Question

Arrol Ltd is interested in leasing a retail unit in a large shopping centre. They would like to negotiate a 15 year FRI lease with five yearly upward only rent reviews. However, in return for an appropriate premium payable to the landlord, they wish to pre agree the rent now and at each rent review thereafter. They wish the rent to be set at: Rent Review Rent Agreed 1)

• 1,100,000 2) 1,300,000 30 1,600,000 Chadwick Ltd, the landlord, is willing to negotiate and have asked you to act for both parties in agreeing the premium. Due to the complexity of the cash flow you feel that a contemporary valuation technique will be the most appropriate. From your experience and knowledge of recent transactions you determine the market rent to be 1,500,000 p.a. and an appropriate freehold ARY to be 5%. The yield on Government gilts is 4.5%.
• Advise on the level of premium that would be acceptable to both parties. Clearly state any assumptions you have made and fully justify and explain your approach to the valuations.