The Effect of Inter-company Lets on the Valuation of Property Assets under the Red Book

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Abstract:

In the last few years a number of large operational companies in the United Kingdom have chosen to segregate the management of their property holdings from the day-to-day running of their core business. This has either been achieved by forming property sections within the main company structure, or in some cases the hierarchy has been more clearly defined by the formation of subsidiary companies feeding into the parent company. The operational arm would then pay the property subsidiary an open market rental for each property that they occupy. The advantage of separating the property function from the core business is twofold. First, it allows the performance of each operational outlet to be measured on the same basis; and second, the investment performance of the properties themselves can now be measured. However, for the latter to occur, the properties need to be valued as investments and not as owner occupied. Under current RICS regulations this is not allowed and any property subject to an inter-company let must be valued as if the lease agreement did not exist. Investigates the effect of the RICS guidelines on the valuation of properties let to related companies and highlights the problems of measuring the performance of the company's property assets against a suitable benchmark.

Keywords: Accounting Policy; Companies; Leasing; Property; Subsidiaries; Valuation

Document Type: Research Article

DOI: http://dx.doi.org/10.1108/09588689410063157

Publication date: January 1, 1994

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