Loan Security SoE Qs Flashcards
What elements of the Red Book apply to loan security valuations?
Can you summarise them?
VPGA 2 covers Valuations for secured lending
Covers conflicts of interest and reporting procedures
Conflicts of interest must be identified, disclosed and managed, or instruction turned down if you can’t effectively manage. Client must agree
Previous involvement defined as last 2 years - must be disclosed
Reporting procedures - as well as minimum requirements of a valuation report, for secured lending valuations
valuers must:
disclose of any prior involvement
advise on valuation methodology adopted and why
disclose a recent transaction price, or agreed price if there is one
comment on any environmental consideration
suitability of the property for mortgage purposes
any factors that cold impact price
any special assumptions and if these have a material impact on value
sustainability factors are becoming more important and should be commented on
Can you explain what prudent lending criteria you might recommend to a client?
I would make the client aware of factors that could impact value
I would advise the bank of any upcoming lease events, and recommend they monitor lease renewals at the property
I would advise the client of any environmental risks e.g. EPC, flood risk
What would you consider when advising whether a property is suitable for loan security?
Security of income - is it let? could it be let? can it generate sustainable income?
Fit for use - is the building fit for its current/intended use? Will it be rendered obsolescent?
Structural integrity - is the building suitable for occupation?
Marketability - Could the bank dispose of the property in a reasonable time frame were the borrower to default on the loan? Who would purchase the property and why? Would the property attract interest/bids?
What Conflict of Interest process do you go through?
What did you do on X example to ascertain whether a conflict of interest was at play?
Determined no personal interest
Sent out a conflict of interest check email
Referred to our internal conflict register (listing projects, properties and clients) to determine if any previous instructions
Spoke directly with individuals/teams who would be most likely to have undertaken instruction on the property/from the client
Level 2 - Industrial Doncaster - Key Facts
December 2023
c. 106,000 sq. ft
Passing rent £4.00 psf
9 years remaining on the term
4 years to rent review
Market Rent £4.50 psf
Adopted 8.75% equivalent yield
£4.875m value
Local covenant, tenant been in occupation for 20+ years, but dated property.
Letting evidence between £4.00 psf and £5.00 psf
Large yard but triangular in shape
Property dated - fit for use but ongoing capex would be required
Reflected in yield
VP 9.75% yield - £4.25m
L2 Industrial Doncaster
You say the layout of the yard was triangular in shape, how did you consider this within your valuation?
Considered within the rent - a more uniform shape would be more desirable BUT it was a suitably sized yard and HGVs were arriving and going without issue. Logistics tenant who reported no complaints
L2 Industrial Doncaster
Can you tell me what would be considered a good specification for industrial warehouses?
Minimum 8m clear eaves height
Full height loading doors
Typically steel portal frame with insulated cladding
5%-10% office content
Approximate site coverage of 40%
Minimum 30KN/sq m floor loading (kilo-newtons)
L2 Office Holborn - Key facts
November 2023
Passing rent £52.50 headline
Basement 75% of headline, second floor 95%, third floor 90%
Rack-rented - rent set in 2021
just over 2 years remaining on lease
allowed for 1-year void and 1-year rent free as were informed they were looking to leave
5.5% yield
£4.6m(?)
Borrower had refurbished so no costs included
Grade II listed so no empty rates
included letting fees
considered investment sales and cross-checked with vacant sales
L2 Office Holborn
How did you consider the tenant’s covenant strength and short lease term?
The tenant was of a reasonable covenant - mid-sized international architecture firm
with 2 years remaining, but they had informed they were likely to vacate.
I considered that investors would view the property as a reasonable investment profile for the local area, but with risk attached to the lease term/vacancy
L2 Office Holborn
It was a Grade II Listed building - so quite old? How did you measure?
I measured on a dual basis using both IPMS 3 and NIA, as the client requested NIA.
When measuring NIA I measured the occupiable space, taking out columns which were on every floor.
When measuring using IPMS 3 I measured to the Internal Dominant Face (IDF), including the pillars.
What is the Internal Dominant Face (IDF)?
the Internal Dominant Face is the ‘inside finished surface comprising more than 50% of the floor to ceiling height for each IDF wall section’
What is the difference between IPMS 3 and NIA?
The main differences are:
IPMS 3 measures to the Internal Dominant Face
it includes pillar/columns - NIA does not
includes restricted height areas of less than 1.5m - NIA does not
Covered galleries and balconies for the exclusive use of one tenant are included and stated separately
L2 Office Holborn
What void period and costs did you include?
I included a 1-year income void and 12 months rent free in line with evidence and conversations with agents
I did not account for empty rates as the property was Grade II listed
I accounted for letting fees
I did not account for capex as property had been refurbished and M&E upgraded in 2021
L3 Retail Hampstead - Key Facts
Passing rent £230 ITZA
Over-rented - evidence between 150-210
Strong position but not prime
Settled on £195 ITZA MR
2 years remaining on lease
6-month void as mid-point, no costs
capitalised at 7%/6.5%
L3 Retail Hampstead
How did you analyse the floor areas on a zoned basis?
Measured the property
Halved back each 6.1m
Small property, Zone A, B and C
A/2 for Zone B and A/4 for Zone C
L3 Retail Hampstead
Why was the property not along the strongest area of the pitch?
The property was located towards to station - it was in a strong position, however my conversations with local agents confirmed the prime area of the pitch was further down, where the pavement becomes wider. I made sure to confirm with multiple agents