‘WRONG2 X WRONG3 = WRONGxxx ? How valuation practice is failing International Valuation Standards ('IVS') in regard to income producing property

Don Gilbert is a Specialist Retail Valuer (“SRV”), a 3D Economist and an arbitrator. He provides independent, impartial advice to landlords, prospective investors and tenants.

He is also the inventor of the GEM Method which is a comprehensive joint “value discovery” solution to bring landlords and tenants to informed conclusion of the reasonable rent for ONE Retail Lease with reasons why. 

TITLE

‘WRONG2 X WRONG3 = WRONGxxx ? How valuation practice is failing valuation standards including International Valuation Standards (‘IVS’) in regard to income producing property?’ ? Donald E Gilbert as Trustee Gilbert Family Trust 2020

TARGET AUDIENCE

Retail Tenants, Landlords, Potential Landlords, Franchise Industry, Investors, Valuers & Property Professionals (and their Associations), Banking and Finance Industry, Regulators, and other professionals

INTRODUCTION

Rest assured, COVID-19 aside, introducing such a controversial title has not been taken lightly.

The hypocrisy within valuation appraisal practice in Australia with our expertise is significant in my opinion due to blatant cheating, I am ready to call upon IVSC to withdraw our peak Professional Body’s right to claim this status, and whether that should be on the IVSC’s Board.

The second part of this article, is, if we have the ability to significantly improve valuation standards, how can this hypocrisy be allowed to continue? It is about behaviour; it is about “culture”. It is about a willingness to change. And that change comes from within. And it needs to happen.

The third part of this article considers why GEM (Gilbert Evaluation Methods) copyrighted Intellectual Property is so valuable.

So I quote again from Lewis Carrol: “If you do not know where you are going any path (metric) will get you there”. This paraphrase of an exchange between Alice and the Cheshire Cat in Chapter 6 of Lewis Carroll's Alice's Adventures in Wonderland is apropos to the current valuation “methodology”.

BACKGROUND

Australia revolves around “politics”. It operates on “Smoke and Mirrors” stuff.

Valuation (appraisal) practice is about FACT.

As a consequence of my research, and many “Case Studies” of valuers blatantly cheating, I evaluated the consequences of their acts and omissions by breaking down the ‘standard income capitalisation’ formula, to try to explain the consequences of their actions.

Some of it is absolutely deliberate; some of it accidental skills problem. And after presenting my two papers at the Pacific Rim Real Estate Society (‘PRRES’) 2020 Conference in Canberra, our PhD Session Chair said: “Wow I had never thought of it like that”.

So lets start off with Alice in Wonderlands’ adventures and or valuation appraisal methodology:

“If you do not know where you are going any path (metric) will get you there”

Now from my PRRES presentation material below, lets go to the Market Value formula. What I have done is to extrapolate how wrong wrong can be, if one’s starting point is incorrect.

Rest assured by the time you have read this article, most valuers appraisers, bankers, investors, potential investors, landlords, tenants, the franchise industry and academia Professional Institutes Institutions IVSC, etc. will be astonished as to what is going on.

In effect the following is the formula: WRONG2 X WRONG3 = WRONGxxx

Fig. 1

Now referring back to my PRRES (and IVSC – ANEVAR; IVSC – WAVO 2018) presentation material, here is the starting point for most valuations of income producing property:

Fig. 2

$1,600 is put on a square metre (square foot, etc.) it is taken at face value, it is multiplied out after deducting expenses, by the “going” multiplier and becomes market value!

Case in Point. Mary Ryan’s bookshop, rental was evaluated by a Specialist Retail Valuer (award winner at Australian Property Institute 2019 Excellence in Property Awards National Conference) in around 2010/11 on a single metric. It cost their client a miserly amount of $1,700 and sent the business on a certain trajectory towards business failure; see my article on LinkedIn “When Cheap is Expensive”.

Fig. 3

The property was dumped on to the market to an unsuspecting country farmer for around $4.6 million. A branded valuation firm ticked and flicked the market value(ation) (sic) until a 2015/16 rental determination opportunity came up. The client’s business was choking and paying $470,000 pa gross.

The real market rent was round about $210,000 to $230,000 (why am I vague; I am an Expert in this field and I am suggesting there is no real right answer) gross and was determined at $250,000.

Now you are a: banker; a potential investor; a franchisor or someone in the mix. You own Bank Shares?

Was that cheap Professional Fee money well spent; or was it a very very very expensive mistake? My fee would be at least $10,000 let alone toing and froing for a complicated rental determination.

And the valuer involved received a prestigious award at the API Excellence in Property Awards – see the real consequences below that.

Now take $470,000, deduct property operating expenses of say $90,000, which leaves a nett income of $360,000. On a plausible 7.5% return (13.3 X multiplier) tends to support the purported market value (sic) price of $4.6 million or so paid for the property.

Run through the standard formula, use say a more appropriate starting point aka market rent of $230,000, less $90,000. Use appropriate 7.5% return, suggests a more authentic ‘Market Value’ of $1.87 million. The difference here is around $3.0 million of “engineered” value!

Let us also forget about the fact that the business owner, invested in a whole new Australia Post franchise and sublet their Corporate Offices upstairs to shore up the business! After said Specialist Retail Valuer put ONE number on the table for a Professional Fee (sic) of $1,700. Check Rule: 1.1, 1.5, 1.6, 1.9 and Rules 2 and 3 of API’s Code of Conduct.

Fig. 4

In many instances, the nett portion; the starting point is WRONG. It simply flows through to WRONG being MORE WRONG.

So if someone has cracked the Codes of a comprehensive joint “value discovery” solution, to bring landlords and tenants to informed conclusion of the reasonable rent for ONE Retail Lease with reasons why, could it be reasonably valuable?

MORE CASE STUDIES; MY CUPBOARD IS FULL OF THEM

In August last year, and in quick succession, I came across the product of the Australian Property Institute’s formal https://www.api.org.au/sites/default/files/uploaded-content/website-content/avtip_10_assessing_rent_and_rent_determinations_effective_9_feb_2018_01072019.pdf just once too often.

The same pattern of behaviour was coming out. I have flagged it a few years before as being problematic.

And it was. And I have critiqued it and have offered to rewrite it.

And this is what went into my PRRES 2020 presentation in Canberra about valuation practice and or the Technical Information Paper:

Fig. 5

And

Fig. 6 (this is duplicated and I cannot delete it)

So let us put some meat on the bone; here is why I offered to rewrite the document. Here is my response to a Landlord’s Specialist Retail Valuer’s submission critiquing that their submission was nothing other than “numbers”; which breached International Valuation Standards followed by an example of how my GEM Software can catch a so-called appointed Expert breaching Australian Property Institute Codes of Ethics and Codes of Practice.

And they do nothing about fixing the Technical Information Paper (sic) or managing Codes of Ethics and or Practice. And in so doing; by doing NOTHING are breaching our (their) own Codes!        

And guess what happened yesterday. This time from another Branded Valuation Firm who would not even put a name (a real person’s name) at the bottom of their submission. It carries no weight in the argument in my opinion. And again the Branded Valuation Firm has done nothing other than cheat ………………..

So here is an actual case study of how the Technical Information Paper supposedly gives a Senior Award Winning valuer the right to blatantly cheat. All names have been changed.

It is my response, which went to the Determining Valuer:

June 2019

 Franchisor:

Franchisee:

Dear Clients

Instructions: response to Landlord’s Valuer

Thank you for your instructions to provide a response to Bill Williams’s [the Landlord’s Expert; you be the judge] submission on behalf of ABC Nominees Pty Ltd.

At a meeting convened by the Specialist Retail Valuer (‘SRV’) Mr Jones, it was agreed that it was within the parties’ interests to cross-over their respective submissions. This response addressed to the stakeholders must be considered in conjunction with the Tenant Franchisee’s initial submission [that was done by me].

At the meeting, it was submitted that the report we presented on behalf of BigEnd Pty Ltd:

1.     Clearly linked the gross rent and the store performance metrics subjected to all of the centre’s influences, the Blanchfield (catchment) influences plus the changing industry (convenience store supermarket) influences. This is clearly presented in Step 1, Option 3 of Tenant’s submission, including the store’s falling performance linked back to industry catchment issues. Of course in the period ahead will be a new Woolworths and Metcash just down the road. What adjustments will the SRV make for this competition?

2.     By far outweighing any other criteria, is that evidence must be “tested”, it must be relevant, one must show how it is relevant, and the outcome must satisfy S 29 of the Retail Shop Leases Act and it must be the ‘current market rent’;

3.     In our submission, our evidence identifies these matters, however we link it to other industry benchmarks, statistics and the Profits Method separates the Lessee’s assets and or goodwill, which is presented clearly and succinctly;  

4.     Forecast minimum maintainable sales for our modelling were circa $1.6 mill [figure altered for article]. This was linked to industry benchmarks. The Franchisee Mr Wilber now believes that $1.4 to $1.5 million is more realistic;

5.     From a body of evidence (recently negotiated convenience store leases (Millington, A. 1996), the evidence is thoroughly tested for its relevance and is presented on a Face Rental Basis and on an Effective Rental basis as follows:

a.      Step 3 of our submission clearly presents the store performance of each piece of evidence. When BigEnd Blanchfield is pitted and tested against the other stores from a store performance basis although turnover has declined for reasons clearly identified, and the store is now too large, it still trades towards the upper end of the range. Sales are in decline and new direct competition will curtail them further;

b.     Step 3 also clearly shows presents via the silver bar charts/graphs, the turnover performance necessary to pay the landlords proposed rent. That ranges at between double an “average” Woolworths and or Coles store of $10,000 per square metre to almost four times a Woolworths Coles average. Quite clearly, Steps 1 and 3, already suggest that both the current and or proposed gross rents are off the scale, and the SRV is being pointed to where the reasonable gross rent ought to lie;

c.      Step 4, shows all the evidence (on a face and an effective rental basis), including the subject shop and or industry benchmarks on an occupancy cost basis;

d.     Step 4 clearly presents that there is a body of recent evidence (Millington, A. 1996) which matches industry benchmarks and that range is circa 3% to circa 4%. Irrespective of the Geographic Area. If the evidence itself fails reasonableness tests aka a willing informed party test, how does that assist one in forming an opinion where the subject shop’s gross rent lies relative to that body of “tested” evidence?

e.      Where does the Act say that “reasonably tested evidence” with clearly defined metrics, Key Performance Indicators is limited to some Geographic Area?

f.       The purple bar graphs present face rents. That evidence I suggest fails this aspect of testing the relevance of that evidence. Notwithstanding the fact S 29 RSLA requires rents to be effective rents;

g.     The mustard coloured bar graph presents the outcome of the Profits Method. As presented in our submission, in all the circumstances one would not start a new store in a XYZ square metre shop in this centre in this location if the shop was vacant and available for lease. And when IGA and Woolworths open down the road, I believe that would be highly unlikely;

h.     Steps 5 & 6 present and link face and effective rents, industry benchmarks, the outcome of the Profits Method, the current and proposed rents, some “averages” (comprising of evidence, some of which satisfies reasonableness tests hence it is distorted) and nominates and suggests or forecasts a suggested rent on:

                                                               i.     An annual rent standardised to a shop of XYZ square metres;

                                                            ii.     On a dollar per square metre (‘$/M2’) basis;

                                                          iii.     An occupancy cost to sales basis for a convenience store trading at future minimum maintainable sales of $1.6 million;

i.       By rotating from Step 5 to 6 and vice versa, each bit of evidence can be linked and tested for relevance;

j.       Colour coding enables one to clearly link the origin of each piece of evidence back to source;

k.     The effective rents have “gathered” towards the RHS (‘right hand side’) and the face rents as expected to the LHS aka less relevant or not relevant at all;

l.       The suggested or submitted gross rent based on the evidence, industry benchmarks = $62,700 pa, = $332.00 a square metre in a XYZ square metre equivalent, = 3.5% occupancy cost on $Y million in sales;

m.   It is noted that this figure corroborates with BigEnd’s recent lease renewals which I understand is circa $67,500 on a gross rental basis;

6.     It was firmly submitted at the meeting with the SRV that:

a.      Any of the Landlords evidence (and any other) can be tested and linked to BigEnd Blanchfield’s store. If we had to run our modelling it would present in dark green;

b.     The outcome of his determination likewise could be run and tested and stress-tested for satisfying “reasonableness” tests; and

c.      This business model in this location is no longer a business that enjoys Sunday Trading exclusivity. It cannot prop up its margins. It is exposed to the wider market. A few fractions of a percentage point, have a significant impact on the gross rent. The reasonable rent.

 To remove any doubt that BigEnd’s sales are on a downhill trajectory, Mr Wilber has informed me that actual retail sales for FY 2019 closed at $1.69 million. My modelling at the time of doing our submissions suggested $1.8 million, but we believed it was pointing downwards.   

Mr Williams’s submission

This part of my response will be succinct. In ABC Pharmacies v The Landlord, Mr Williams’s determination was overturned. I assisted the Applicant as their Expert.

Mr Williams’s methodology is very similar in this submission. His evidence appears not to be “tested”, a random “number” is introduced and quite simply “engineers” the outcome.

1.     In the Executive Summary, the Assessment fails to comply with S 29. All rents must be grossed up otherwise it has the potential of being misleading. The Gross Rent here is around $110,000 = $582.00 per square metre = 6.1% of future minimum maintainable sales referring to Steps 5 & 6 of our submission. And not $90,000 as submitted by Mr Williams;

2.     Referring to Steps 5 & 6 of our submission, Mr Williams’s suggested or submitted “assessment” of $110,000 gross would be off the scale of either “face” or “effective” rents;

3.     Referring to Step 3, BigEnd Blanchfield needs to trade at $2.75 million pa to trade at the highest relevant industry benchmark equivalent to an occupancy cost of 4.0% of future minimum maintainable sales (and industry benchmarks in itself is an “average” aka it is “untested”) in order to pay Mr Williams’s suggested or submitted gross rent using flawed evidence;

4.     Over and above Pt. 3 above, the SRV is not just valuing the lease at the effective date of the lease, he / she is considering the term of the lease, rent increases, etc including new competition;

5.     The submission by Mr Williams on page 10 states: “In accordance with the Lease, the existing fitout within the premises is Lessee owned and has been disregarded in our assessment.” Where are his adjustments? Our submission clearly shows the consequences if one were to start a store for a vacant shop. The lease would not proceed. Reference mustard coloured charts;

6.     The “Market Commentary” under Pt. 7 on page 12 links nothing back to the shop, the centre, the precinct, introduction of Sunday trading, etc. Where are factors more relevant. Oh. How about a new Woolworths and IGA in the immediate catchment? As a qualified economist I suggest within this context the Market Commentary shows little relevance for BigEnd Blanchfield;

7.     Mr Williams’s evaluation of the Brisbane, the Local Market and Blanchfield Market links nothing back to the shop, centre or catchment. Step 1 Option 3, including our narrative in our submission clearly does all of that, including linking the store performance to the rent;

8.     In Pts. 8 and 9, Mr Williams nominates that he uses adopts “effective market rent” using the Direct Comparison Approach. Let us try to understand what he has done:

a.      All rents are presented on a Gross Face rental basis (sic); the Act prescribes Effective Rent;

b.     None of the evidence forms a “body of evidence” that has been “tested” for its veracity in any way. They could be numbers from anywhere;

c.      If one notionally imputes evidence no. 5 and applies it to the BigEnd Blanchfield shop what does it mean? Notwithstanding the fact that Steps 5 and 6 = “Gross Face Rents”, $935.00 X XYZ = $176,715 = 9.8% of turnover = 2/3rds more than the “reasonable rent” aka all indicators support a gross annual rent of 1/3rd of what Mr Williams suggests presented by this evidence alone;

d.     Evidence No. 1 of Branded Valuer Firm Report relates to Emerald Hill Convenience Store. There is no lease agreement in place. Annual sales are $300,000. Applying even the most elementary of business maths, this business ought not to pay rent; they should close down [this business will be closing down 21.3.2020]. The gross purported “face” rent = an astonishing 20.0% of turnover. The matter is subject to court action. From what I understood calling the owner they were sold the business on purported sales of $15,000 per week. They in fact annualise are around $6,000 per week or thereabouts;

e.      BigEnd’s Ashmore’s lease renewal called Evidence no. 2 in Branded Valuer Firm Report included 6 months rent free plus $100,000 fitout. The latter has been ignored by Mr Williams. The gross FACE RENT was $440.00 per square metre = $83,160 in a XYZ square metre equivalent presented as Expert Evidence 7 represented by purple bar graphs in Steps 5 & 6. Properly presented as Tenant Evidence 14, the gross effective rent was $291.00 per square metre X XYZ square metres = $55,078 = 3.1% of minimum maintainable sales of $Y million. This “evidence” is clearly engineered;

f.       Evidence no. 3 in Branded Valuer Firm Report relates to a determination which is not presented as a determination, but if it was how is it relevant? Referring to Expert Evidence 5 in purple and Tenant Evidence 12 on pages 17 and 18 of our submission. In Step 4 Emerald Hill BigEnd’s rent as determined = 5.3% of turnover; well outside industry standards at the start of a lease;

g.     Given the outcome of Mr ANOTHER determining valuer’s determination (in Pt. f. above) was applied to BigEnd Blanchfield, the gross rent is the highest “face” rent of the whole data series and if applied to a XYZ square metre equivalent = $95,520 = $505.00 a square metre = 5.3% of turnover in Steps 5 & 6 of our submission. Is this the “reasonable rent”? This evidence I suggest is to be given no weight and appears on the far LHS by purple and yellow bar graphs;

h.     Evidence 4 from the Branded Valuer Firm Report is almost 5 years old. Apply a gross rent of $831.00 per square metre to a XYZ square metre equivalent whose projected minimum maintainable sales = $Y million = $157,059 pa = 8.73% of turnover = a gross rent of around 135.0% above the “reasonable rent”. Branded Valuer Firm suggested gross rent would be off the scale of any of the “tested” evidence. This again “untested” evidence = $157,059 / estimated sales of $1,400,000 = 11.2% of turnover;

i.       We strongly submit that none of Mr Williams’s evidence has been “tested” nor is relevant, nor does he show and or link it to BigEnd Blanchfield;

j.       It is respectfully submitted, had Mr Williams taken “tested” evidence, properly applied known incentives to the tested “evidence” and shown the relevance linked to BigEnd Blanchfield, and the product was is the “reasonable rent”, which he then made adjustments for likely events eg. A new Woolworths shop, then perhaps he may have given me something to respond to and respond about.   

Conclusion

In sum, it is disappointing to have to make such a response.

The rent suggested or proffered by Mr Williams does not comply with S 29 of the Retail Shop Leases Act; it is not the gross rent.

None of Mr Williams’s evidence per se appears to have been “tested” for being the “reasonable” rent. All the evidence provided as stated in his report is not based on an effective rental basis; it is “face rent”. Some of it is not even “evidence”.

Evidence 1 of Branded Valuer Firm report does not exist. Evidence 2 as presented is the face rent. He says it includes 6.0 months free rent, but this is not included in the calculations. This excludes $100,000 worth of fitout. This presents as Expert Evidence 7 and Tenant Evidence 14 of Steps 5 & 6 of our submission aka the gross effective rent applied to the BigEnd Blanchfield shop equates to $291.00 a square metre, not $440.00 a square metre, or $55,078 per annum gross, not $83,160 per annum for a XYZ square metre equivalent.

Evidence 3 of Branded Valuer Firm Report is from a determination. It appears as Expert Evidence 5 and Tenant Evidence 12 on the far LHS of Steps 5 & 6 of our submission. Applied to a XYZ square metre equivalent shows this “evidence” to be the highest of all the evidence in the range we presented.

Evidence 4 is old evidence = 11.2% of current sales.

Evidence 5 if applied to a XYZ square metre shop whose future minimum maintainable sales are $Y million is off the scale of anything.

Mr Williams then has taken the “untested” evidence of face rents, he has taken the highest and lowest, got some form of “average” and applied it to the BigEnd Blanchfield shop.

The product of these numbers, is another number (adjusted for “incentives”; where does that number come from; why not get access to the “effective rents” and test that evidence) which he says is $110,000 per annum. When “tested” against Key Performance Indicators of BigEnd Blanchfield they would not satisfy any “reasonableness” test.

I believe that our first report leaves both the reader and the SRV under no doubt where the reasonable rent ought to be for an equivalent BigEnd Blanchfield shop, in a XYZ.0 square metre store, from tested evidence, which states the reasons why. I quote from Pt. 8 on pg. 15 of our submission:

1.     “Referring to Steps 5 & 6, falling between key Benchmark Evidence applicable to this business model presented by silver bar graphs, again lies Tenant Evidence 9, 14, 11 and 8, the “Average Tenant Evidence”;

2.     Actual annual rents within this range falls from $54,000 (aka $286.00 per square metre in XYZ square metre equivalent) to say $72,000 or $381.00 a square metre;

3.     The modelling takes an “average” from the range and predicts a gross rent of $61,773 referred to by the red bar graph;

4.     Given that physically, the BigEnd Blanchfield store’s sales have collapsed since FY 2011 by $750,000, that the rent had escalated by circa $40,000, in turn which calls for sales of $1.15 more assuming a 3.5% occupancy cost to cover operating expenses, amortisation, etc. to maintain the status quo, turnover ought to be $3.6 million to justify a the Landlord’s proposed gross rent of $142,500;

5.     In the alternative, the shop could now trade out of say 125.0 square metres at previous productivity levels.”

If there is anything and I repeat anything that the SRV needs to verify our evidence, our submission, etc. he is free to contact us.

Notwithstanding the fact sales have fallen by $750,000 alone calling for an adjustment for pre-2011 levels, what adjustments will the SRV make for this most likely compression of sales?

This is not an arbitration, and BigEnd have a good body of evidence for this business model across a wide geographic area. I will test it as required.

Your faithfully

Response must be read in conjunction with our first report              

And here is evidence of blatant cheating by our Profession.

Fig. 7

The above bar graph, is Step 6 of my interactive GEM Software, which is a comprehensive joint “value discovery” solution, to bring landlords and tenants to informed conclusion, of the reasonable rent for ONE Retail Lease with reasons why.

We can interrogate any rental determination retrospectively (see purple bar graphs) for its veracity and overturn it, including if evidence is claimed as being based on effective rents. But our evaluation of the very same data which is presented by yellow bar graph adjusted for incentives, which a valuer is compelled to use under the law shows how this valuer had done nothing other than:

1.     Act as an advocate: breach Code of Conduct Rule 1.1; Rule 2; Rule 3; and probably several others;

2.     Skewed the determination (sic) to the highest end of what in effect was “specious evidence” the purple bar graphs;

3.     Failed to properly evaluate the real evidence in the market place and or apply that evidence in making his her determination;

4.     Failed to determine the rent at current market rent;

5.     The outcome fails IVS (‘International Valuation Standards’);

6.     Effectively promotes a two-tier market;

7.     Hopelessly fails other stakeholders in the mix. Bankers. Investors, potential investors, the franchise industry, buyers of the business, etc;

8.     Fails our Profession in the eyes of the Community.

WHY IS GEM INTELLECTUAL PROPERTY SO VALUABLE?

Go to Figure 2. Valuers are effectively taking Tenant Lease Schedules and with some naval gazing, and some evaluation of the data, converting the numbers into Market Value. Aka in effect, going from $1,600 on a square metre, deducting landlord operating expenses and applying some kind of multiplier and justify it as market value.

WRONG2 X WRONG3 = WRONGxxx

As Lewis Carrol wrote, “If you do not know where you are going any path (metric) will get you there”.

GEM Intellectual Property, which is copyrighted in 16 pivotal papers, contains reasoning analysis justification which starts at the very beginning WRONG2: starts with my very first paper with a key assumption which flows through the software:

#updated 7/2/2021 'Economics: a most useful Tool for the Valuer.' (Gilbert, D. 1993) GEM Analytics? software, which examines and analyses leases, uses a pivotal assumption: the concept was first considered in my first professional paper insofar as using future maintainable sales for a lease period ahead. The Copyright Act 1968 recognises that copyright in a work that “In addition, there is a separate and basic concept that copyright is not infringed unless a substantial part of the work has been used. The concept of 'substantial' in the legal sense means quality rather than quantity. In other words, a single key table of information from a publication may be 'substantial' in that it is a key summary of the text of the article itself.(39)”. In this instance it is a key assumption that flows throughout GEM Analytics? software. Of course software being a 2.2 Copyright - covers rights in original literary, artistic, dramatic or musical works as well as films, broadcasts and sound recordings and includes new developments such as computer software.

Current Market Rent (Gilbert, D. 1995), he revisits this in 2004 (Market Rent Revisited); he starts searching for the consequences of the Industry and the Profession’s behaviour from 2006 through to 2009 in several papers, in January 2011 he presents a pivotal breakthrough in regard to the invention of his software to evaluate the reasonable rent for one retail lease aka (now scaled, fully coded, almost automated and substantially refined with nuances teased out)

https://www.prres.net/papers/Gilbert_Matching_market_demand_to_supply_market_rental_valuations.pdf he explores the consequences of industry behaviour and explored the pitfalls of the Comparison Method and the Profits Methods in around 2017, by which time he is committed to use his own funds to “Black Box” same for the International Market.

So what the software does (described in letter above), is intensely evaluate and “segment’ a retail market eg. into specific permitted uses such as supermarkets, restaurants, coffee shops, etc. to evaluate the evidence for its veracity, to link it to other benchmarks for example, to standardise the metrics on a common scale eg. future maintainable sales and foot plate of the actual business, and also bring in a separate methodology i.e. The Profits Method for comparison purposes.

Given each data series is colour coded, ranged and re-arranged, it can easily be evaluated and one can appreciate what the reasonable rent ought to be and why?

A completely different part of the comprehensive joint “value discovery” solution, for ONE Retail Lease is:

1.     To take a sample of leases for ONE Investment Property for due diligence purposes OR to evaluate the veracity of valuer appraiser’s market value opinions;

2.     To stress-test a body of lease rental evidence;

3.     To stress-test retail property, to link low low interest rates to so-called perpetual growth advocated by Central Banks, the folly of low interest rates to high house “price” vs bona fide value, etc. https://www.dhirubhai.net/pulse/gem-three-extrapolated-don-gilbert/?trackingId=XeU0K4jowBx1BhsFUO133g%3D%3D and

4.     Modelling linked to geared assets: https://leaseconsultant.com.au/papers-article/evaluating-the-reasonable-rent-for-multiple-retail-lease/

Conclusions

There are 10s of 1,000s perhaps several thousand mispriced leased assets (retail premises up and or down) in Australia alone, let alone around the World. I have already canvassed this. It is a problem World-Wide.

A lot of work aka jobs will be created to reappraise what the reasonable rent ought to be for these leases.

The GEM Software methodology does not tell a party, tell the parties what rent one should pay for a retail site, for a specific lease use. It brings the parties to a reasonable conclusion what the reasonable rent should be and why.

100’s of millions perhaps billions of dollars are swinging swing on these misplaced metrics (rental dollars) which flows on into “value dollars”.

10’s of 1,000’s of businesses fail annually because over time leases were entered into at the wrong rent, they have escalated contrary to the business metrics, and in fewer cases, leases are mispriced in favour of the tenant business.

As stated above, further work has been done linking leases and rents to market value, house prices, monetary policy, bonds, etc.

I believe this is pivotal work which one day will be recognised.

 ? Donald E Gilbert as Trustee Gilbert Family Trust 2020