Scope
The scope of this Practice Note is solely to ensure a consistent valuation approach for this property Class/ Subclass/ Type for Non Domestic Revaluation 2023 and subsequent entry in the new Valuation List which becomes effective on 1 April 2023.
The basis of valuation for new entries in the Valuation List, and Rating Revision cases after 1 April 2023, is Schedule 12 (2)(1) of the Rates (NI) Order 1977.
Description
This Practice Note refers to property classified as:
Class: Unlicensed Accommodation
Sub Class: Bed and Breakfast Establishment, Guest House
Type: Not Applicable
And
Class: Unlicensed Accommodation
Sub Class: Hostel
Type: Outdoor Activity Centre, Youth Hostel, Other
Types of accommodation as per Tourism NI
Under the Tourism (NI) Order 1992 there are the following categories of tourist accommodation:
https://www.tourismni.com/build-your-business/sector/accommodation/accommodation-getting-started/what-are-the-different-accommodation-categories/
Guesthouses must have at least three double en suite bedrooms and must provide breakfast and have the facilities to provide an evening meal. They are run on a more commercial basis than B&Bs, and usually more services are provided by staff as well as the owner. If a liquor licence is held with such premises, they are a Licensed Guesthouse and should be valued under the Hotels and Guest Houses (licensed). Usually, the owner lives in an entirely separate area within the property. Guesthouses can range in size from one with three double rooms to larger premises more similar in character to small hotels and can have facilities including fitness suites, spas and licensed restaurants.
Bed and breakfast - A B&B offers overnight accommodation whilst also providing guests with a cooked breakfast. There is not a requirement to provide an evening meal and they typically provide between one and ten guest rooms.
Hostel - provides low cost accommodation, breakfast is sometimes provided though a self-catering kitchen is more usual. Guests rent a bed in a dormitory and share a bathroom, lounge and kitchen. Hostels for travellers are commonly known as “backpackers’ hostels”. These properties are generally run by non-profit making bodies such as Hostelling International Northern Ireland (HINI). They are competing for business with Guesthouses and Bed and Breakfast establishments, and therefore will be valued as part of this Practice Note.
Legislative background
Schedule 12 Part 1 Paragraph 1 of the Rates (NI) Order 1977 applies.
“Subject to the provisions of this Schedule, for the purposes of this Order the Net Annual Value of a hereditament shall be the rent for which, one year with another, the hereditament might, in its actual state, be reasonably expected to let from year to year, the probable average annual costs of repairs, insurance and other expenses (if any) necessary to maintain the hereditament in its actual state, and all rates, taxes or public charges (if any), being paid by the tenant”.
Rates NI Order Schedule 5 Para 2 applies:
(1) A hereditament which is wholly or mainly used in the course of a business for the provision of short-stay accommodation, that is to say accommodation—
(a) Which is provided for short periods to individuals whose sole or main residence is elsewhere, and
(b) Which is not self-contained self-catering accommodation provided commercially, shall be deemed not to be used for the purposes of a private dwelling.
(2) Sub-paragraph (1) does not apply if—
(a) It is intended that within the year from the day in relation to which the question is being considered, short-stay accommodation will not be provided within the hereditament for more than 6 persons simultaneously; and
(b) the person intending to provide such accommodation intends to have his sole or main residence within that hereditament throughout any period when such accommodation is to be provided, and that any use of living accommodation within the hereditament which would apart from this sub-paragraph, cause any part of it to be deemed not to be used for the purposes of a private dwelling, will be subsidiary to the use of the hereditament for, or in connection with, his sole or main residence.
Regulatory Legislation
Tourism NI
The statutory criteria for tourist establishments is laid out in Categories of Tourist Establishment (Statutory Criteria) (Amendment) Regulations (Northern Ireland) 2011. The web link is:
http://www.legislation.gov.uk/nisr/2011/104/made.
All tourist accommodation in Northern Ireland must be certified by Tourism NI. Each property is inspected every four years to ensure compliance with minimum standards set by the Tourism (NI) Order 1992 http://www.legislation.gov.uk/nisi/1992/235/contents, and premises can only trade once the certificate is issued.
Tourism NI provide tourist accommodation start up advice at the following site:
https://www.tourismni.com/build-your-business/sector/accommodation/accommodation-getting-started/what-do-you-need-to-consider/
Guesthouses, B&Bs and hostel operators can opt into a Quality Grading Scheme and receive a Star rating from 1-5. The “Star” grading system is voluntary. Tourism NI have confirmed that a lot of small operators opt out of the scheme due to the annual cost involved. This star rating reflects the quality of the accommodation and facilities on offer but does not reflect the geographic location of the property.
https://www.tourismni.com/globalassets/business-development/quality-and-standards/accommodation-quality-assurance/guidance--assessment-criteria/small-serviced-accommodation/assesment-criteria-for-small-serviced-operators.pdf
Hostels also comply with Hosteling International’s brand standards which ensure safe, clean, comfortable and affordable accommodation under their assured standards scheme.
Valuation approach for 2023
The R&E method of valuation is to be retained as the approach for this type of hereditament. Research by the Practice Note author concluded that there was insufficient rental evidence available to develop a comparative approach.
In the absence of rental evidence, or a suitable unit of comparison to permit such rental evidence to be reliably analysed, the preferred method of valuation may be either the R&E method or the Contractor’s basis. Where the nature of the occupation of the property is primarily concerned with achieving anticipated profit, and the tenant’s rental bid is, therefore, likely to be based upon a consideration of receipts and expenditure, then in the absence of reliable rental evidence, the R&E method may be the most appropriate method of valuation to adopt.
Source: The Receipts and Expenditure Method of Valuation for Non-Domestic Rating Guidance Note produced in 1997 by the Joint Professional Institutions' Rating Valuation Forum which consists of the RICS, the IRRV, the RSA, the SAA, the VLA and the VOA.
Step 1
Gross Receipts will be determined by taking into account all income reasonably to be derived from occupation of the property. A period of three years accounts, prior to the AVD should give sufficient information to establish a fair and reasonable indication of the trading position. In the case of new ventures where trading accounts do not exist, refer to the accounts of similar ventures, or to the business plan prepared for the new occupier.
In general, receipts should include all income derived directly and indirectly from occupation of the property.
Step 2
The proper Cost of Purchases made in order to produce those receipts should be deducted to determine the Gross Profit. Such costs relate only to those purchases which form part of the venture undertaken.
Step 3
Deduct the Working Expenses from the Gross Profit to determine the Divisible Balance. Outgoings considered as allowable working expenses are those incurred as a result of the operation. For example, salaries, National Insurance payments, provision of services, insurance, phone bills, advertising, Head Office expenses. However, a mortgage payment, which is an expense of the business, is not an expense for a rating valuation.
Step 4
The Divisible Balance (or net profit) is the remaining sum available to be shared between the landlord, and the tenant. It comprises two main elements:
a. The Tenant’s Share – to provide a return on any tenant’s capital employed and a reward to the tenant for his venture reflecting the extent of the risk and the need for profit. It must be a proper and sufficient inducement, not merely a fraction of the divisible balance. A 50/50 split of the divisible balance is adopted as a last resort. This is deducted from the Divisible Balance to leave:
b. The Landlord’s Share – i.e. the amount available for the payment of rent and rates.
The above sets out the methodology for assessing a rent using the Receipts and Expenditure. It may also be possible to determine a ‘short hand’ approach whereby a percentage is applied to the Gross Receipts to determine a rental value. The NAV can be devalued to an overall £/m2 for comparative purposes.
Having arrived at an initial valuation it will be necessary to stand back and take an overview of the assessment to ensure relativity with other comparable premises.
The information provided on the Rent and Lease Questionnaires (RALQ) has been analysed to produce a matrix of values setting out a range of values per weighted guest space against quality and locational factors. A standard guest place is a single room with a wash hand basin. An enhancement is added to reflect the availability of en suite facilities. Tourism NI has indicated that the market makes an addition for an en-suite in terms of pricing structures. A standard room in a B&B is one without an en-suite. A guest place with en suite facilities will continue to be weighted at a factor of 1.2. An appropriate rate per weighted guest place is then applied depending upon the quality of the accommodation on offer and the location of the establishment.
Youth Hostels are generally run by non-profit-making bodies such as Hosteling International Northern Ireland (HINI). However, these Hostels are competing for business with other tourist accommodation. It is recommended that these properties be valued in line with B&B establishments. It is anticipated that the price per guest space to be adopted will be at the lower range for this category of property.
Outdoor activity centres should also be valued by the R&E method. The price per guest space adopted will reflect the extent of facilities available
An emerging feature in the marketplace is large Mansion House properties offering extensive guest accommodation as well as a venue for weddings/civil ceremonies. Depending upon whether the premises is licensed this may fall to be valued under the Hotels Practice Note.
There are also a number of licensed properties which contain an element of Bed and Breakfast accommodation. If the public house has a full on-licence with B&B facilities these should be valued in line with the licensed property scheme, with the income from the accommodation being included in the R&E method. The B&B accommodation in these circumstances must not be valued using a price per weighted guest place as this would be double-counting. The District Office must define the principle use of the hereditament before determining the valuation approach, and bring the hereditament to the attention of the Public House Valuer if appropriate.
If there is a licensed restaurant with the accommodation, then it should be valued on a price/sqm basis. If the restaurant is situated in a shop, office or warehouse type property then it needs to be valued accordingly having regard for comparable properties in the List.
Domestic Apportionment
The approach to be adopted is as follows:-
- Assess Domestic Capital Value for whole premises derived from comparables (A).
- Determine the total weighted guest places for the establishment including staff and proprietors' accommodation. (B).
- Determine the number of weighted guest places occupied by the proprietor as family accommodation. (C).
The Capital Value of the domestic element is = C * 100% = say 20%
B
(Weighted guest places (proprietor's family accom) *100%) * Capital Value
Total weighted guest places
E.g.20% * CV = Apportioned Domestic Element
NB: Staff accommodation used only seasonally which reverts to domestic use should be added to weighted guest places of proprietor.
Rent and Lease Questionnaire
For this class of property RALQs were issued centrally by LPS and analysed by the Practice Note author. Full accounts information was not requested but details of gross receipts only were requested.
Contacts
For advice on any aspect of this Practice Note contact LPS on 0300 200 7801.
More useful links