Registered club valuation

Valuations of Registered Clubs are most commonly prepared for either mortgage or financial reporting purposes. The two valuation purposes will involve the application of different valuation methodologies.

Instructions for mortgage valuations usually require a market value assessment on one or more bases, namely:

• Alternate use with vacant possession
• Subject to a notional lease (sometimes referred to as a continued use)
• Notional going concern

An alternate use assessment will require an assumption of vacant, or unoccupied, real estate with the prospect for a use, alternate to that of a Club. This assessment necessitates the examination of relevant environmental planning instruments, to ascertain what uses are permissible on the subject land. Other issues requiring special consideration may include the following:

• In a number of instances Clubs are located on land zoned open space or special uses which may limit alternate uses under the zoning
• Different tenures, such as Crown and special leases, may complicate use and transfer/assignment requirements and therefore impact on value
• Special provisions relating to Clubs and aged housing under State Environmental Planning Policy may also require examination
• Improvements, sometimes physically substantial, may have limited or no functionality with the alternate use envisaged

Valuation methods employed will vary depending upon the alternate uses identified. Most commonly this will involve direct comparison and hypothetical development approaches.

Where valuations are sought on the notional lease or notional going concern bases it is most usual to apply a capitalisation of net income method. Perhaps the most common example of this is to determine a rental that the Club operation could afford to pay and then determine a value of the real estate subject to a notional lease. Advice on this basis, also known as a continued use, would require analysis of the trading performance of the Club business. Accordingly an understanding of the following is required:

• Departmental revenues and benchmarks
• Gross profit margins and stock levels
• Expenditure items including adjustments and add backs

The notional going concern is a less used instruction basis as it assumes a scenario which includes both a plant and equipment value and a goodwill component. This is a scenario however which cannot be realised. The provisions of the Registered Clubs Act 1976 do not enable a club in NSW to distribute profits. Thus restriction means a Club does not meet one of the fundamental tests of a normal going concern valuation, such as a hotel or motel.

Similar to a hotel a Club can operate Poker Machines in NSW under the auspices of the Gaming Machines Act 2001. Both Hotels and Clubs are able to trade Poker Machine entitlements (PMEs) and markets exist for same. However the values of these trades are vastly different. Hotels are not permitted to trade with Clubs and vice versa, therefore the dynamics and composition of the two markets are significantly different. In general terms Club PME’s are 10-15% of the value of a Hotel PME.

Amalgamations are another area requiring consideration. An amalgamation in most cases only occurs when a Club, or in some instances both Clubs, are in a financially distressed position. In these circumstances an amalgamation does not usually involve an agreement to purchase another Clubs assets, rather an agreement to take on the weaker Clubs liabilities. Whilst amalgamation may be an exit strategy for a lender, it is not a factor in which a valuation can be predicated.

Aside from mortgage valuations, opinions are often sought in relation to financial reporting assessments. These assessments are generally made under the Australian Accounting Standards framework (AASB 116). These assessments are predicated on the fair value concept and require the inclusion of assumptions regarding continuation of existing use. Financial reporting valuations most commonly rely on the depreciated replacement cost method of valuation.

Financial reporting assessments are predicated on different underlying assumptions to mortgage valuations and the two rarely accord.

Unlike most other property classes there is no active market place for the buying and selling of Club premises. This feature, coupled with the nuances associated with the differing bases of valuation, requires the knowledge of a specialist practitioner, familiar with the Club industry, hospitality markets, as well as planning and environmental law. For further information, contact our Industry Specialist, Greg Jones.

Greg Jones

Ph: (02) 4305 5403

Mb: 0414 187 911

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