Val.3 Profits and Investment

Question 1

When is the profit method used?

Answer 1

Used for trade-related properties where there is a monopoly position or the value depends on the business’s profitability.

Question 2

What type of property is it used for?

Answer 2

Pubs, hotels, petrol stations, and care homes.

Question 3

What information do you need?

Answer 3

Audited accounts for 3 years.

Question 4

What if it was a new business?

Answer 4

Use estimates or business plans for new businesses.

Question 5

What would you adjust for?

Answer 5

Adjust for maturity of the business and any exceptional items of expenditure.

Question 6

What steps are involved?

Answer 6

Turnover minus costs gives gross profit, subtract reasonable expenses and operator’s remuneration to get net profit, capitalise at appropriate yield.

Question 7

Any guidance available on this?

Answer 7

RICS Red Book 2017, Pub Rental Valuations 2010, Capital and Rental Valuation of Hotels 2012.

Question 8

The profits method of valuation is used for what type of property?

Answer 8

Used for income-producing properties with a monopoly, where valuation by comparison is not possible.

Question 9

What is the divisible balance?

Answer 9

The figure after deducting gross receipts from gross income, split between tenant’s profit and rent.

Question 10

How do you get FMT?

Answer 10

Review past trade (3 years) and establish a maintainable income amount.

Question 11

How do you get to the tenants share?

Answer 11

Negotiation, reflecting tenant’s input into the business and elements like capital, profit, and risk.

Question 12

Have you valued a public house?

Answer 12

No, but I would use the profits method for valuation.

Question 13

What do you understand by Fair maintainable trade?

Answer 13

Trade level expected from a reasonably efficient operator, assuming proper maintenance.

Question 14

How would you value a caravan site?

Answer 14

Use either comparable or receipts/expenditure method based on available evidence.

Question 15

Why do we need the red book?

Answer 15

Ensures consistent, professional standards for RICS members.

Question 16

What are the exceptions to the red book?

Answer 16

Exceptions include agency service, expert witness, statutory functions, internal purposes, and negotiations.

Question 17

Are negotiations Red Book?

Answer 17

No, but they should follow similar ethical standards.

Question 18

Are estate agents covered by the red book?

Answer 18

No, estate agents are not covered by the RICS Red Book.

Question 19

What is the basis of valuation in the red book?

Answer 19

No set basis; use the most appropriate basis such as Market Value or Market Rent.

Question 20

What UKGNs are there and which have you used recently?

Answer 20

UKGN 1-7. Recently used UKGN3 for CGT, UKGN4 for inspections, and UKGN6 for lease analysis.

Question 21

What PS are there and which have you recently used?

Answer 21

PS1 and PS2. Recently used for compliance and ethical standards.

Question 22

What VPS are there and which have you recently used?

Answer 22

VPS1-5. Regularly use VPS1 for terms of engagement, VPS2 for inspections, and VPS3 for reports.

Question 23

How would you value a property for secured lending purposes – what would you refer to?

Answer 23

Refer to VPGA 2 note for secured lending valuation.

Question 24

How do you deal with valuation uncertainty?

Answer 24

Refer to VPGA 10 and specify the reason for valuation uncertainty in the report.

Question 25

What should you check before carrying out any valuation?

Answer 25

Check for previous involvement, conflicts of interest, and competency.

Question 26

Aside from HMRC cases, what would you do if you received a valuation instruction?

Answer 26

Provide terms of engagement including VPS1 minimum terms.

Question 27

What are the things included in a valuation report?

Answer 27

VPS3 specifies required elements like approach, valuation date, and valuation figure.

Question 28

What method of valuation do you use for shops?

Answer 28

Zoning method with comparable evidence.

Question 29

What would you look for when valuing a return frontage?

Answer 29

Check footfall, type of frontage, and whether masking occurs.

Question 30

If the first floor of a shop was retail rather than storage, how would you treat it?

Answer 30

Value it as part of the main retail space, adjusting if there’s lift access.

Question 31

Have you done an investment valuation?

Answer 31

Yes, I used the investment method to value shops for IHT purposes.

Question 32

How did you do it?

Answer 32

Found comparable yields, capitalised rental income to arrive at the capital value.

Question 33

Could you have done it any other way?

Answer 33

No, but I would use term and reversion for under-rented properties or hardcore/layer for over-rented ones.

Question 34

How would you carry out a market valuation of an office?

Answer 34

Use term and reversion or hardcore/layer method, based on lease terms.

Question 35

If I wanted to value my property with a rent of £100,000 and a yield of 5% forever, how would I do it?

Answer 35

Calculate YP (100/5 = 20), multiply by rent (£100,000 x 20 = £2,000,000).

Question 36

What is comparable evidence in your view?

Answer 36

Evidence that is physically similar, in the same area, and with the same legal interest and valuation date.

Question 37

What guidance did you refer to when undertaking a CMR?

Answer 37

Used GN60 and NHS directions for CMR on a doctor’s surgery.

Question 38

When carrying out an investment valuation how would you reflect a good tenant?

Answer 38

Adjust the yield to reflect tenant’s covenant strength; lower yield for strong tenants.

Question 39

How long do you value the over rented bit for?

Answer 39

Until the lease ends or next rent review.

Question 40

How do you account for 3 year rent reviews?

Answer 40

Account for market norms, adjust yield based on rent review clauses.

Question 41

How would you adjust for a rent free period?

Answer 41

Calculate the value of rent receivable to the next review date, amortised over the period.