NB Real Estate -- The full story...

The full story...

Before 1990, business rates were set and retained locally. Since then, they have been set nationally and paid into a central pool for distribution to local authorities according to need. The total rates yield this year is about Ł19 billion which accounts for 15% of local authority spending.

Unlike other taxes, the revenue generated from rates rises in line with RPI every year, regardless of economic conditions. For 2008/2009 the national multiplier has been 46.2 pence in the pound. Next year’s level will be determined shortly and with inflation currently at 5%, next year’s increase will be even greater.

The Government has just published further information about plans for a local rate supplement from 2010, to be called The Community Infrastructure Levy, or CIL. This will be set and retained by local authorities to give them “extra resources to invest in these vital facilities”. It will relate to specific projects, such as Crossrail and would be at the discretion of local authorities with an upper limit of 2p in the pound.

Empty Rate changes

Empty rate relief was abolished, virtually, from 1 April 2008.

Previously, most commercial properties enjoyed exemption from rates for three months after becoming vacant and then were liable for only 50% of the occupied levy. From last April, the three months holiday was retained, but that’s all. Thereafter, 100% rates are payable. Industrial sheds and warehouses were previously entirely exempt from empty rates. From April, they have six months grace after becoming vacant and then become 100% liable.

Listed buildings continue to be entitled to full empty rate relief. The Government has so far held back on implementing anti-avoidance provisions designed to prevent owners deliberately “vandalising” their properties to escape liability, but if applied in future these provisions could be back-dated.

According to the Government, the stated aim of these changes is to incentivise owners to re-let or redevelop commercial property – and nothing whatever to do with the additional annual tax revenue, which is expected to be some Ł950m.

For 2009/10, empty commercial properties with a rateable value below Ł15,000 will be exempt from business rates. This is to cover about 70 percent of all empty properties. However, the extended exemption is limited to one year and it will only apply to smaller assessments, reducing the Government take by a mere Ł185M. So, even taking into account the statement in the Chancellor's Pre-Budget Report, we can still expect an additional rates bill of circa Ł765M for 2009/10, reverting back to the full Ł950M thereafter.

The new tax on empty buildings will have an increasingly distorting impact on the property market as the percentage of unlet space rises during the current downturn.

2010 revaluation

Values are reassessed for rating every five years; the purpose is not to increase total revenue, but rather to redistribute the burden between sectors and regions, by taking account of their relative changes in value. The next revaluation is due on 1 April 2010 to be based on values prevailing in 2008.

Whether tenants or landlords of vacant buildings, losers will be rate payers over London offices that may not experience the same great rental growth as the past five years. The worst hit area is likely to be the West End, where rate liabilities for prime offices in Mayfair are expected to double from Ł25 to Ł50 per sq ft.

Likely effects of the changes

It is clear that these recent changes are likely to create a step change in the way empty properties are managed. Given the economic climate - the percentage of unlet commercial properties has risen by almost a quarter (22%) over the past two years to 9.3% in March 2008 - the number of vacant buildings is likely to increase further. The City of London alone has an estimated 6 million square feet of space due to be completed by the end of the year, adding to 7 million square feet already unlet. So, we could see up to 11 million sq ft empty in the City a year from now. The cost to the property sector for rates on all these vacant buildings increased considerably from April and will become greater as the present economic conditions continue. The Government’s changes to empty rates charging were supposed to reduce rents and provide an incentive for owners to re-use, re-let or re-develop their empty properties, but instead, developers will think twice about building without a pre-let, if a property could remain vacant for some time.

When you consider that the main aim of property investors is to maximize the return on their assets, they need no encouragement to let their buildings. The simple fact is that the pool of business premises is likely to reduce, as landlords chose to demolish empty buildings which are particularly difficult to let rather than pay this tax; a wasteful loss of properties that might otherwise be refurbished when market conditions are right .

If property is empty, it is because of low occupier demand. So, this tax will not result in fewer empty properties. In fact, empty rates could discourage the regeneration of rundown areas because such large-scale projects often come to market with a significant proportion of buildings unlet. Developers will face significant additional costs where they need to acquire, and keep empty, a number of buildings prior to commencing a major regeneration scheme. The prognosis is that this change will hinder, not help, re-development.

The situation is even more severe with respect to industrial properties. Empty factories and warehouses that were previously exempt from empty rates are now being charged at the full level, proving an even greater obstacle to landlords’ development plans and adding significant cost to the sector.

With the uncertainty about rental levels for the 2010 rates revaluation, we can expect an increase in the number of rating appeals and valuation tribunal cases as rating agents challenge new assessments, not least for any properties that have remained unlet. This may produce positive short or long term results, so long as each individual case is prepared and pursued by expert practitioners.

Options for Investors

The subject of property rates is both complex and dynamic, encompassing a broad range of legislation and statutory requirements. The recent changes in legislation raise the priority of rates and for many make a compelling case for review. The real question is “What action, if any, should you be considering at this time?” Given the far reaching consequences of the legislation, speculative building carries a higher level of risk and may cause a change in policy for investment companies, stifling new development. That’s a problem waiting to happen, but for some the problem is more immediate. If you own an empty building, then the clock is ticking and rapid action is in order.

Creative thinking combined with a thorough knowledge of rating law can produce some relief for investors. There may be opportunities to reduce or avoid additional cost by appealing against rating assessments, or applying to the local authority for discretionary rate relief. But in order to benefit, you will need to take action.

The first stage is to take expert advice to establish whether your specific circumstances may provide a suitable platform for an appeal. NB Real Estate has made a successful business from helping clients who are in exactly this position. We have a specialist department with a superb track record helping our clients through the rating minefield.

For example, NB Real Estate's rating consultancy helped BSkyB to produce savings estimated in excess of Ł2.8 million over 5 years through a concerted and tenacious appeals process.

The same is true for Royal Mail where NB Real Estate orchestrated savings estimated at over Ł7.7 million.

You may be surprised at how your business can also benefit. If you are experiencing difficulties, or just concerned about the impact of business rates, you will find that the NB Real Estate consultancy and appeals service is the smart way to minimise your costs and exploit your position to best effect.

Call me, Andrew Warde, Director of Rating on 020 7544 2050 or email me at awarde@nbrealestate.co.uk. I would be delighted to hear from you and happy to assist.