By Kwaku Obeng Mireku (Chauser)

Estate and valuation surveyors would need to be extra cautious when practically answering the questions, ‘what is goodwill’ and ‘what is premium’ in Kumasi’s commercial property market. The concept of goodwill and premium as taught in textbooks and lecture halls apply in reverse order. In fact, the practice is in defiance with theory.  

The International Financial Reporting Standards (IFRS) define goodwill as future economic benefits arising from assets that are not capable of being individually identified and separately recognized. However, goodwill is capital. Johnson et al (2000) define the goodwill of a business as the probability of a business being carried on at a certain level of profit. “In effect it is the value of the business itself as a capital asset, distinct from (a) the premises, (b) the trade in stock and other chattels, and (c) the profits and income from the business. Where a trader has been in business in a certain premises for a number of years he will have acquired a circle of regular customers on whose patronage he can rely; he will also be able to count on a fairly steady volume of casual custom…” It is this probability of profits being maintained, or even increased, in the future which constitutes the “goodwill” of a business”. Goodwill is often not readily available for consumption. 

Goodwill is of two kinds - ‘Cat’ and ‘dog’ – goodwill. The September, 2008 edition of the RICS’ Commercial Property Journal is a good start to learn more about ‘Cat’ and ‘Dog’ goodwill (www.rics.org). However, valuation surveyors have used the expressions ‘cat goodwill’ and ‘dog goodwill’ to mean different aspects of the concept. The cat goodwill tends to stay at the premises when the owner moves away whiles the dog goodwill goes wherever the owner goes. The cat represents goodwill inherent in the value of the property, and the dog represents goodwill that can be transferred elsewhere with the business. 

But some scholars have questioned whether the ‘cat’ is goodwill at all. Where real property is valued by the profits method, the ‘cat goodwill’ is an inherent part of the property value. The RICS’s definition refers to this as trading potential to avoid conflict with the IFRS definition of goodwill. The ‘dog goodwill’ might then be capable of subdivision if some of these transferable earnings relate to separately identifiable intangible assets like brands and patents. Goodwill often crops up in valuing businesses as a going concern and in compensation valuation. To demand goodwill from prospective tenants, landlords err. Unfortunately this is happening in the commercial property market of Kumasi. To understand why this is so consider what premium is?  

Assume you have registered DataEstate as a real estate professional services firm. You need an office space in a perfect location to attract wealthy clients. Your investigations in an area you have chosen indicate that full rental values are going for GH300.00 yearly. As a professional in the property market, you forecast rental growth to remain at about 7% per anum. You are not certain whether DataEstate can generate enough revenue to pay salaries, electricity, water and telephone bills in addition to rent. You have enough start-up capital to pay rent in advance for about ten years, and your prospective landowner is glad with that but the landowner still would want to be receiving some rent yearly.   

The landowner has agreed to take a calculated lump sum now so that you paying GH¢15.00 reduced annual rent for the next 5 years after which rent may revert to full rental value. In such an instance, the lump sum you paid in order to be paying GH¢15.00 reduced rent, instead of the GH¢300.00 full rental value, for the next 5 years is what valuation surveyors consider premium. Premium is an amount paid at the commencement of a lease in consideration that the rent reserved is fixed at a figure less than the full rental value of the premises. Premium is used in markets where demand outstrips supply - more people chase the same property. 

Why should you be interested in what is Goodwill or Premium? I believe you should because you might not understand the reverse usage of these concepts in Kumasi. I have recorded rental market transaction with premiums ranging between GH¢20,000.00 and GH¢40,000.00 for ten (10) years in the Central Business District of Kumasi. These premiums have allowed for reduced rents ranging between GH¢15.00 and GH¢32.00 with varying reviews. In actual sense, the full rental values should have been much more than rents passing. The practice has been that commercial landlords in Kumasi usually take premium for ten years so that tenants pay yearly or monthly reduced rents.  

Paradoxically, they do not consider such considerations received for reduced periodic rents as ‘premium’; they think those considerations are ‘goodwill’. However, their actions are intentional. A tenant can demand premium in respect of an unexpired term of a lease but not goodwill. Therefore, to avoid tenants who become disinterested in premises they occupy demand unexpired premiums, landlords term the premium collect as premium. Approached a commercial landlord in Adum with the pretence renting a shop and what you hear is not far from: ‘Goodwill for ten years, we can negotiate the rent’. Thin about this.  


Kwaku Obeng Mireku

BSc. Land Economy


0248 82 49 03

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