Halving back puts shops of different depths on one footing. It tells you what the comparable implies, not what the occupier can pay.
Zone A rent is calculated by dividing a shop's floor into strips of equal depth from the frontage, weighting them 1, ½, ¼ and ⅛ (halving back), and expressing the result as area in terms of Zone A (ITZA). A comparable let at 95,000 on 65.32 m² ITZA gives a Zone A rate of 1,454 per m², and applied to a deeper 196 m² subject shop with 83.21 m² ITZA it gives a rent of 121,013, not the 155,167 that the comparable's overall rate per m² would suggest. Then test it against the tenant's sales, because a zoned rent can be arithmetically right and still unaffordable.
Worked in full in Retail Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Zoning exists because the front of a shop earns more than the back. Shoppers see the window and the first few metres; the stockroom at the rear sells nothing. Comparing rents per square metre of total area between shops of different depths therefore compares different things. Halving back puts every shop on the same footing, the value of one square metre of the front zone, so that a rent agreed on one unit can be applied to another.
| Input | Comparable | Subject |
|---|---|---|
| Frontage, m | 6.0 | 7.0 |
| Depth, m | 20.0 | 28.0 |
| Ground floor sales area, m² | 120 | 196 |
| Rent agreed, a year | 95,000 | to find |
ITZA = Zone A + Zone B ÷ 2 + Zone C ÷ 4 + remainder ÷ 8
Zone A rate = rent ÷ ITZA
In Excel, with frontage in F, depth in D and zone depth 6.1: Zone A is =F*MIN(6.1,D), Zone B =F*MAX(0,MIN(6.1,D-6.1)), Zone C =F*MAX(0,MIN(6.1,D-12.2)) and the remainder =F*MAX(0,D-18.3).
| Zone | Area, m² | Weight | m² ITZA |
|---|---|---|---|
| A, 0 to 6.1 m | 36.60 | 1 | 36.60 |
| B, 6.1 to 12.2 m | 36.60 | ½ | 18.30 |
| C, 12.2 to 18.3 m | 36.60 | ¼ | 9.15 |
| Remainder, 18.3 to 20.0 m | 10.20 | ⅛ | 1.275 |
| Total | 120 | 65.325 |
95,000 divided by 65.325 m² ITZA is a Zone A rate of 1,454.27 per m². That is the figure an agent would quote as the evidence: "Zone A of 1,454".
| Zone | Area, m² | Weight | m² ITZA |
|---|---|---|---|
| A | 42.70 | 1 | 42.70 |
| B | 42.70 | ½ | 21.35 |
| C | 42.70 | ¼ | 10.67 |
| Remainder, 18.3 to 28.0 m | 67.90 | ⅛ | 8.49 |
| Total | 196 | 83.21 |
83.21 m² ITZA at 1,454.27 is a rent of 121,013 a year. The remainder is 35 per cent of the subject's floor area but only 10 per cent of its rent; Zone A alone carries 51 per cent. On a total-area basis the subject pays 617 per m² against the comparable's 792, and both are the same Zone A rate.
Zoning tells you what the comparable implies. It does not tell you whether the occupier can pay it. Retail is the one asset class where the tenant's sales can be checked, so check them with the occupancy cost ratio: rent, service charge and business rates over sales excluding VAT.
| Line | Amount |
|---|---|
| Sales excluding VAT | 950,000 |
| Zoned rent | 121,013 |
| Service charge | 18,000 |
| Business rates | 45,000 |
| Occupancy cost, 19.4% of sales | 184,013 |
| Rent sustainable at a 15% ceiling for this trade | 79,500 |
At a 15 per cent ceiling the occupier can carry 142,500 of total occupancy cost; after service charge and rates that leaves 79,500 of rent, a Zone A of 955. The zoned rent is 41,513, or 52 per cent, above what the trade supports. To afford it the shop would need sales of 1,226,755, 29 per cent more than it takes.
| Depth, m | Area, m² | m² ITZA | Rent | Rent per m² overall |
|---|---|---|---|---|
| 12 | 84 | 63.35 | 92,128 | 1,097 |
| 20 | 140 | 76.21 | 110,833 | 792 |
| 28 | 196 | 83.21 | 121,013 | 617 |
| 40 | 280 | 93.71 | 136,283 | 487 |
More than tripling the depth from 12 to 40 metres adds less than half to the rent. That is the point of zoning, and also its limit: the ⅛ weight on deep space is a convention, not a measurement of what that space earns for a particular retailer.
The common mistake is to take the comparable's overall rate, 792 per m², and multiply it by the subject's 196 m². That gives 155,167, 34,153 or 28 per cent too much, because it prices the subject's deep rear space as if it were shop front. The second mistake is to stop at the zoned figure. A Zone A rate is evidence of what one tenant agreed on one unit; whether the next occupier can pay it is a question the sales answer, and here they answer no.
Zone the comparable, divide its rent by its ITZA, apply the rate to the subject's ITZA, then check the result against the occupier's sales. Here zoning gives 121,013 and the sales support 79,500. The occupancy cost test is run unit by unit in the free workbook for this case; how to calculate a retailer's occupancy cost ratio sets out the ratio and its trade ceilings, and the sales growth article shows how fast the gap reopens under indexation.
In terms of Zone A: the shop's floor area expressed as an equivalent area of front zone. Zone A counts in full, Zone B at half, Zone C at a quarter and the remainder at an eighth. A 7.0 m by 28.0 m shop of 196 m² is 83.21 m² ITZA with 6.1 m zones, so a Zone A rate of 1,454 gives a rent of 121,013.
It is the metric form of the traditional 20 foot zone used in the UK. Other markets and some valuers use different depths, and the depth must be the same for the comparable and the subject. Changing it changes the Zone A rate derived from a comparable, so state the convention with the figure.
No. Zoning transfers a rate from one unit to another; it says nothing about the subject occupier's trade. In the illustration the zoned rent of 121,013 puts occupancy cost at 19.4 per cent of 950,000 of sales against a 15 per cent ceiling, so the sustainable rent is 79,500, a Zone A of 955.
This article is one calculation from Retail Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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