Ask The Experts - Valuing Premises Shares

Published:10/09/2010

Question

Our Partnership has an agreement that covers what happens to a partner’s premises share if they die, retire or expelled. The continuing partners must buy out that partner’s share at 20 times the annual share of notional rent, or for another amount that is agreed by all parties. One partners wishes to sell their share while continuing at the practice. How would you advise us to proceed. When the original agreement was signed our formula seemed a fair gauge of value but, in today’s economic climate, it seems pretty high and does not reflect actual value.

Answer

I note that you have an agreement whereby you buy out partners at a rate of 20 times the annual share of notional rent which you perceived to be a “rule of thumb” for calculating value. I should first note that this is a very haphazard method as the notional rent should first be netted down to remove the repair element and then the multiple will vary dependent upon the type of property and the state of the investment market (in turn affected by the acknowledged situation of the country, current lending rates etc etc). A multiple of 20 would show a net initial yield of 4.73% much lower than is really sustainable in the market. Over the last 3 years the range has been more between 5% and 7% for good quality modern premises. At the present times certainly adopting your approach is in serve danger of being regarded as including an element of good will which of course is not allowable under NHS terms.

The only fair way for both retiring doctors and anyone wishing to sell their share during the course of their partnership term is to adopt the fair market valuation. The BMA have guidance on this point but basically recommend that a market valuation should be obtained for the premises having regard to the level of cost or notional rent but excluding any element of good will.