Loan Security Valuation Flashcards
what is the difference of loan security TOE and financial reporting TOE
- loan security Toe covers borrowers name, details of loan
what is included in VPGA 2 ?
talk about specific matters for loan security valuation
basses of value, assumptiona and special assumption
use of market value
any reporting requirement by lenders
“Valuation of interests for secured lending
Market Value: The valuer must determine the market value, which reflects the most likely price the property would achieve in the current market.
Assumptions and Special Assumptions: Clearly define any assumptions or special assumptions made during the valuation, such as the property being free from legal restrictions or having planning permission.
Property Risks: Identify and report risks that may affect the value, such as market volatility, structural issues, or location-specific concerns.
Suitability for Lending: The valuation must assess the property’s suitability as security for lending purposes, taking into account factors like condition, location, and legal title.
Due Diligence: The valuer should perform thorough due diligence, including inspection, legal documentation review, and consideration of market comparables.
Client’s Needs: Ensure that the valuation report meets the lender’s specific requirements, as outlined in the terms of engagement.”
what is the difference between VPGA 2 and UK VPGA 10?
VPGA 2 in the RICS Red Book refers to Valuation of Interests for Secured Lending, which provides guidance on valuing properties specifically for mortgage and loan security purposes. It outlines how valuers should consider factors such as market value, risks, and assumptions to support lending decisions. It emphasizes providing lenders with reliable and consistent valuations that adhere to RICS standards. Both of them discusss very similar issues but in different language
Suitability for loan security purposes
The valuer is only expected to provide an opinion based on information that is readily available in the market and/or is reasonably foreseeable. it is out of valuer’s job scope to take the final decision on the suitability of the asset for loan security”
is VPGA mandatory?
“No, following VPGA (Valuation Practice Guidance Applications) in the RICS Red Book is not mandatory but is considered best practice. VPGA sections provide guidance on how to apply valuation standards in specific circumstances, such as for secured lending or particular property types.
While it is not compulsory, compliance with VPGA is strongly recommended to ensure that valuations are performed to a high professional standard and in line with RICS expectations. Valuers should refer to VPGA to ensure their methodologies and reporting align with RICS guidelines, which can also enhance credibility and minimize risks of disputes or errors.”
what is the role of debt finance in real estate?
“Leverage: Debt allows investors to leverage their own capital, increasing their purchasing power.
Risk Management: By using debt, real estate investors can spread out financial risk over several investments.
Tax Efficiency: Interest payments on debt can often be tax-deductible, reducing the overall cost of financing.
Cash Flow Management: Debt financing enables investors to maintain liquidity while acquiring or developing property.”
what are the main types of debt and their sources?
“Senior Debt:
Definition: The first level of debt financing, secured against the property. Senior debt holders have the first claim on assets in case of default.
Sources: Banks, insurance companies, and pension funds.
Mezzanine Debt:
Definition: Subordinate to senior debt, mezzanine financing is a hybrid of debt and equity. It has higher risk but also higher returns compared to senior debt.
Sources: Private equity firms, specialized real estate funds, and alternative lenders.
Junior/Subordinated Debt:
Definition: Debt that ranks below senior debt but above equity. It has lower priority in case of asset liquidation.
Sources: Private lenders, hedge funds, and real estate investment trusts (REITs).”
why do you use GIA while measuring the industrial building in reading?
“In most cases, GIA is the standard method for valuing industrial buildings as it captures the entire functional space, which is critical in industrial use where the whole building is often utilized for operations, not just office areas (as in NIA).
Excludes External Features: While GEA measures the entire building footprint, including external walls and features like balconies, GIA focuses on the space within the building envelope, making it more relevant for internal operational use and valuations.
Clarity for Industrial Use: Industrial buildings often require specific space for machinery, storage, or manufacturing, which may not be fully reflected using NIA (which excludes areas like corridors and plant rooms). GIA ensures that all relevant spaces are included, providing a clearer picture of the building’s functional capacity.”
what is the business rates for industrials
rateble value * multiplier, can get rateble value from gov website
what is the difference between a valuation for financial reporting purposes and for loan security purposes?
“Basis of Valuation:
Financial Reporting:
The basis is typically fair value, which reflects the price that would be received to sell the asset in an orderly transaction between market participants.
Valuers may take a long-term view of the asset’s performance and consider factors like replacement cost, income potential, and market conditions.
Loan Security:
The valuation is based on market value, often taking a more conservative approach to reflect the property’s current sale price under typical market conditions.
The focus is on forced sale value or realizable value, considering the potential for a quicker sale, which may result in a lower value than a long-term market view.
Purpose and Objective:
Financial Reporting Purposes:
Valuations are conducted to reflect the fair value of assets on a company’s balance sheet, following accounting standards such as IFRS or GAAP. The goal is to provide an accurate representation of the asset’s value for shareholders, auditors, and regulators.
The valuation must comply with accounting standards like IFRS 13 (Fair Value Measurement) and is often used for year-end reporting, mergers, or asset impairment tests.
Loan Security Purposes:
Valuations for loan security (or mortgage) purposes are carried out primarily for lenders, who need to assess the asset’s value as collateral. The valuation focuses on the property’s market value to ensure the lender can recover the loan amount in the event of default.
The emphasis here is on marketability and liquidity—how quickly and easily the property can be sold to repay the loan.
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how do you know if it is suitable for loan security purposes?
“When evaluating whether a property is suitable for loan security purposes, a valuation must ensure that the asset is adequate as collateral for a loan. The process involves several critical factors:
- Physical Condition and Maintenance:
The property’s physical condition must be assessed. Properties in poor condition or needing significant refurbishment might require higher costs, reducing their security value.
The inspection should include structural issues, potential environmental concerns (like contamination), and the overall maintenance of the property, Condition of the property (e.g., does it need major repairs?).
. - Rental Income (for Income-Producing Properties):
If the property generates rental income (e.g., commercial buildings), the stability of rental income is critical. Lenders will want to assess whether the income stream is sufficient and reliable to cover loan repayments.
The valuer must evaluate existing leases, tenant quality, and rent levels in relation to market rates. - Liquidity and Saleability:
The property must be saleable within a reasonable timeframe to ensure that the lender can recover the loan if the borrower defaults. Liquidity factors include:
Market demand for the property type. - Vacancy and Occupancy Levels:
High vacancy rates or low occupancy can indicate a higher risk, particularly for commercial properties. Lenders want to ensure that the property is in active use or is attractive to future tenants or buyers.
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