Option Appraisal

• Property search
• Report on options
• Option Appraisal
• Financial appraisal
• Non-financial factors

Having identified a suitable area to relocate to, the department's options should be determined through a two stage process:

1) an initial property search for a suitable site or building in the preferred region; and
2) a report on options and further investigations.

These should consider:

• the relative merits of options involving freehold or leasehold acquisition,
• private developer schemes, PPP/PFI, or major new build.

Once the main options have been identified, the department should carry out an option appraisal which takes account of the financial and non-financial aspects of each alternative.

The specification of requirements should be used to appoint and brief property advisers to carry out a search for properties within the chosen region which meet the specification. The quality of these advisers is a key factor in ensuring a search that identifies all the department's options. They should be estates professionals with proven knowledge of the local property market in the area of the proposed search.

The advisers should use pre-set criteria in evaluating a possible site or building. These should reflect those used to select a region, although on a smaller scale. The criteria will differ slightly, depending on whether it is a building or a site which is being assessed.

The scope of the property search will differ depending on the brief, but it should usually cover a number of sources. These include:

• the property adviser's database,
• properties available in the area through other property advisers,
• the availability of surplus space,
• local authorities; institutional and private property owners, and
• information on any vacant property already on the Government's estate from OGC.

Where PPP/PFI solutions are being sought, the department should assemble an information pack which, as well as the user's requirements, should contain details of any other properties, particularly vacant ones, that can be used by the private sector in developing a PFI solution. Any publicly funded alternatives to PFI should also be indicated to allow bidders to propose solutions which might offer better value for money.

Once the search has been completed, the property advisers should report to the department on the options which fit the brief.  The report should contain:

• details of all the properties including size,
• full specification of the building and acquisition terms, and
• advise on the advantages and disadvantages of each option.

The department will need to consider which of the options are practically available to them and those which best meet their needs. The major determining factors are likely to be:

• funding constraints,
• the timing and duration of the requirement, and
• the availability of property which meets the specification.

As well as construction, the main alternatives are likely to be:

• freehold purchase,
• leasehold acquisition, and
• private developer schemes.

Construction and private developer options are likely to provide most scope for PFI solutions.

Having identified the alternatives on the Civil Estate and the commercial property market, the options should be supported by an appraisal in order to obtain Treasury approval for the acquisition. This appraisal should cover both financial and non-financial factors. The key Treasury guidance on option appraisal is:

• Economic Appraisal in Central Government: A Technical Guide for Government Departments (the "Green Book"): January 2003; and .
• The Economic Appraisal of Property Options: A Manual of Procedures and Techniques: December 1993.
  
  

The appraisal should compare the costs and savings arising from the various alternatives. Advice should be obtained on the likely magnitude of these costs from property advisers. The costs should be appraised over the length of the building lease or the appropriate period indicated in Treasury guidance unless there are compelling reasons for choosing a different period; if a longer period is chosen then additional items such as the cost of refurbishments should also be included. The appraisal should indicate the net present value of the options based on the discount rate indicated in Treasury guidelines.

Appraisals should initially be prepared on the basis of:

• estimated rents,
• purchase prices, or
• construction costs, and
• should be subjected to sensitivity analysis for charges in key variables.

This analysis should cover:

• changes to estate variables, and
• those concerning staffing matters.

For example, a sensitivity analysis could identify the possible impact of staff unwillingness to move by calculating the net present value for the relocation for differing levels of staff resignations.

Common option appraisal weaknesses (Source: National Audit Office)

• Departments appraise only a limited number of options;
• options are discounted over an inappropriate period;
• appraisals for the construction of a new building exclude the residual value of the building at the end of the appraisal period;
• some costs are excluded. For example the appraisal fails to reflect the cost of dilapidations at the end of a lease or, where the department will own the new accommodation, that a major refurbishment is usually necessary after twenty-five years;
• the cost of managing the property vacated by the relocation is greater than expected as disposal takes longer than planned; and
• inadequate sensitivity analysis is performed.

The option appraisal should also consider the non-financial aspects of each available property or site. This will involve assessing the extent to which each option meets the criteria set out in the department's statement of requirements, bearing in mind the priority attached to each aspect.

In assessing the treatment of non-financial factors in appraisals, departments should be aware of the impact on the overall case for the acquisition. Where possible, significant non-quantifiable factors should always have a value attached to them, though these will have to be estimated.