A ten-year survey cost schedule turned into one price deduction, and why the items after your exit still come off your price.
To price a building survey into the purchase price, load each item for fees and contingency, inflate it to the year it falls due, discount it back to today, and include the items that fall after your own exit, because the next buyer will deduct them from your sale price. On an illustrative £24.0M office, a survey schedule of £2,350,000 at today's prices is worth a deduction of £2,430,728, 10.13 per cent of the price. Pricing only the works inside a five-year hold gives £1,225,274, half the true figure.
Worked in full in Real Estate Transaction Due Diligence by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A buyer has agreed £24.0M for a multi-let office producing £1,440,000 of net operating income, a 6.00 per cent yield. The building survey returns a ten-year schedule of landlord's capital items that the leases do not allow to be recovered through the service charge. The buyer's committee wants one number to put to the seller. All figures are illustrative.
| Item | Year due | Cost at today's prices |
|---|---|---|
| Roof recovering | 1 | 420,000 |
| Chiller replacement | 3 | 650,000 |
| Lift modernisation | 6 | 380,000 |
| Facade and windows | 9 | 900,000 |
| Total | 2,350,000 |
Pricing assumptions: professional fees of 12 per cent and a contingency of 10 per cent on the works, construction cost inflation of 3.5 per cent a year, a discount rate of 7.0 per cent, and a hold of five years.
Each item goes through three steps. The loading is applied first, because a surveyor's figure is the contract sum, not the cost to the owner: (1 + 12%) × (1 + 10%) = 1.232. The loaded cost is then inflated to the year it falls due, and the result is discounted back at the buyer's rate.
PVi = Costi × 1.232 × (1 + 3.5%)t / (1 + 7.0%)t
Roof: 420,000 × 1.232 = 517,440; inflated to year 1, 535,550; discounted, 500,514
Excel: =C2*(1+12%)*(1+10%)*(1+3.5%)^B2/(1+7%)^B2
| Item | Today | Loaded | Inflated | Present value |
|---|---|---|---|---|
| Roof, year 1 | 420,000 | 517,440 | 535,550 | 500,514 |
| Chillers, year 3 | 650,000 | 800,800 | 887,861 | 724,759 |
| Within the hold | 1,070,000 | 1,318,240 | 1,423,412 | 1,225,274 |
| Lifts, year 6 | 380,000 | 468,160 | 575,488 | 383,472 |
| Facade, year 9 | 900,000 | 1,108,800 | 1,511,181 | 821,982 |
| After the hold | 1,280,000 | 1,576,960 | 2,086,669 | 1,205,454 |
| Total deduction | 2,350,000 | 2,895,200 | 3,510,080 | 2,430,728 |
The buyer spends the roof and chiller money itself, in cash, during its ownership. The lifts and the facade fall due after it has sold. That does not make them someone else's problem. The next buyer's surveyor will find them, and at the end of year 5 will deduct their loaded, inflated cost discounted to that date: £1,690,712 off the exit price. Brought back to today, that exit deduction is £1,205,454, exactly the present value of the two items. Under a consistent discount rate it makes no difference whether you pay for works yourself or through a lower sale price.
The ask to the seller is the whole £2,430,728, not the £1,225,274 the business plan will spend. Taking that deduction moves the price to £21,569,272 and the yield from 6.00 to 6.68 per cent, 68 basis points.
| Inflation | 6% discount | 7% discount | 8% discount |
|---|---|---|---|
| 2.5% | 2,426,784 | 2,314,611 | 2,210,517 |
| 3.5% | 2,550,864 | 2,430,728 | 2,319,315 |
| 4.5% | 2,682,511 | 2,553,851 | 2,434,606 |
The deduction moves by about £120,000 for each point of inflation or discount rate, and the two largely cancel if they move together, as they tend to when the discount rate is built from a real return plus expected inflation. What moves it far more is the treatment of the items after the hold. If you believe the exit buyer will price only half of them, the deduction falls to £1,828,001; if none, to £1,225,274. That is a judgement about the next buyer's diligence, and it should be written down as one rather than buried in the discount rate.
Two mistakes are common and they pull in opposite directions. The first is to take the survey total at today's prices, £2,350,000, and present it as the deduction. Here it happens to land within 3.4 per cent of the right answer, because loadings and inflation roughly offset the discounting. That is luck, not method: bring the facade forward or push the discount rate down and the gap opens, and the seller's adviser will be the first to point out that unloaded, undiscounted figures are not a valuation.
The second is to price only the works the buyer will itself carry out, because those are the ones in the business plan. That loses £1,205,454, half the answer, and the buyer finds it again at exit as a price chip it cannot recover. The diligence exercise exists to move cost to the seller before exchange; a schedule priced to the hold only gives half of it back. The value of what a diligence exercise recovers depends on pricing findings this way.
The free workbook for this case sits alongside a blank set that includes a model for turning findings into price, with the survey schedule worked the same way.
Yes, in most cases. The next buyer's surveyor will find the same items and deduct them from the exit price, so you bear them either way. In the example the two items after year 5 cost £1,690,712 at exit, which is £1,205,454 today, almost exactly half of the £2,430,728 total deduction.
Survey schedules usually price the works alone. Professional fees and a contingency should be added before discounting; at 12 per cent fees and 10 per cent contingency the loading factor is 1.232, so a £420,000 roof becomes £517,440 before any inflation. Whether VAT is also added depends on the buyer's recovery position.
Only by accident. In the example the loadings and inflation roughly offset the discounting, so £2,350,000 at today's prices lands within 3.4 per cent of the £2,430,728 present value. Change the timing or the rates and the gap opens: at 4.5 per cent inflation and a 6 per cent discount rate the deduction is £2,682,511.
This article is one calculation from Real Estate Transaction Due Diligence. 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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