in the rent of more than 25%, but only in the case of automatic indexation at the end of the lease: no eligibility criteria for decreasing the rent, but justification for "lifting the ceiling" is required in order to increase it. There are various justifications, however, they are subject to the interpretation of the courts. There must be a change, however, this is alone is not enough. The change must be significant and have a positive impact on the commercial activity.

 

1/ Intrinsic justification: change to:

• The scope of the lease or the features of the premises
• The use authorised by the contract
• The terms for setting the rent

This list is not exhaustive.

 

2/ Extrinsic justifications: change in the marketability of the local area. For the change in the marketability of the local area to be significant, the changes that resulted in the additional demand must have been taking place before the lease expired. For this to be applicable the catchment area must be defined in advance. Change in the marketability of the local area is usually assessed within a radius of 400m for a shop. The size of this radius should be adjusted according to:

• The attractiveness of the location the
• The commercial acitivity

There are three aspects to the flow of customers in the catchment area:

• Residential areas
• Office blocks
• Tourist areas

<93>This is evaluated quantitatively and/or qualitatively, and in relation to the commercial activity.</93><94/><95/> This involves taking account of the development of the competition, and of its impact on the commercial activity, which can be neutral, positive or negative. <96/> The rate at which customer flow generates revenue varies depending on the skill of the business operators. <97/>The development of the flow of customers is evaluated depending on the features of the sector itself vis-a-vis the commercial activity, without taking into account the skill of the operators. <98/>The changes must have resulted in a development that is liable to have a positive impact on the commercial activity. <99/>This requires that the changes that have occurred, both favourable and unfavourable, be examined in order to produce an overall evaluation, as well as the possible development of the competition and its impact on the commercial activity.

Single-use premises:

<104>Specific methods according to the use104><105/><106/><109>Hotels, apartment hotels or tourist accommodation: using the hospitality method, by adjusting the revenue rate in relation to the responsibility for compliance work (owner or tenant), GOP approach. </109><110/><111/><114>Cinemas: using the revenue rate (ticket sales and other revenue). </114><115/><116/><119>Theatres and performance venues: using the seat and capacity approach. </119><120/><121/><124>Garages: metric approach. </124><125/><126/><129>Clinics: on the basis of the number of activities that could have been carried out since the "T2A" healthcare reform, excluding psychiatric activities. </129><130/><131/><134>Retirement homes: bed-based approach, including additional revenue and care subsidies (Iso-Resource Group).

Commercial Property

Tenant's Right to Lease

Calculation based on capitalising the difference between the market rental value and the rent with a commercial top-up percentage. When conducting a valuation during the lease, the possibility of the rent increasing or decreasing during or at the end of the lease should be taken into account. <140/><141/>This involves calculating the difference over a year between the market rental value and the rent. The resulting figure, called the rent economy, is then capitalised. <142/><143/><146>If the rent is equal to the market rental value, the right to the lease has no value. </146><147/><148/>The market rental value, is the rental value:

• For a new rental property without payment of an initial lease fee,
• For the most compatible business for the location: that which will generate the highest revenue per m² of sales area with the highest gross operating margin.

But should current or future rent economy be capitalised?
Three issues can arise:

• Despecialisation, if the business is not compatible,
• The lifting of the ceiling during the lease for reasons unrelated to the transfer,
• The lifting of the ceiling at the end of the lease where the business is compatible.

The consequences of lifting the ceiling differ depending on whether the current rent:

• Exceeds the judicially established rental value,
• Is the equal to it,
• Is lower.

Raising the rent ceiling does not eliminate the value of the right to the lease in attractive locations owing to the gap between the market prices and judicially established prices. The right to the lease is split into two parts in the event of an anticipated change in the rent:

• 1st part which cannot be reduced: resulting from the difference between the market rental value and that established in accordance with the Commercial Code, to which a commercial top-up percentage is applied;
  
  
• 2nd part which can be reduced: resulting from the difference between the rental value established in accordance with the Commercial Code and the rent, to which a 'financial percentage' is applied which takes account of the outstanding duration of the lease.

Commercial Property

Business assets

Dual approach: profitability and revenue. The elements that comprise the intangible assets are:

• The right to the lease,
• The clientele,
• The residual value of equipment and fixtures.

These last two items have a relative value. They can only be valued in relation to the profitability of the business activity. If the rent is lower than market rental value, this generates a value for the right to the lease and requires that the profitability of the operation be researched by breaking down the GOP (Gross Operating Profit).The profitability approach is economic: it involves finding its origin. The profitability of the lease is capitalised at a higher percentage than that of the business operations.

The result is not the addition of the right to the lease and the business assets, but the valuation of the intangible assets by breaking down the GOP depending on its origin: the lease or the business operations.

The profitability approach is preferred by buyers, except where retailers seeking to acquire market shares are concerned. However, in this case, contractual price brackets are consistently higher.

Valuation on the basis of revenue (contractual schedules) is more empirical than the profitability approach. It gives a prescriptive yet more approximate picture of the value of the intangible assets. <183/><184/>The contracts index transfers between independent traders. <185/><186/>The percentages are higher in attractive locations where the right to a lease has a high value, or for national retailers whose gross operating margin is higher than that of independent traders.

Commercial Property

Eviction Compensation

The loss or transfer of intangible assets Civil Jurisdictions. In the event of the loss or transfer of intangible assets: calculation of the principal compensation and additional compensation The loss takes the form of the loss of the business assets, unless the owner demonstrates that the loss is lower, in the event of a transfer of the intangible assets without a significant loss of clientele The cost of the transfer may not exceed the value of the business assets.In the event of the loss of the business assets, the main elements are:

• Loss of assets or the right to the lease
• Reestablishment costs
• Reinstallation costs (only for special features)
• Loss of stock
• Disruption to business
• Reimbursement of staff redundancy costs (on the basis of supporting documents)

The tenant may remain in the premises until agreement is reached with the owner as to the amount of the eviction indemnities, or until a final court order establishes its amount.

Commercial Property

Expropriation Compensation

Expropriation proceedings: specific methodologies

The four key dates are:

• The preliminary survey
• The ruling
• The declaration of public utility
• The judgment (which fixes the date for calculating the price)

Reestablishment costs are only payable in the event of a Declaration of Public Utility <222/><223/><226>Premises: </226> dual approach: land and buildings or whole plot.<227/>The land and buildings approach involves valuing the land and the buildings separately. This is advantageous if the land has not been built on extensively.
The expropriating authority most often chooses the method which is least favourable to the owner of the property subject to the compulsory purchase order. <229/>The compulsory purchase may result in the depreciation of the remainder (the part not subject to the order). <230/>Business assets: </235> calculation of the principal compensation and additional compensation <236/>The principal compensation comprises the value of the right to the lease or of the business assets. <237/><238/>The right to the lease is calculated using the rent differential method, or on the basis of the difference between the free market value and the actual rental value. <239/><240/>The value of the business assets is calculated on the basis of the revenue.