Loan Security Valuations Flashcards
3 things covered in VPGA 2?
- Dealing with conflicts of interest
- Additional reporting requirements
- Potential Special Assumptions
Guidance on dealing with conflict of interest?
- Any previous, current or anticipated involvement with the borrower or property must be disclosed to the lender.
- Previous involvement - usually within last 2 years.
- Instruction must be declined if conflict cannot be managed.
- Valuer must be independent.
Additional minimum reporting requirements?
- Disclosure of previous involvement
- Valuation methodology adopted
- Information concerning recent transaction of the property if been disclosed and relied upon as MV
- Comment on environmental considerations
- Comment on suitability for lending
Examples of special assumptions?
- Vacant possession
- Restricted marketing period
- Planning consent granted
- New letting on given terms
- Special purchaser
What is UK VPGA 10?
Provides UK specific guidance.
- panel agreements must be relevant to each instruction and regularly reviewed.
- reports must be solely addressed to the lender (no third party reliance unless stated)
What is the difference between a normal conflict check and a loan security conflict check?
- Must disclose any previous involvement in the terms of engagement and report.
- Must check over last 2 years.
- Conflict check on borrower and property.
Why do you do special assumption valuations in loan security valuation reports?
Provides a lender with values for different scenarios - well informed and prepared.
What is a SWOT analysis?
Strengths, weaknesses, opportunities and threats
Important thing to remember when undertaking a SWOT?
- Remain objective.
- Get colleague to review to make sure objective.
Advantages of SWOT?
- Simple framework to use/ understand.
- Facilitates understanding of strengths and weaknesses.
- Encourages strategic thinking.
- Flexible.
Disadvantages of SWOT?
- Sometimes oversimplify - focus on key items.
- Pace of change makes it difficult to assess.
- Some data based on assumptions.
What are lender action points (LAPs)?
Provides lender with succinct summary of items that need to be addressed confirmed.
Example of LAPs?
- Site Area
- Tenure
- Tenancy info
- Fire risk assessment
- EPC
- Flood risk
- Refurb costs
- Floor areas
Sources of risk to lenders?
- Environmental
- Tenure
- Lease terms
- Covenant strength
- Market conditions
What is debt finance?
- Borrowing money from bank
- Must be paid back by an agreed date/ time
- Interest accrued on loan
What is equity finance?
- Selling shares to raise capital.
- Always paid back last.
Types of finance (ladder)?
- Senior debt
- Mezzanine debt
- Equity
What is valuers role on loan security valuations?
- Provide lender with risk level of investment and certainty that lending will be secure.
- Outline strengths, weaknesses and areas of concern.
Loan to value ratio
50-60%
Dependent on current market situation
What do lenders usually look for?
- Lend on MV subject to occupational lease (providing good covenant/ unexpired term/ good spec)
- Use VP if lender is uncertain on covenant strength/ worried may default
Factors that affect ability to obtain finance?
- Borrower has poor credit rating.
- Character of the market (Covid/ poor retail).
- Proof that borrower can repay loan and interest and pay remaining purchase price capital.
Advantages of debt finance?
- Preserves companies ownership as not having to sell shares.
- Principal payment and interest expenses are fixed and known amount assuming that the loan is paid at a constant rate.
Disadvantages of debt finance?
- Need regular income to pay regular instalments.
- Adverse impact on credit ratings.
- Potential bankruptcy if can’t pay.
What advice would you provide to the Bank following Mini Budget?
- Market explanation clause
- Volume of transactions stagnated - lack of data from September onwards (after Mini Budget) so unsure on what impact it had on prices.
- Perception that values started to fall and transactions that are being completed are subject to price chips
- Market adjusting to increased interest rates, although primary markets are not affected as much as secondary/ tertiary markets
- Borrowing cost increased - likely to impact prices buyers are willing to pay
Peter Pereira Gray Report findings
Lead independent valuation review commissioned by Standards and Regulation Board.
Published in December 2021.
Made 13 recommendations which were accepted by the RICS in full and are awaiting implementation. Recommendations apply to major UK and global assets such as shopping centres, offices and business parks.
4 main takeaways from this Review:
- The creation of Valuation Panel under SRB to ensure quality assurance of valuers, especially of high risk valuations such as for loan security purposes).
- Introduction of a Valuation Compliance Officer role within RICS regulated firms undertaking valuation.
- Independence of valuers and their rotation.
- Adoption of DCF methodology as primary valuation method for all income-producing assets. Especially for high risk valuations and where there is limited comparable evidence. DCF based on a number of assumptions.
