Quarries, Sand Pits, Mines (Non Domestic Valuation practice notes)

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, or 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 occupied for the extraction of minerals.

The properties covered in this Practice Note are diverse in nature and may comprise excavations with associated processing plant and buildings.

Mines open for a period of less than seven years are not to be treated as a hereditament as per Schedule 11 of the Rates (NI) Order 1977. Therefore, no further consideration will be made into the mining of lignite.

Legislative background

Schedule 12 Part 1 Paragraph 1 of the Rates (NI) Order 1977 applies.

“Subject to the provisions 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”.

Schedule 12 Part 1 Paragraph 4 states: Where the Net Annual Value of a Hereditament is fixed, wholly or partly, having regard to the quantity of minerals or other substances extracted from the hereditament, the quantity to be taken into account for the purposes of a valuation shall be the probable quantity for the first year with respect to which that valuation will be in force. The output from the quarry, mine etc will be valued by reference to this paragraph and shall be assessed by way of a royalty payment. This element will then be abated by 50% as per Schedule 12 Part IX as shown below.

Schedule 12, Part IX goes on to state:

1.This Part applies to any hereditament which consists of or includes a mine (which for the purposes of this Part includes a well or bore-hole) or a quarry.

2.The Net Annual Value of a hereditament to which this Part applies shall be its value as ascertained under Part I, Paragraph 1, reduced by one half of the part of the rent estimated under that paragraph which is attributable to the occupation of land for the purpose of the following operations, namely, the winning and working, grading, washing, grinding and crushing of minerals.

"Minerals" are as described in Article 2(2) of the 1977 Rates Order as including stone, slate, clay, gravel, sand and other natural deposits except peat. Peat extraction is dealt with by way of a separate scheme.

2. General interpretation and definitions

1. As per Article 2 of The Rates (NI) Order 1977 - The Interpretation Act (Northern Ireland) 1954 shall apply to Article 1 and the following definitions from this Order

(2) In this Order—

"mine" has the meaning assigned to it by Section 156 of the Mines Act (Northern Ireland) 1969 (c6) and includes anything which by virtue of that section is deemed to form part of a mine;

"minerals" includes stone, slate, clay, gravel, sand and other natural deposits except peat;

"quarry" has the meaning assigned to it by Article 2(2) of the Quarries (Northern Ireland) Order 1983 and includes anything which by virtue of that Article is deemed to form part of a quarry.

There is no statutory definition of the word “royalty” within the Rates Order but can be defined as ‘the amount of compensation the landowner (lessor) receives for each tonne (or other unit of measure) of mineral that is extracted and sold from the lessors property’. (M Nowobilski, 2002).

Valuation approach for 2023

The recommended valuation approach for Reval2023 is the hybrid approach utilizing both the Contractor’s and R&E methods. Buildings plus plant and machinery on site are valued using the Contractor’s method. Extraction of minerals is valued using a shorthand R&E method. Both methods are described below.

The Contractor’s method of valuation

The overall aim of the Contractor’s basis is to arrive at the effective capital value (ECV) that is then converted into annual rent. The primary method of arriving at ECV is to consider replacement building costs suitably adjusted.
Source: RICS guidance note: The Contractor’s Basis of Valuation for Rating Purposes 2nd edition August 2017, from the Joint Professional Institutions' Rating Valuation Forum, which is made up of representatives of the RICS, the IRRV, the RSA, the SAA, LPS and the VOA.

The method is employed in the case of properties that are not normally let out, which by their nature do not lend themselves to valuation by comparison with other classes where rental evidence does exist, and which are not of the type where a valuation solely by reference to the accounts of the undertaking would be appropriate.

The recommended approach to valuation comprises five stages.

Stage 1: Estimated Replacement Cost (ERC)

Identify the extent of the rateable hereditament, then estimate the replacement cost of the buildings, site works, all rateable structures, and rateable plant and machinery within the property on an undeveloped site.

In order to achieve consistency, a unit cost approach using Cost Guides is the primary method adopted. This approach will include the prevailing costs in the identified location, the effect of any contract size, and any associated professional fees. VAT is excluded, as are any grants or donations.

There may be cases where it would be appropriate to cost a modern, simpler or smaller substitute. The substitute would be of a design and specification that enables the use of the actual property to be carried out in a fully satisfactory manner.

Stage 2: Adjusted Replacement Cost (ARC)

The ERC should be adjusted to take account of the difference between the property, in its actual state, and the replacement property costed at Stage 1.

Stage 2 adjustments can be viewed from the perspective of an owner-occupier, as opposed to Stages 1 and 3 which are concerned with capital sums.

Allowances made at this stage are intended to reflect the disadvantages of a particular building (or an item of plant and machinery within it). These allowances are generally termed obsolescence.

It should not be automatically assumed that because a property is old it merits an allowance. In certain circumstances, age may be a positive asset or have little effect, for example prestige buildings such as town halls, art galleries or universities. Age in itself is not a disability but rather what flows from age.

Where a modern substitute has been costed at stage 1, allowances at Stage 2 should be restricted to the disadvantages of occupying the actual buildings in comparison with occupying the costed substitute.

The deficiencies that may be taken into account at Stage 2 can be grouped under the heading of ‘obsolescence’ and they are normally subdivided into the following types:

• Physical obsolescence which relates to wear and tear of the building due to its age. Although age itself is not a justification for an allowance the tenant will reflect the prospect of increased maintenance and running costs in his rental bid.
• Functional obsolescence may occur when the functional capability of the property is not comparable to new building or design standards in the sector. Functional obsolescence may take the form of the building exceeding the required capacity or quality compared to current market standards, or conversely being less than adequate for the intended purpose.
• Technological obsolescence is an extension of functional obsolescence where current technology has changed so radically that the actual plant and machinery to be valued or the building housing such equipment has become redundant.

For Reval2023, adjustments will apply for Age Obsolescence appropriate to the property class.

Stage 3: Value of Land

The consideration of the land element comprises two stages. The first is to establish the capital value of the site of the hereditament. The second is to make such adjustments as may be appropriate to those parts of hereditament site that have been developed with buildings or other rateable structures on it (i.e. encumbered by buildings and to which the average obsolescence allowance that was adopted to the structures at Stage 2 will normally be applied).

The capital value adopted for the land at the first stage, and before adjustment as appropriate at the second stage for the existence of rateable structures, should reflect all the advantages and disadvantages of the site and its location and assume the following:

• The site is cleared of all buildings.
• All services existing at AVD are available for connection.
• There is planning permission for the subject buildings and their existing use.
• No development potential exists over and above that required for the existing buildings or rateable structures on the land.

The assessed capital land value element will be added to form part of the total Effective Capital Value (ECV) to which the appropriate decapitalisation rate should be applied to calculate the Net Annual Value (NAV). [See Stage 4 for details on decapitalisation].

It may be appropriate to consider alternative sites in an area of high land value where the occupier of the property derives no extra benefit therefrom, however, comparisons should be made with sites of a comparable size, in the same mode or category of use.

For certain property types there may be a reasonable amount of reliable market evidence for site rents which can be used. For these property types the value of the land element may therefore be assessed by applying a rental rate per unit of assessment (acres/hectares) derived from analysis of such reliable rental information. Where this method is employed, the decapitalisation rate is not applied to the assessed land rental element, the land rental element instead being added to the decapitalised ECV to form part of the Total NAV for the hereditament.

Stage 4: Apply the appropriate decapitalisation rate to the total ECV

Decapitalising the sum of Stages 2 and 3 by the appropriate rate converts the ECV to an annual equivalent. The decapitalisation rates are prescribed by legislation, this does not allow any degree of valuation judgement.

Lower rate: 2.27% - in the case of a healthcare, educational or church hereditament.
Standard rate: 3.4% - for all other types.

Stage 5: Review. Also known as the ‘stand back and look’ stage

This stage is used to consider if any further adjustments are appropriate. Any such adjustments must be made for specific reasons and cannot be used to circumvent the decap rate. Care should be taken to ensure they do not duplicate allowances already made at Stage 2.

Adjustments made at this final stage are to reflect factors that affect the value of the property as a whole, e.g. poor access, cramped site conditions, inadequate layout. This stage provides an opportunity to consider whether a pioneering allowance or allowance to reflect the economic state of the industry is appropriate.

The value arrived at in Stage 5 is rounded to produce the NAV.

For full details see the following documents:

RICS guidance note: The Contractor’s Basis of Valuation for Rating Purposes 2nd edition August 2017.
LPS Code of Measuring Practice
LPS NI Reval2023 Rating Cost Guide Practice Note
LPS NI Reval2023 Rating Cost Guide Spreadsheet
LPS Contractor’s Basis of Valuation

The Receipts and Expenditure Method of Valuation

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

Working Expenses are deducted 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 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.

Appendix 1 shows the rates to be adopted for each type of mineral being extracted.

It should be noted that the rates to be applied are for hereditaments with average disabilities, including overburden, height of the working face etc. and includes an amount for reinstatement. These rates should not be adjusted unless local information suggests more serious disabilities. If such conditions exist, Valuers should consult the specialist district for guidance.

It will be necessary to use the previous three year’s throughput to inform your estimate.

Obtain details of the annual output of the hereditament in tonnes for the last three years. Details of earlier years output will be available in District Offices if required.

Multiply the yearly trend (tonnes) X the appropriate royalty rate. The resultant figure is then multiplied by 50%. (Schedule 12 Part IX 1977 Rates Order). This abatement is attributable to the winning, working, grading, washing, grinding and crushing of minerals.
The resultant NAV will be classified/apportioned INDUSTRIAL (IN) as per Article 43 and Schedule 14 of the Rates (NI) Order 1977.

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.

Rent and Lease Questionnaires

For this Class/ Type of property a bespoke Rent and Lease Questionnaire was issued.

Contacts

For advice on any aspect of this Practice Note contact LPS on 0300 200 7801.

Appendix 1: royalty rates

The royalty rates below are to be adopted without variation. Where local evidence suggests otherwise, advice must be sought from the specialist district. They represent royalties paid for good quality minerals, having average disabilities and reflect the average tenant's liability to reinstate.

Where there is poor quality material (gravel, whinstone or decomposed granite etc) which can only be used for infill being extracted then an adjustment to the basic rate could be made.

Thickness of overburden – the significance of overburden i.e. the soil and subsoil above the mineral has tended to have been exaggerated as a disability i.e. a fault or flaw in the mineral. Modern equipment and methods of working have generally reduced the difficulties unless the overburden is exceptionally heavy, therefore no further reduction should be made for overburden unless of a very serious nature.

Height of the working face is now restricted by governing legislation such as the Quarries Regulations (Northern Ireland) 2006, which ensures that higher working faces are stepped. Therefore, no further reduction should be made.

Planning or blasting restrictions which may limit the volume of extraction in order to reduce noise and vibration in the area, may affect the willingness of a tenant to take a lease and may therefore have an effect on the royalty rent. These restrictions would need to be particularly onerous.

In general, if any such issues should arise, they should be referred to the specialised district for further consideration.

More useful links

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