31 The plots of land that are available for new developments may not precisely match requirements, but where a plot exceeds requirements, the surplus should be disposed of as soon as possible.
32 An exception to this rule is in cases where future expansion is anticipated, (for example within a phased development), and where the extra land may not be available later. Efforts should still be made to secure some return from land than needs to be retained, but which is temporarily surplus (for example by short term letting).
33 Including the value of land already owned means that an appraisal must also include the costs of retaining vacant land. It is sometimes argued that vacant land on government sites could not be used for any other purpose because of the demands of security, and so the opportunity cost of this land is zero. However, it is generally possible, by the re-organisation of a land portfolio taken as a whole, to release land elsewhere. In practice, land that can be used for a public sector project nearly always has an opportunity cost.
BOX 3.1: LAND AND BUILDINGS WORKED EXAMPLE
34 The purpose of this example is to introduce basic concepts regarding typical accommodation appraisals and/ or evaluations; some are specific to land and property valuation, and others apply more generally.
CONTEXT A government department (A) owns the freehold of a 2000 m2, 1960's office block on the outskirts of the city. It lets 500 m2 to another government department (B) under a memorandum of terms. Department B continues to occupy the premises, with Department A's permission, although the current memorandum of terms has expired. Department A occupies the remainder. Enquiries of the local authority have confirmed that planning consent for conversions of the buildings for high density, high quality residential development would be granted. Department A's current accommodation is poor; a staff survey has revealed widespread dissatisfaction with its facilities. Managers are now exploring the options for providing future accommodation needs. OBJECTIVES The main aim of Department A is to provide modern office accommodation for its staff in a manner which represents value for money. OPTIONS A number of options are being considered, including relocating the activities of this branch to the Department A's head office. For this example, only three will be considered in detail. Option 1 'Do Minimum' This entails refurbishing the current property at a cost of £1 million. Department B has expressed an interest in taking a new lease after refurbishment for 15 years, with 5 yearly upwards-only rent reviews at a rent of £60,000 per annum, effectively on full repairing and insuring terms, which represents the current open market rental value. It is likely that there will be a need for a further minor refurbishment of the building in 10 year's time at a cost of £0.5 million, but it is anticipated that this will help maintain the open market rental value of the property in real terms, with only a slight decline. Option 2 New office block Department A moves into 1500m2 of a new city centre office block, to be completed in the near future, situated next door to a rail and bus terminus. The location is seen as one that will improve markedly over the next couple of years or so and consequently, rental values are expected to grow faster than the rate of inflation over this period. The developer would be prepared to accept a fifteen-year full repairing and insuring lease for the property, with a tenant's option to break at the end of the 10th year, without penalty. The initial rent can be agreed today at £240,000 per annum subject to upwards-only rent reviews every 5 years. Department A's consultant surveyors have confirmed that the rent and other terms generally reflect current market conditions. Option 3 Re-use existing vacant government office space Department A moves to a vacant office property currently leased to another department and surplus to their requirements. The property, known as Crown Building, comprises a 1500m2 modern city center office block. The location is similar to that of the new city centre property outlined in Option 2 above. The passing rent is lower at £200,000 as it is a second hand building with a more basic specification, but growth assumptions are similar. The existing 15 years' lease has 5 years left to run and can be renewed under the Security of Tenure provisions of the Landlord and Tenant Act. The Owning Department's agents advise that the cost of disposal or surrender will be equivalent to the rent and running costs for the remaining period of the lease. ASSUMPTIONS The detailed assumptions are shown in the notes to the tables of calculations. The Department initially performs a cost-effectiveness analysis on the three options. Table 1 shows the results of this analysis. Initial appraisal findings (table 1) The cost effectiveness analysis shows that option 3, the reuse option, provided significantly better value. Managers want to investigate the differences between the options further. Models are developed of the benefits that accrue from each option. There are some additional benefits in moving to the new, more accessible site. These include times-savings for the public who use the site regularly, accruing from the more central location. CONCLUSION In this example, cost effectiveness analysis is sufficient to make an appropriate choice. Valuing its additional benefits further improves the case for developing a solution based on Option 3. This example illustrates some specific aspects of accommodation appraisals, as well as introducing benefits valuation in the appraisal process, which is considered in more detail in Annex 2. |