Going-concern value calculator
Capitalise fair maintainable operating profit at a yield to estimate the going-concern value of a trading hotel, pub or restaurant.
A trading hospitality property is valued as a going concern: the fair maintainable operating profit capitalised at a market yield. This calculator does exactly that. Enter the fair maintainable operating profit, the yield and, if you want a buyer-side figure, the purchaser’s costs. It returns the gross value and the net value after purchaser’s costs, updating as you type. It is the calculation behind the completed value a lender measures against and the value a refinanced property settles on, so it underpins the other tools in this set.
- Net value (after costs)£0
- Purchaser’s costs£0
- Value per £1 of profit£0
Indicative only. Not financial advice or an offer of finance.
The profit divided by yield relationship
- Gross value = fair maintainable operating profit ÷ yield. Worked as a decimal: 500,000 pounds at 5 percent is 500,000 ÷ 0.05 = 10,000,000 pounds.
- Net value (after purchaser’s costs) = gross value ÷ (1 + purchaser’s costs). This reflects that a buyer’s total outlay, including stamp duty and fees, has to deliver the target yield.
- Value per £1 of profit is the inverse of the yield, so a 5 percent yield values every pound of profit at 20 pounds.
Fair maintainable operating profit is the profit the property should earn in competent hands, after the costs of running it and before finance costs. The yield is the relationship between that profit and the price an investor will pay: lower yields produce higher values for the same profit, and they reflect a prime location, a strong operator or a tight market. Because value is profit divided by yield, a small change in either input moves the figure significantly, which is why a proven, sustainable trade on a keen yield is worth so much more than an unproven one. This going-concern value is the completed value the loan sizing calculator measures against, and the value that drives the refurbishment value uplift. For how we arrange finance against it, see our commercial mortgages for hospitality property.
Going-concern value: common questions
What is the formula to value commercial property on rental income?
Divide the net operating income by the net initial yield expressed as a decimal. Net operating income of 500,000 pounds at a 5 percent yield gives a gross value of 10 million pounds, because 500,000 divided by 0.05 is 10,000,000. This income-capitalisation approach is how investors value income-producing commercial property.
How can I value my commercial property?
For an income-producing asset, capitalise the net operating income at a market yield. Establish the annual net income the property produces after running costs, choose a net initial yield appropriate to the asset, the location and the covenant, and divide the income by the yield. For a formal figure a RICS valuer should be instructed, because the yield and the income both need careful judgement.
What are purchaser's costs and why do they matter?
Purchaser's costs are the costs a buyer pays on top of the price, such as stamp duty, agent and legal fees. A net or capital value is the gross value divided by one plus the purchaser's costs percentage, because the buyer's total outlay including those costs needs to deliver the target yield. Quoting net of purchaser's costs gives a more realistic figure for what a buyer would actually pay.
What does the yield tell you about value?
The yield, known in the United States as the cap rate or capitalisation rate, is the relationship between income and price. A lower yield or cap rate means a buyer will pay more for the same income, usually because the asset is prime, well-located or has a strong covenant. A higher yield means they pay less, reflecting more risk. Because value is income divided by yield, a small move in the yield moves the valuation significantly, which is why the figure here is an indicative estimate rather than a formal valuation.
What is the loan-to-value ratio for a hospitality property?
Loan to value (LTV) is the loan expressed as a percentage of the property's value. On a trading, income-producing hospitality asset, lenders commonly advance up to around 60 to 70 percent LTV, with the loan often constrained by debt service cover rather than LTV alone. Where the trade is still being built after a purchase or refurbishment, the value is lower and lenders price the risk, so leverage is more conservative until the income is proven. All bands are indicative, vary by lender and format, and are not an offer of finance.
Related calculators and finance
Valuing a trading property?
Send us the trading accounts and the yield and we will model the value and the debt it supports across our lender panel.