Loan Security

Question 1

When undertaking a loan security valuation, what parts of the Red Book would you have view on?

Answer 1

VPGA 2 and VPGA 10 of UK National Supplement.

Question 2

What areas does VPGA 2 cover?

Answer 2

Conflict of interest checks
Taking instructions
Basis of value
Assumptions and special assumptions
Reporting and disclosures

Question 3

Under VPGA 2, what must you include in your ToE for LSV?

Answer 3

Disclose any previous involvement within the last 24 months in ToE.

Disclose any anticipated future involvement too.

Question 4

What are examples of previous/future involvement under VPGA 2?

Answer 4

Long-standing professional relationship
Introducing transaction for which a fee is payable to the valuer or firm
Has a financial interest in the asset or in the borrower
Is acting for the owner of the property or asset in a related transaction.
Is acting (or has acted) for the borrower on the purchase of the property or asset

Question 5

Can you value a property that your agency team has sold?

Answer 5

Under RICS Professional Statement: Conflicts of Interest - UK Commercial Property Market Investment Agency (2017).

You can be both the agent for the seller and the valuer for the lender/purchaser - however, must be disclosed and agreed in writing.

Question 6

What do you do if the borrower won’t disclose the lender?

Answer 6

If the party
does not know, or is unwilling to disclose, the identity of the intended lender, it will need
to be stated in the ToE that the valuation may not be acceptable to a
lender.

This may be because some lenders do not accept that a valuation procured by
a borrower or an agent is sufficiently independent, or because the particular lender has
specific reporting requirements

Question 7

What basis of value is commonly used in LSV?

Answer 7

MV

Question 8

How do you agree special assumptions?

Answer 8

In writing in the ToE

Question 9

Examples of common special assumptions in LSV?

Answer 9

planning consent has been granted
2. planning has been satisfactorily developed

Question 10

Under VPGA 2, what must you state if you have made a special assumption?

Answer 10

Special assumption value must be accompanied with a comment on any material difference between the reported value with and without the special assumption.

Question 11

What additional things do you need to report on for LSV?

Answer 11

Disclosure of involvements
Valuation methodology
If recently transacted, the extent to which that has been accepted as Market Value.
Comment on environmental consideration
Comment on suitability for loan security purposes.
Factors which could affect price.

Question 12

What would you look at for environmental factors?

Answer 12

Flood risk
EPC
Current and Historic use
Contamination
Invasive species

Question 13

What are sustainability factors and why are they becoming more important to lenders?

Answer 13

VPGA 8 - Valuation of Real Property Interests

in a valuation context sustainability encompasses a wide range of physical, social, environmental and economic factors that can affect value and of which valuers should be aware.

As commercial markets in particular become more sensitised to sustainability matters, so they may begin to complement traditional value drivers, both in terms of occupier preferences and in terms of purchaser behaviour

Question 14

If the property is to be held as an investment, what additional report contents should be included?

Answer 14

Summary of occupational leases
Commentary on current rental income
Covenant strength
Maintainability of income over the loan.

Question 15

If the property is to be developed, what additional report contents should be included?

Answer 15

The costs
Viability of project
Sensitivity of residual valuations from assumptions
Implications of project taking longer than expected

Question 16

What should you attach to the report as good practice?

Answer 16

Instruction letter

ToE

Question 17

What 2 main pieces of info does VPGA 2 advice the valuer to request off the lender?

Answer 17

previous recent sales price if applicable
2. loan terms

Question 18

What does VPGA 2 advise you to include in your report re. a property’s security for a loan?

Answer 18

Comment on the suitability of the property as security for mortgage purposes, bearing in mind the length and terms of the loan being contemplated.

Where the terms are not known, the comment should be restricted to the general marketability of the property.

Question 19

What does VPGA 2 advise you to include in your report re. the property use in relation to market conditions?

Answer 19

Potential and demand for alternative uses, or any foreseeable changes in the current mode or category of occupation.

Question 20

What does VPGA 2 advise you to include in your report re. the market conditions in relation to the property and the loan?

Answer 20

The potential occupational demand for the property
Past, current and future trends, and any volatility in the local market and/or demand for the category of property
The current marketability of the interest and whether it is likely to be sustainable over the life of the loan

Question 21

What does UK VPGA 10 apply?

Answer 21

Valuations for commercial secured lending

against investment, development and owner occupied real property

Question 22

How does UK VPGA 10 define commercial property?

Answer 22

‘standard’ asset
classes, operating assets, and residential assets that are considered to fall
within the professional investment sector.

Question 23

Under UK VPGA 10, how should a valuer obtain information which is not publicly available?

Answer 23

Take instructions from Lender.

If lender elects to open a dialogue between borrower and valuer, the valuer should request these instructions in writing

Question 24

What term does UK VPGA 10 advise is the minimum ‘conflict position’ you must be in to undertake a secured lending valuation?

Answer 24

Be at minimum an external valuer.

Question 25

What is an external valuer?

Answer 25

A valuer who, together with any associates, has no material links with the client, an agent acting on behalf of the client or the subject of the assignment.

Question 26

What is an independent valuer?

Answer 26

No clear definition.

Valuer needs to ensure the instructing client has defined the term.

Question 27

What must valuers mitigate in valuation work?

Answer 27

Risk.

Pursuant to RICS guidance note: Risk, Liability and Insurance in Valuation

Question 28

What does UK VPGA 10 state re. limitation of liability?

Answer 28

It’s a negotiation.

However, should be reasonable and proportionate to the nature of the instruction and their respective exposures to risk.

Question 29

What are panel agreements?

Answer 29

Many lenders deploy framework agreements or ‘panel agreements’, which may be made directly with the valuation firms or managed via a third-party panel management firm.

Where these are agreed and adopted by the parties concerned, they may have the benefit of standardising ToE and the associated reporting requirements.

However, great care must be exercised to ensure that where such agreements are in place, they are and remain appropriate in relation to individual valuation assignments

Question 30

What does UK VPGA 10 state re. limitation of reliance?

Answer 30

ToE should limit reliance only to addressee, who should be the named lender.

As default, 3rd party reliance is excluded.

If they are requested to be included, then they should be specifically named.

Question 31

What does UK VPGA 10 recommend re. who the LSV report is addressed to?

Answer 31

Strongly recommended to be addressed to lender.

Not a broker or potential borrower.

Question 32

What does UK VPGA 10 say re. suitability for loan security?

Answer 32

Lender is responsible for assessing and taking the final decision on the suitability of the asset.

Valuer only expected to provide an opinion based on information that is readily available in the market.

Question 33

What does UK VPGA 10 say re. extensions?

Answer 33

If completion of a loan is delayed, then a lender may ask if it’s still valid.

Valuer must be cautious, but can confirm the valuation where appropriate.