Optional - Loan Security Valuation (L3) Flashcards
Level 1
What Does VPGA 2 of the Red Book Cover?
Guidance surrounding valuation for the purpose of secured lending.
Level 1
According to VPGA 2 of the Red Book, when valuing for Secured Lending Purposes, for what period of time is “previous involvement” defined as being within?
According to VPGA 2 of the Red Book, Previous Involvement is defined as involvement within the last 2 years.
Level 1
What are Some of the Examples Listed in VPGA 2 of the Red Book of situations where an instruction should be declined on the basis of Previous Involvement?
- Having a longstanding professional relationship.
- When the valuer will gain a fee from introducing the transaction to the lender.
- If there is a financial interest in the property holding, or prospective borrower.
- When the valuer is retained to act in the disposal or letting of the completed development on the subject property.
Level 1
In Addition to those Points Listed in VPS3 (Valuation Reports), what has to be Included in a Valuation Report for Secured Lending Purposes According to VPGA 2 of the Red Book?
- Disclosure of Involvement.
- Valuation Method Adopted.
- If there is a Recent transaction of the Property, how much reliance there is on that value?
- Comment on the suitability for Secured Lending Purposes.
- Comment on any factor affecting value.
- Demand for alternative uses.
- Disrepair (Deleterious materials etc.)
- Environmental issues (Flood risk etc.)
- Market Commentary.
- Current marketing period required.
- Details of comparable transactions relied upon.
Level 1
What are the common reasons for a loan security valuation
- Owner-occupied
- Investment
- Fully equipped as a trading entity
Level 1
What is the overriding objective for a valuer when completing a valuation for loan security purposes?
To understand the lender’s needs and objectives
Level 1
What additional criteria may a lender specify for a valuation for secured lending?
No previous, current or anticipated involvement with the borrower, the asset or any other party connected with the transaction over the last 24 months
Level 1
What is an example of previous involvement
- long standing professional relationship
- currently acting/recently acted in any other capacity that involves a fee
- providing consultancy for current or previous owners
Level 1
When taking an instruction for secured lending, what should the valuer enquire about?
If there has been an agreed price for the asset, and if so, to what extent was the best price obtainable (e.g. Was it properly marketed? Any incentives? Were there any other bidders?)
Level 1
What is a special assumption?
Assumes something is factual that is not true at the valuation date
Level 1
What examples are there of special assumptions in secured lending?
- planning has been agreed
- development has been completed
- new lease in place
- trade inventory has been removed
- business is closed and licenses lost
- subject to a limited marketing period
- vacant posession
- special purchaser
Level 1
What additional comments should be made at the end of a report for loan security purposes?
- buyer profile
- marketability
- sale period
- lender’s action points (e.g. hazards noted, EPC missing etc)
- security for the loan
- development issues
- local market
Level 1
What does deleterious mean?
Causing harm or damage e.g. asbestos
Level 1
What is VGPA 2 called?
Valuation for interests for secured lending
Level 1
What do you understand a negligence case to mean?
Where a valuer may have failed to act in with the level of care that a reasonable valuer would have
Level 1
Tell me what you know about the K/S Lincoln and others vs CB Richard Ellis Hotels Limited (2010) case.
The claimant pursued a case of professional negligence against the valuer of 8 hotels in England in 2005. The outcome of the case provided useful authority on two key issues:
1) It established that a valuer cannot be deemed to have acted negligently if the valuation falls within a permissiable range of variation to the ‘true’ valuation, even if the methodolgy used to get there was flawed.
2) It established that valuation is not an exact science and defined the permissable margins of errors as follows:
i) +/- 5% for residential
ii) +/- 10% for standard commercial
iii) +/- 15% for unique commercial
Level 2
The vacant nightclub in Falkirk. Why didn’t you chase for the terms of the loan?
The majority of the time, we don’t get given the terms of the loan from the client. This wouldn’t impact our opinion of value. However, we always make a comment on the Property’s suitability for the security of the loan based on the knowledge we have:
- suitable for a 20 year term (this is a standard loan term in our commercial experience)
- suitable to be secured against MV2 (vacant posession)
- if loan amount exceeds MV2 value, then the income generating capability of the business model should be closely monitored
Level 2
What methodology did you use to calculate Market Value
Profits method based on projections.
* MV: £1,050,000 on a 6.5YP
* MV3 (day one value): deduction of 1 year’s FMOP for build up - £890,000
* MV2: £250,000 (agreed purchase price) - compared this on a cap rate per sq ft basis and adopted it as our own
Level 2
You mentioned that you were aware of the agreed purchase price at £250,000 - did you make any further enquiries?
Yes, I spoke to the disposing agent and the Property had been marketed for a long time. The asking price was £300,000, a previous bid of £225,000 was rejected and £250,000 was accepted from the Bank’s customer.
Level 2
You were advised that there was no rent being paid on two of the units, did you mention this in the terms?
In our agreed terms of engagement, we had a clause stating that any information provided to us by the client or a third party directed by the client would be relied upon as being accurate.
Level 2
What was the MV and VP value?
MV: £1,010,000
MV2: £750,000
