Optional - Loan Security Valuation (L3)

Question 1

Level 1

What Does VPGA 2 of the Red Book Cover?

Answer 1

Guidance surrounding valuation for the purpose of secured lending.

Question 2

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?

Answer 2

According to VPGA 2 of the Red Book, Previous Involvement is defined as involvement within the last 2 years.

Question 3

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?

Answer 3

• 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.

Question 4

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?

Answer 4

• 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.

Question 5

Level 1

What are the common reasons for a loan security valuation

Answer 5

• Owner-occupied
• Investment
• Fully equipped as a trading entity

Question 6

Level 1

What is the overriding objective for a valuer when completing a valuation for loan security purposes?

Answer 6

To understand the lender’s needs and objectives

Question 7

Level 1

What additional criteria may a lender specify for a valuation for secured lending?

Answer 7

No previous, current or anticipated involvement with the borrower, the asset or any other party connected with the transaction over the last 24 months

Question 8

Level 1

What is an example of previous involvement

Answer 8

• long standing professional relationship
• currently acting/recently acted in any other capacity that involves a fee
• providing consultancy for current or previous owners

Question 9

Level 1

When taking an instruction for secured lending, what should the valuer enquire about?

Answer 9

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?)

Question 10

Level 1

What is a special assumption?

Answer 10

Assumes something is factual that is not true at the valuation date

Question 11

Level 1

What examples are there of special assumptions in secured lending?

Answer 11

• 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

Question 12

Level 1

What additional comments should be made at the end of a report for loan security purposes?

Answer 12

• buyer profile
• marketability
• sale period
• lender’s action points (e.g. hazards noted, EPC missing etc)
• security for the loan
• development issues
• local market

Question 13

Level 1

What does deleterious mean?

Answer 13

Causing harm or damage e.g. asbestos

Question 14

Level 1

What is VGPA 2 called?

Answer 14

Valuation for interests for secured lending

Question 15

Level 1

What do you understand a negligence case to mean?

Answer 15

Where a valuer may have failed to act in with the level of care that a reasonable valuer would have

Question 16

Level 1

Tell me what you know about the K/S Lincoln and others vs CB Richard Ellis Hotels Limited (2010) case.

Answer 16

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 methodology 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

Question 17

Level 2

The vacant nightclub in Falkirk. Why didn’t you chase for the terms of the loan?

Answer 17

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

Question 18

Level 2

What methodology did you use to calculate Market Value

Answer 18

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

Question 19

Level 2

You mentioned that you were aware of the agreed purchase price at £250,000 - did you make any further enquiries?

Answer 19

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.

Question 20

Level 2

You were advised that the park was 82% let, did you mention this in the terms?

Answer 20

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.

Question 21

Level 2 - both examples!

What was the MV and VP value?

Question 22

Level 2

Talk me through your valuation methodologies for these two values.

Question 23

Level 2

Why was the reversionary yield on your VP Value at 13.5% compared to the VP reversionary yield at 12% for your VP units in Market Value?

Answer 23

Two of the existing tenants are strong medical covenants driving footfall to the area. With no key tenants like this in situ, the overall VP investment is riskier. We have reflected this in softening the VP yield from 12% to 13.5%

Question 24

Level 3

What do you mean by “it was clear that the owner was achieving EBITDA levels ahead of all comparable evidence”?

Answer 24

YE 2021 accounts showed an EBITDA of 49.3%. Highest EBITDAs of football centres is usually high 30s. The Bank’s Customer benefitted from the easement of lockdown restrictions, an event that is unlikely to be replicated.

Question 25

Level 3

What was the MV and MVSA values?

Answer 25

EBITDA £415,000 (33.5%)
7.75YP
MV: £3,225,000

MV2 = MV - (2 x FMOP) = £2.3m

Question 26

Level 3

What did you say about the marketability of the Property?

Question 27

Level 3

At the equestrian club, were you aware of the terms of the loan?

Answer 27

Yes, we were aware that the loan was for £600,000 but not aware of the terms. We commented that the Property offers sufficient security over a 20 year term

Question 28

Level 3

What was the difference between MV and MV2 subject to trade projections?

Answer 28

MV: £10.5m
MV2: 11.0m
FMOP: £1.0m