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APC Commercial Real Estate 2021 - Core > The Red Book > Flashcards

The Red Book Flashcards

1
Q

What is the structure of the red book?

A 
Introduction
Glossary
Professional Statements
Valuation Technical and Performance guidance
Valuation Applications 
International Valuation Standards
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2
Q

What is the red book’s full title? When did it come in and when was it issued?

A

RICS Valuation - Global Standards
Issued November 2019
Effective 31 January 2020

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3
Q

When is a red book not a red book valuation?

A

Internal ALES

1) A valuation as part of a brokerage/agency instruction
- Except if a purchase report
- Refer to RICS Professional Statement Real Estate Agency and Brokerage 2016
2) Acting as an expert witness
- Refer to RICS UK Professional Statement Surveyors Acting as Expert Witnesses 2016
3) Performing statutory functions/requirements
- Excludes valuations where you have to comply with the law but not enforcement of the law e.g. statutory returns to tax authority
4) Valuations for purely internal purposes with no liability and no communication to an third parties
5) Preparing valuation advice for litigation or negotiation

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4
Q

How do you know if you are qualified to do a valuation?

A

Qualifications
Local knowledge
Local legislation
VRS

1) Appropriate academic/professional qualifications demonstrating competence
2) Membership to professional body with commitment to ethical standards
3) Sufficient local/national/international knowledge of the asset type and market
4) Compliance with local legislation to do valuations
5) Compliance with the Valuer Registration requirements

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5
Q

What are the mandatory points of the RICS CoI doc?

A

RICS Global Professional Statement Conflicts of Interest 2017.

1) Don’t act if there is/a risk of a CoI
2) Keep information confidential
3) Share all relevant information with clients
4) Have systems in place to check CoI

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6
Q

What goes into a valuation terms of engagement

A

1) Identification and status of the valuer
- Person not firm
- External, internal
- Sufficient knowledge and no conflicts
2) Identification of the client
3) Identification of any third parties relying on the report
4) Identification of asset being valued
5) Currency
6) Purpose
7) Basis of valuation adopted
8) Valuation date
9) Nature and extent of valuer’s work -> including inspections, investigations and associated limitations
10) Nature and sources of information relied upon
11) All assumptions and special assumptions
12) Format of the report
13) Restrictions on distribution and publication
14) Confirmation of RBG and IVS compliance
15) Fee basis
16) Reference of firm’s CHP
17) Statement that the valuation may be subject to compliance by the RICS
18) Statement on liability agreed

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7
Q

What is an assumption?

A

Matters that are reasonable to accept as fact in the context of the valuation

  • No specific investigation or verification
    e. g. allocate parking to each unit
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8
Q

What is a special assumption?

A

Assumption of facts different to reality at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date
e.g. development is completed

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9
Q

Are desk tops appropriate? How?

A

1) Agree the nature of the restriction in writing
2) Confirm the potential implications of the restriction in writing before reporting
3) Is the restriction reasonable?
4) Refer to the restriction within the report

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10
Q

If re-valuing, do you need to inspect?

A

Only if you are satisfied there have been no material changes to the physical attributes of the property or its location

  • Get client to confirm this in writing
  • Terms of Engagement must state this as an assumption
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11
Q

Define Market Value

A

The estimated amount for which an asset or liability would transact

  • On the valuation date
  • Between a willing buyer and seller
  • In an arm’s length transaction
  • After proper marketing
  • Where the parties had each acted knowledgeably, prudently and without compulsion
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12
Q

Define Market Rent

A

The estimated amount for which an interest in real property should be leased

  • On the valuation date
  • Between a willing lessor and lessee
  • On appropriate lease terms
  • In an arm’s length transaction
  • After proper marketing
  • Where the parties had each acted knowledgeably, prudently and without compulsion
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13
Q

Define Fair Value. When is it used?

A

IFRS 13:
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Used if client has adopted IFRS

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14
Q

Define investment value

A

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives

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15
Q

What are PS 1 and PS 2?

A

PS 1: Compliance with standards where a written valuation is provided
PS 2: Ethics, competency, objectivity and disclosures

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16
Q

State the VPSs

A 
VPS 1: Terms of Engagement 
VPS 2: Inspections, investigations and records
VPS 3: Valuation reports
VPS 4: Bases of value
VPS 5: Valuation approaches and methods
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17
Q

What are the rules around draft reports?

A

Must be clearly marked as draft
For internal purposes only -> cannon be relied upon
Cannot be published or disclosed for any reason
Can discuss with client but:
- Do not be influenced by their comments
- File note the reasons for any changes made
- Any additional information supplied by the client must be stated in the report

18
Q

Can you depart from the Red Book?

A

Yes. But you must:

  • Satisfied non-compliance doesn’t cause misleading or unethical behaviour
  • Identification of departure is identified in the ToE and the report
  • All other aspects of the Red Book are complied with
19
Q

What do you do if there are external standards?

A

That’s okay. Name the standards within the ToE and the report

20
Q

Who must abide by the Red Book?

A

Members and Firms including any person who is responsible or accepts responsibility for analysing and communicating an opinion of value

21
Q

What is new in the 2019 red book?

A

Date dropped from title
Referred to as Red Book Global
Changed to reflect updated IVS

  • PS 1: Written -> any valuation conveyed by paper/digital/electronic means or in the form of written media. Can include valuation software outputs
  • PS 2: Professional scepticism (point reinforced) -> apply to all information before relying upon it
  • IVS 410: development property – apply a minimum of 2 appropriate recognised methods for each development valuation
22
Q

What is in VPGA 1?

A

VPGA 1: Valuations for inclusion in financial statements

  • Fair Value shall be used for IFRS
  • There are “performance standards” that must be adhered to (e.g. Professionalism, ToE, information verification, reports)
23
Q

Whats in VPGA 2?

A

VPGA 2: Valuations for Secured Lending

  • Taking instructions
  • Conflicts of interest
  • Basis of value and common special assumptions
  • Reporting
24
Q

For secured lending, what are some of the prerequisits?

A

Under VPGA 2

  • Understand the lender’s needs, objectives, loan terms
  • Must act as External Valuers
  • Any previous, current or anticipated involvement with asset, borrow or connected third parties must be disclosed. Previous = 2 years (or longer if appropriate)
  • If you consider any involvement will create a CoI -> decline instruction
25
Q

What is an example of a potential CoI for loan security? Do these prevent you accepting the work?

A

Longstanding professional relationship with borrower
Gain a fee from introducing the transaction to the lender or borrower
Has a financial interest in the asset or borrower
Retained to act or has recently acted in a market transaction of the property
Providing development consultancy for the current or previous owners

It is the valuer’s responsibility whether or not to accept the instruction

26
Q

What do you need to report in addition to VPS 3 when undertaking loan security?

A

i. Disclosure of any involvements or CoIs
ii. Valuation method adopted and calculations
iii. Details of comparables used
iv. The extent to which recent transactions within the property are treated as reliable evidence or Market Value
v. Impact of giving incentives to residential purchasers
vi. Comment on the suitability of property as security
vii. Comment on environmental condition
viii. Any circumstances which may impact on value (market trends, potential demand for the asset, occupational demand for the asset)

If you use a Special Assumption –> state the impact this may have on value

27
Q

VPGA 10 - What is it, how should it be used?

A

VPGA 10: Matters that may give rise to material valuation uncertainty

  • Material uncertainty is often not able to be quantified
  • Must comment on the uncertainty
  • Careful not to give a misleading impression (i.e. you can but its not good to give a range/”in the region of”)
  • Comment not on general risk of future market movements/cashflows but on the risk specifically to that asset
28
Q

Whats the purpose of the UK National Supplement? When is it dated?

A

RICS Valuation – Global Standards (UK National Supplement 2018)

Provides specific requirements and guidance for the application of the Global Red Book during valuations undertaken in the UK

29
Q

How is the UK supplement structured?

A

Part 1: Introduction
Part 2: UK Professional and Valuation Standards – Mandatory
Part 3: UK Valuation Practice Guidance Applications – Advisory
Summary of changes from Red Book UK 2014

30
Q

What does a valuation in accordance with the RICS Red Book mean in the UK?

A

UK VPS 1: UK Valuation Techniques and Performance Standards; under both Global and UK standards

31
Q

What is a regulated purpose valuation? Give an example

A 
Valuations relied upon by third parties who have not commission the valuation 
5 purposes 
-	Financial reporting
-	IPOs
-	M&A
-	Collective investment schemes
-	Unregulated property unit trusts
32
Q

How are regulated purpose valuations different?

A

Valuation monitoring requirements:

  • RICS Professional Regulation team
  • % of fee income from that job in last year (over/under 5%?) -> has it gone up or down?
  • Policy to rotate valuers on the job every 7 years or less
  • If your firm accepts a fee for agency, your firm cannot value that property for 12 months for regulated purposes
33
Q

Can you give an example of a matter that may give rise to material uncertainty?

A
  • Characteristics of the property
  • Quantification highly dependant on Special Assumptions
  • Restricted information that reasonable assumptions cannot solve
  • Markets disrupted by unique factors -> lack of empirical data or unprecedented circumstances
34
Q

Is material uncertainty not covered by sensitivity analysis?

A

Sensitivity analysis covers relatively small changes to inputs. Material uncertainty is typically much larger changes which would be inappropriate to include in a sensitivity.

35
Q

Do you have a standard VPGA 10 clause?

A

NO! Our commentary is specific to that asset at the valuation date.

36
Q

What is VPGA 8?

A

Valuation of real property

37
Q

What does VPGA 8 cover?

A

Supplements IVS 400 Real Property and 410 Development Property.
Outlines key factors to consider in inspections and investigations

38
Q

Waht are the key factors to consider under VPGA 8?

A

Inspection

i. Characteristics of local area, services, facilities
ii. Characteristics of the property (age, amenities, condition, fixtures/fittings)
iii. Characteristics of the site (contamination)
iv. Potential for future development/redevelopment (physical constraints)

Investigations

i. Title
ii. Planning
iii. Environmental matters
iv. Building condition

39
Q

If undertaking Loan Security work, what else do you need to have regard to/discuss within your report?

A

VPGA 2 including:

  • What are the loan details
  • Comment on the security of the loan
  • Any circumstances that could impact value
  • Any factor impacting the assumptions/special assumptions
  • Demand for the property (both the land and the individual units) and if it is sustainable
  • Extent to which you have relied on information from within the scheme as MV/MR evidence
  • Alternative uses
40
Q

Restricted information on a val. What would you do?

A

1) Does the client know the limitations?
2) Is it still appropriate? What is the true purpose of the valuation?
3) Does the restriction compromise my SUK
4) Consider the information provided and if it is credible. Corroborate all information.
5) Agree in writing in ToE and in report

APC Commercial Real Estate 2021 - Core (17 decks)

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