Chapter 10: Valuation of Specialized Interests

Question 1

Which of the following statements regarding air rights is FALSE?
1.) In commercial real estate practice, density is the common unit of measurement associated with air rights.
2.) Air rights can be legally defined through a subdivision under provincial Property Law Acts
3.) Transferrable air rights are a marketable commodity
4.) Air rights over public utilities such as railway lines are usually costly and only have value in areas of high-density land use.

Answer 1

2.) FALSE - Air rights can be legally defined through a subdivision under provincial Property Law Acts
(Land Title Acts)

Question 2

Shirley’s husband Edgar has recently passed away. Edgar has willed the couple’s family home to his wife Shirley for the remainder of her life and then, upon her death, the property will be passed to Edgar’s eldest daughter, Noel. Given the terms of Edgar’s will, Noel is the _____ and Shirly is the _____.
1.) remainderman, life tenant
2.) remainderman, reversioner
3.) life tenant, remainderman
4.) life tenant, reversioner

Answer 2

1.) remainderman, life tenant

Question 3

Which of the following statements regarding personal property is FALSE?
1.) Often the most critical part of a personal property assignment is defining the purpose and function of the appraisal and defining the value being sought
2.) CUSPAP defines personal property as identifiable, portable, tangible or intangible objects
3.) Though Canadian taxing jurisdictions generally tax personal property, these values may be omitted in an appraisal report when not relevant to the assignment
4.) Personal property valuations may arise from credit or loan applications.

Answer 3

3.) FALSE - Though Canadian taxing jurisdictions generally tax personal property, these values may be omitted in an appraisal report when not relevant to the assignment.
(Canadian taxing jurisdictions do NOT tax personal property)

Question 4

Common types of rights of way include which of the following?
1.) Hydro lines
2.) Tunnels for transit lines
3.) Water mains
4.) All of the above

Answer 4

4.) All of the above

Question 5

If a 30,000 sqft redevelopment site in downtown Mississauga has an allowable floor space ratio (FSR) of 6:1, what is the maximum buildable density?
1.) 180,000 sqft
2.) 30,000 sqft
3.) 150,000 sqft
4.) 60,000 sqft

Answer 5

1.) 180,000 sqft

Question 6

Which of the following statements regarding easements is TRUE?
1.) A personal easement in gross is transferable
2.) Public utility easements are typically commercial easements in gross
3.) An easement appurtenant is for the benefit of a person or a company
4.) An easement in gross has both a dominant estate that benefits by the easement and servient estate burdened by the easement

Answer 6

2.) Public utility easements are typically commercial easements in gross

Question 7

What is an easement appurtenant?

Answer 7

Appurtenant - easement for the benefit of another parcel

Question 8

Which of the following BEST describes capitalization rates used for the valuation of life interests?
1.) Lower than capitalization rates for other types of interests
2.) Readily available in the market place for comparable use
3.) Higher than capitalization rates for other types of interests
4.) Based on the financial stability of the life holder

Answer 8

3.) Higher than capitalization rates for other types of interests

Question 9

Which of the following statements regarding business valuation approaches is FALSE?
1.) Liquidation valuation is most commonly used for valuing a going concern business
2.) Some analysis consider asset multiples to be more accurate than value estimates based on sales of earning
3.) A difficulty with the comparable sales approach is that purchasers may pay prices beyond reasonable expectation
4.) The quality and objectivity of the financial statements and management projections may pose a potential problem of using income-based approaches of valuation.

Answer 9

1.) FALSE - Liquidation valuation is most commonly used for valuing a going concern business

Question 10

Helen is a CRA who has been practicing in Ontario for the last 25 years. Andre, one of her long time clients, is seeking her help in an air rights valuation. Andre is developing a golf course subdivision near a lake. He wants to ensure his townhouses always have a lake view, so he wishes to restrict the lakefront cottage owners from ever building more than a one-storey structure of letting their trees grow higher than 15 feet tall. He intends to make an offer to buy the air rights from these property owners. Helen has never carried out an air rights valuation. Which of the following statements is TRUE?
1.) Competency is not a consideration here because there is no appraiser with experience in such a highly unique air rights assignment.
2.) Valuation of air rights is specifically prohibited for appraisers holding the CRA designation scope of practice.
3.) This is an invalid assignment because there are no rights to appraiser and, even if there were, they have no value.
4.) CUSPAP does not specify any restrictions regarding air rights; if the assignment is a residential site with less than four dwellings, then any interest in that land is within the scope of practice

Answer 10

4.) FALSE - CUSPAP does not specify any restrictions regarding air rights; if the assignment is a residential site with less than four dwellings, then any interest in that land is within the scope of practice.

Question 11

Which of the following statements regarding the valuation of rights of way using the summation method is FALSE?
1.) The summation method is also known as the pro-rata method
2.) One of the steps of the summation method is to determine the value of the land associated with the entire property without considering the impact of the right of way
3.) A weakness of the summation method is it may not reasonably account for the value of the partial interest to be granted by the owner
4.) The summation method is based on the premise that the right of way affects the utility of the owner’s land at its highest and best use

Answer 11

3.) FALSE - A weakness of the summation method is it may not reasonably account for the value of the partial interest to be granted by the owner
(this is a weakness of the “before and after” method)

Question 12

Mr. Shaw dies leaving the family home in Winnipeg, Manitoba to his 63 year old wife. Upon the death of his wife, the ownership of the home is transfer to his eldest son Max. The home is 25 years old and has been valued at $500,000 with a decapitalization rate of 8%.

What is the annual equivalent value of the home?
1.) $50,000
2.) $25,000
3.) $20,000
4.) $40,000

Answer 12

4.) $40,000

Value X Decap Rate = annual equivalent/income potential

Question 13

Mr. Shaw dies leaving the family home in Winnipeg, Manitoba to his 63 year old wife. Upon the death of his wife, the ownership of the home is transfer to his eldest son Max. The home is 25 years old and has been valued at $500,000 with a decapitalization rate of 8%.

Mrs. Shaw is considered to be in very good health, and according to the Manitoba female life expectancy chart, a 63-year old woman has a remaining life expectancy of 22.9 years (rounded to 23 years). Since there is a considerable amount of risk inherent in the investment as her death could easily occur prior to the 23-year life expectancy, a 12% capitalization rate will be used. Given this information, what is the value of the life interest, rounded to the nearest $100? (PV factor is 7.718433)
1.) $920,000
2.) $625,200
3.) $412,800
4.) $308,700

Answer 13

4.) $308,700

annual equivalent X PV factor
40,000 X 7.718433

Question 14

The discounted cash flow method is most useful for valuing businesses that have which of the following?
1.) A constant rate of growth or decline
2.) Stable predictable sources of income
3.) Start-up companies or smaller businesses
4.) Predictable but uneven annual net income

Answer 14

4.) Predictable but uneven annual net income
(stable/constant growth - typically uses capitalization; start-up use asset-based valuation)

Question 15

Which of the following statements of valuation of air rights is FALSE?
1.) A development pro forma is generally utilized to determine a residual land value measure in per buildable square foot
2.) Using the direct comparison approach can be difficult because the sale of air rights is highly unique and impacted by the limited market in which density transfers occur.
3.) The direct comparison approach, income approach, and cost approach are all generally accepted approaches for the valuation of commercial air rights
4.) The residual income after deducting all development expenses from the forecast value of the project upon completion represents the maximum amount that a developer should pay for the development site.

Answer 15

3.) FALSE - The direct comparison approach, income approach, and cost approach are all generally accepted approaches for the valuation of commercial air rights
(only direct comparison and income)

Question 16

Which of the following is the BEST definition of liquidation value for personal property?
1.) Has a useful remaining economic life and is sold to a purchaser to intends to use the items in a productive capacity
2.) Is purchased for its component parts
3.) Has to be sold in short order
4.) Can continue in its current use

Answer 16

1.) Has a useful remaining economic life and is sold to a purchaser who interests to use the items in a productive capacity

Question 17

Which of the following statements regarding a “life tenant” is FALSE?
1.) A life tenant does not have the right to endow another person as a new life tenant
2.) During their remaining life, a life tenant shares ownership of the life estate with the remainderman
3.) Under a legal agreement, a life tenant is allowed to profit from the rental of the property of the life estate
4.) A life tenant cannot sell the property of the life estate without consent of the remainderman

Answer 17

2.) During their remaining life, a life tenant shares ownership of the life estate with the remainderman

Question 18

The capitalized cost of an asset or liability less accumulated depreciation, depletion, or amortization is known as which of the following?
1.) Investment value
2.) Book value
3.) Liquidation value
4.) New realizable value

Answer 18

2.) Book value

Question 19

Which of the following statements regarding a right of way (ROW) is FALSE?
1.) In a typical TOW involving telecommunications, a key economic impact on the owner is the loss of any opportunity to add improvements to the ROW area
2.) A ROW is typically defined by a legal survey and a ROW agreement deposited in the Land Titles Office
3.) The two generally accepted methods for ROW valuation are the summation method and the cost approach
4.) If a site is already build-out to its most probably and profitable legally achievable density, the impact will be less significant than the case where the presence of the ROS on an undeveloped site restricts the owner’s options

Answer 19

3.) FALSE - The two generally accepted methods for ROW valuation are the summation method and the cost approach
(summation method and the before and after method)

Question 20

If you have determined that a personal property item has no remaining economic life and only the value of the underlying materials needs to be determined, your task is to determine which of the following?
1.) Salvage value
2.) Scrap value
3.) Liquidation value
4.) Fair market value

Answer 20

2.) Scrap value
(salvage value is when you are purchasing for parts)