Four- star solutions

Imagine the scenario: you are instructed to carry Out a rent review on an office block or warehouse -no problem. It is within your expertise, and there is some comparable information so far so good.

There is, however, a difficulty: you can inspect the property, but you are not allowed to measure it. You have to estimate the floor area, based on your perception of the property and negotiate it with the opposing surveyor. As an added complication, the floor areas for some of your comparables will be assessed on a similar basis, and you will not be certain of the floor area used when the transaction was agreed. Sounds like a nightmare? Actually, it is a familiar problem for surveyors negotiating ground rent reviews on petrol stations.

It is often not appropriate to supply fuel-throughput figures for sites when negotiating ground rent reviews, which assume a "cleared site" approach. The reasoning is that if the site were cleared and available to let with planning consent, the acquiring party, possibly an oil company, would have to make their own assessment of the likely site performance, and make their rental bid accordingly.

The assessment of a site's performance is complex and requires a traffic count and competitor analysis. The "turn-in ratio" - namely the proportion of vehicles that actually enter the site - is then assessed. Often this lies between 25-4% of the traffic volume, but depends on the road type (single or dual carriageway), the amount and nature of the competition and the location (rural, transient or urban). The positioning of the access and general convenience of the site to motorists also have effects.

In exceptional circumstances, the turn-in ratio can be higher. Normally, one assumes a 25-litre (5.5 gallons) purchase and therefore a typical site assessment might be, for example:

Traffic volume of 14,500 vehicles per day x 365 days x 25 litres x 3% = 3.97m litres.

Problems with comparables

In this recessive market, there has been little acquisition activity, resulting in a dearth of rental and capital evidence. Some transactions have clearly been the result of oil companies "buying volume" in an attempt to dilute fixed costs, while other acquisitions are not always what they seem the problem being demonstrated as follows.

Suppose a major oil company takes a lease on a site formerly run by a more minor brand that was achieving 5m litres pa The major company will probably predict a likely increase in volume of, say, 15% to reflect "brand loyalty", customer reward schemes, and general site re-imaging. If they acquire the site for £80,000 pa as a rack rent, will the site assessment analysis suggest 1.6p per litre (£80,000 ¸ 5rn litres) or 1.4p per litre (£80,000 ¸ by 5.75m litres)?

Oil companies rarely publicise their volume predictions for a Site, so often the "incorrect" analysis is used, based on the volume before the takeover. The analysis problem is further compounded by the performance of the shop and car-wash, particularly in rack rent situations. If the shop was turning over, say, £250,000 pa (excluding VAT)

TENANT'S IMPROVEMENTS

VALUES DEPEND ON THROUGHPUT

Rack rent reviews are often more straightforward than ground rent reviews because site trading information is often available. Problems arise, however, because of the frequency of site redevelopment. Unlike office or warehouse buildings, which are unlikely to experience tenant's improvements beyond partitioning or air-conditioning, few oil companies will have sites older than 15 years which have not been redeveloped or substantially improved. Most leases have the normal disregards relating to tenant's improvements and, although it is relatively easy to assess the change in value by increasing the size of the shop, it is far more difficult to determine how a forecourt redevelopment affects fuel throughput.

A "three pumps in line" forecourt with attended service and limited tankage, redeveloped to a modem configuration with an increased number of self-service pumps and a canopy, could have a dramatic effect. Often the lease directs us to disregard the rental value of such improvements, so it is necessary to assess the site potential in its unimproved state. This is difficult, can cause considerable argument and often results in valuers agreeing to treat such reviews as ground rent reviews. (The reasoning being that a tenant acquiring such a site would probably carry out an immediate redevelopment.)

The costs of running a petrol station vary little, whether sales are running at 2.5m or 5m litres, so rents tend to rise in a more than proportional rate compared with volume.

Values and rent are also dependent on the site's attractiveness to an oil company. Few major oil companies would purchase or rent a site with a throughput potential of less than 5m litres, although some may agree to supply it as a dealer site. The other factor having a bearing on the value, apart from the site's facilities, is the margin on fuel sales which the site can achieve. A site selling fuel at the current discounted price of 64.9p per litre will clearly be less profitable than a site in an area of little price competition which can maintain a price of, say, 69.9p per litre. As indicated above, there are many regional variations in pricing and therefore margin.

There will be a difference in value between "tied" sites and those free of tie, depending on the terms of the supply agreement. The margin provided for in the supply agreement will be affected by the supplying oil company's pricing policy in the area. The retailer benefits where the supplying oil company has a policy of supporting the price at the site, at its own cost, to keep the site competitive with those in the locality. Without such a policy, the retailer will either be forced to forgo margin to adjust his fuel prices to remain competitive or experience a fall in fuel throughput