RICS Valuation Faculty

VALUATION INFORMATION PAPER No. 3

The Capital and Rental Valuation of Petrol Filling Stations in England, Wales and Scotland

Prepared by the

TRADING RELATED VALUATION GROUP

This Valuation Information Paper is effective from 1 July 2003. Published by RICS Business Services Limited a wholly owned subsidiary of The Royal Institution of Chartered Surveyors under the RICS Books imprint Surveyor Court Westwood Business Park Coventry CV4 8JE UK No responsibility for loss occasioned to any person acting or refraining from action as a result of the material included in this publication can be accepted by the author or publisher. Prepared by the Trading Valuation Group in the Valuation Faculty of the Royal Institution of Chartered Surveyors. ISBN 1 84219 144 6 RICS 2003. Copyright in all or part of this publication rests with RICS, and save by prior consent of RICS, no part or parts shall be reproduced by any means electronic, mechanical, photocopying or otherwise, now known or to be devised. Typeset and printed in Great Britain by MFK Group, Stevenage.

RICS Information Papers

This is a Valuation Information Paper. Valuation Information Papers are intended to provide information and outline current practice for RICS members. The function of this paper is to give an indication of the approach to issues that may arise in the subject to which it relates. It is relevant to professional competence to the extent that valuers should be up-to-date and should have informed themselves of Valuation Information Papers within a reasonable time of their promulgation. When an allegation of professional negligence is made against a valuer, or disciplinary action is taken, the valuer will need to conrm that Valuation Information Papers have been considered. No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in this publication can be accepted by the author, publisher or RICS.

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Contents
1. Introduction ............................................................................... 2. Valuations of petrol lling stations fully equipped as operational entities ..................................................................... 3. Valuation of non-operational petrol lling stations and land having trading potential ............................................................. 4. Valuations for loan security purposes ........................................ 5. Other property ........................................................................... 6. Condentiality ............................................................................ Page 1 2 8 9 10 11

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1.1

Introduction
GN 1 in the RICS Appraisal and Valuation Standards (the Red Book) contains guidance on the application of Market Value to certain categories of property that are normally bought and sold having regard to their trading potential. Although it is not intended to be fully comprehensive, this Valuation Information Paper considers the general approach to be adopted for the capital or rental valuation of petrol lling stations. It offers comment only on selected aspects. It is not directly concerned with valuation method, but with a practical approach to the assembly and interpretation of relevant information. This Valuation Information Paper has been written specically with regard to the law and practice in England, Wales and Scotland. However, surveyors operating in other states may nd some of the principles discussed helpful and capable of adaptation to their local circumstances. The following matters are considered: the general approach to be adopted for the valuation of trading petrol lling stations; the valuation of non-operational petrol lling stations and land having trading potential; valuations for loan security purposes.

1.2

1.3

1.4

1.5

The valuer needs to be actively involved in the market, because practical knowledge is essential for the analysis and review of trading performance and in forming an opinion of the future sustainable trading potential achievable by a competent operator.

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2.1

Valuations of petrol lling stations fully equipped as operational entities

In considering the valuation of a petrol lling station fully equipped as an operational entity, for capital and rental value, the valuer may wish to consider separately: land and buildings; trade xtures, ttings and equipment; and the markets perception of inherent trading potential, with an assumed ability to obtain/renew existing licences, consents and certicates.

Wet and dry stocks are not included in the valuation.

2.2

An analysis and review of the current and previous years trading performance, in addition to projections for future years, may help in forming an opinion, as at the date of valuation, of the future genuine sustainable trading potential achievable by a competent operator. The valuation is an assessment of the future genuine sustainable trading potential and future maintainable prots that could be achieved by a reasonably competent operator of the business, upon which a potential purchaser would, in the opinion of the valuer, be likely to base an offer. If accounts are used to assist in the formulation of an opinion on future sustainable trading potential, they will show only how a particular property is trading under the particular management at the time. Current and past performance is no guarantee as to future potential. Accounts may be prepared for various purposes; any trading and prot and loss accounts to be relied upon usually show all items of income and expenditure. Other matters to be considered could include the following: companies with a number of outlets may provide unit trading and prot and loss accounts which do not, for instance, show outgoings such as marketing, training, accountancy, depreciation and cyclical repairs costs, or other head-ofce management expenses; the accounts of an owner-occupied business may not show management salaries or directors remuneration; the accuracy and reliability of current and past trading information, where appropriate, may be established from delivery statements for fuel throughput; adjustments may need to be made to reect the cost of repairing and maintaining the property and its xtures, ttings and equipment to the appropriate operational standard, and to a standard that complies with current and proposed legislation; petrol lling stations require retting and re-equipping throughout their lifetime and it is important for the valuer to take into consideration the timing, cost and impact upon prots of such events;

2.3

2.4

2.5

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the business mix and the risks and prot potential of the component elements, which will include fuel throughput, shop sales and car wash turnover.

2.6

To comply with PS 4.2, the valuer will need to consider the accuracy and reliability of trading information and/or projections supplied for the purpose of the valuation. Determination of the accuracy and reliability of trading information is often a matter of experience and is generally established from delivery statements for fuel throughput, or from management accounts or computerised print-outs. The valuer should be aware of the relative reliability of such information. If there is doubt about the accuracy of the information the Report will recommend verication. Should any material discrepancies be identied the valuation will have to be revised. To comply with PS 5.1, the source and basis of the trading gures (actual and/or projected) and other trading information and assumptions made are to be stated in the Report. All trading gures should be stated as being inclusive or exclusive of VAT. In assessing future trading potential and protability, there are a number of factors to be considered that may inuence past and future trading, including an operators pricing policy or brand of fuel retailed, competition, trading hours, trafc movements and highway matters. The valuation method adopted will need to reect the approach generally used by the market for the type of property under report. Different methods, including the prots method and analysis of comparable transactions, or a combination of these, may be appropriate for different types of petrol lling stations. It may be appropriate to consider the suitability and economic adaptability of the property for a different and more protable style of operation.

2.7

2.8

2.9

2.10 2.10.1

Trading potential and personal goodwill

In considering the requirements of paragraph 4 of GN 4, the valuer may need to distinguish between the trading potential and the personal goodwill of the operator (see GN 1), so that the latter may be excluded. If the valuation is to include the rights to the trading name (which would usually be treated as personal goodwill), then the potential of that name will need to be identied and any additional value stated. The circumstances and content of any franchise contract that relates to the business, and any benecial or adverse value that may result, may need investigation. Such a contract would usually be regarded as personal goodwill, unless the franchise is transferable with the property.

2.10.2

2.10.3

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2.10.4

Consideration of the underlying property value of the business may indicate that such value exceeds the business value. It will be helpful to note the values in the Report (see also UKPS 1.4, where the valuation is for a Financial Statement). This will include consideration of the suitability and economic adaptability of the property for a different and more protable style of operation.

2.11

Market analysis, comparables and factors affecting valuation

The following list includes various matters which the valuer may nd it helpful to consider: a clear identication of the comparables analysed in relation to the subject property; these will differ in terms of locality, facilities and maintainable trading potential; the existing and potential competition and impact on pricing and trading; the availability of services in particular, water, gas, electricity and drainage; the extent of ownership and the age of xtures, plant and ttings and equipment, and the identication of leased, hired and rented items; any lease provisions of particular relevance to petrol station valuation; the impact of any actual or potential contamination of the property: have there been any environmental surveys and if so, what was the result? the duration and terms of a fuel supply agreement and/or availability of supply terms; the importance and contribution of other income-producing centres; any conditions attached to planning permission, for example, restricted trading hours; consideration of the rating assessments there could be a shift of emphasis towards turnovers generated by the shop element (for example, future possible shifts in outgoings increasing tax principally on the new generation of c-stores currently being developed); the age and construction of the storage tanks what are they made of? Are they single or double skinned? Has cathodic protection been provided? When were they last tested? If tested, was it a hydrostatic, precision or vacuum test, or has an MTCF test been carried out? What were the results?; have there been any leaks or overlls? Is the wetstock reconciliation within permitted tolerances?; check that Stage 1 vapour recovery has been installed and that the tank gauging is up to date.

2.11.1

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2.12 2.12.1

Capitalisation
With petrol lling stations, it is particularly important to be able to identify closely the sector of the market most likely to produce a potential purchaser of such a property (excluding a special prospective purchaser). Generalisations can, however, be dangerous and misleading. Detailed knowledge of, among other things, current market conditions, marketing trends, protability and potential purchasers requirements in the market, will assist the valuer. An experienced valuer will be able to identify those petrol lling stations acquired and operated for other than purely commercial reasons for example, for reasons of status or pride of ownership. Further information to be established could include: whether the petrol lling station is subject to a supply agreement (tied) and the terms and duration of that agreement or other agreements (diesel bunkering agreements, etc.) and their impact on the value; and the ownership of plant and equipment and which items are to be included in the valuation.

2.12.2

2.12.3

2.12.4

Trading at petrol lling stations is affected by external factors. In particular, the effect of new competition can be dramatic on trading potential and protability, and hence value. The impact of current levels of competition may be considered and, if a change is anticipated, it would be appropriate clearly to identify such a change in the Report, and note the impact this might have on future trading potential, protability and value. Outside inuences, such as construction of a new by-pass or changes in relevant legislation, or, in particular, environmental legislation, can often have a substantial effect on the trading potential and/or value of this type of property. The determination of the capitalisation factor applied in arriving at the capital value of the property relies upon the experience and judgement of the valuer. It will reect the valuers opinion of the markets perception of the risk or security associated with the subject property, the relevant market sectors approach to value, and the propertys current and future trading potential. It will take into account and be supported by all available market evidence, intelligence and general economic factors.

2.12.5

2.12.6

2.13 2.13.1

Licences, consents and certicates

The operation and trading of a petrol lling station may only be carried out with the authority of statutory consents, certicates and licences. In particular, each and every petrol lling station needs a valid Petroleum Licence granted in

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accordance with the Petroleum (Regulation) Acts 1928 and 1936 and any subsequent relevant legislation.

2.13.2

When petrol lling stations are sold as fully operational entities, the new owner will expect to renew or have transferred the licences, consents and certicates required to operate the property. In view of the importance of these to the operation of the petrol lling station, paragraph 5 of GN 1 is relevant. This states that the valuer should, where possible, inspect the licences, consents and certicates relating to the property. It will generally be assumed that the Petroleum and any other relevant licences will be renewed, and that the property will continue to trade with all existing licences, consents and certicates (see PS 3.2, Market Value and Appendix 2.3, Special Assumptions). The valuer will need to point out that the value could be reduced if such an assumption is not valid, or if the licences are lost or in jeopardy. If the granting authorities have indicated that they intend to attach conditions, refuse or oppose a renewal, this should be mentioned and due weight given to it in the valuation. Environmental legislation is increasingly important. It would be appropriate to check whether there are any recent or outstanding complaints of environmental damage against the property. Matters to be considered may include the environmental state and repair of the property, the age of the underground petroleum installations, the date of last testing of underground installations, the state of the ground and the proximity to water courses, among other matters. Statutes and regulations that may affect petrol lling stations include: Landlord and Tenant Act 1927 (for improvements this Act does not apply to Scotland); Petroleum (Consolidation Act) 1928; Landlord and Tenant Act 1954 (for the impact on renewals, length of term and the impact on retting/redevelopment this Act does not apply to Scotland); Food and Drugs (Scotland) Act 1956; Ofces, Shops and Railways Premises Act 1963; Chronically Sick and Disabled Persons Act 1970 (part of this Act does not apply to Scotland); Health and Safety At Work etc. Act 1974; Environmental Protection Act 1990 (relative to contamination); Building Act 1984 and Building Regulations 1985 (as further amended the Act does not apply in Scotland); Food Act 1984 (part of this Act does not apply in Scotland); Food Safety Act 1990; Disability Discrimination Act 1995; The Environmental Protection (Prescribed Processes and Substances Etc.) (Amendment) (Petrol Vapour Recovery) Regulations 1996; Town and Country Planning (Scotland) Act 1997; Planning (Consequential Provisions) (Scotland) Act 1997;

2.13.3

2.13.4

2.13.5

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Planning (Hazardous Substances) (Scotland) Act 1997; Groundwater Regulations 1998; Local Authority Food Hygiene Regulations; Health and Safety at Work etc. Act 1974 (Application to Environmentally Hazardous Substances) Regulations 2002.

2.13.6

Where information cannot be veried, the valuer is required by PS 4.2 to state in the Report the assumptions that have been made and recommend further conrmation by the clients professional adviser.

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Valuation of non-operational petrol lling stations and land having trading potential
When valuing non-operational petrol lling stations or land to be developed as a petrol lling station, the following factors are important: the suitability and/or economic viability of the development or redevelopment of a petrol lling station or land, and the ability to obtain or renew licences; the costs of developing or recommissioning a petrol lling station and the requirements of the Petroleum Ofcer; the costs of remediation of environmental damage or of decommissioning; whether valid planning consents have been obtained or are available, and whether these are subject to unduly onerous conditions.

3.1

3.2

Where the property may be subject to costs of remediation, the valuer may nd it helpful to make a comparison between the alternative use of the property and the estimated costs, in addition to the valuation on a trading basis.

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4.1

Valuations for loan security purposes

The Standards in the Red Book dealing with valuations for secured lending are PS 6.2 (Secured lending) and, specically in the UK, UKPS 3.1 (Commercial secured lending) and UK Appendix 3.1. Valuations based on trading potential are valid for loan security purposes, as purchasers in the open market would tend to bid on this basis. In following the guidance in paragraph 4 of GN 4, it would be appropriate for the valuer to conrm the exclusion of personal goodwill in the Report. In stating a value for loan security purposes, it would help the lender if the sensitivity of the value to future trading potential, and to outside factors indicating which factors may impact on the value, and how were emphasised, thereby reecting the valuers opinion of the market perception of risk associated with the future trading potential at the property.

4.2

4.3

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5.1

Other property
Petrol lling stations may form part only of a larger property, for example, a motorway service area, a vehicle dealership or hypermarket. It should be appreciated that the approach to the valuation of the petrol lling station element may be inuenced by the market for the overall property. Depending on the circumstances, the lling station may be valued as a separate entity or, alternatively, it may be necessary to consider the value as part of and in terms of its contribution to the whole property. An example may be where a lease of a motorway service area petrol lling station is granted by the motorway service area operator to an oil company which, in turn, sub-lets to the motorway service area operator, subject to a fuel supply agreement. The approach to valuation will differ in each instance, whether by reference to protability or comparisons.

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6.1

Condentiality
Certain information in respect of petrol lling stations may be condential. To comply with the Rules of Conduct, the valuer should strongly endeavour to preserve such condentiality, whether in respect of the property to be valued or comparable properties.

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