Valuation Flashcards
1
Q
What is an internal valuer?
A
- Employed by a company to value their assets
- Valuation for internal use only
- No third-party reliance
2
Q
What is an external valuer?
A
Has no material links with the asset to be valued or the client
3
Q
What are the THREE steps you should undertake prior to commencing a valuation?
A
CCT:
- Competence - check you have the correct level of skills, understanding and knowledge
- Conflict of Interest - check you are able to act independently on the instruction
- Terms of engagement - issue to the client and receive written confirmation
4
Q
Why do you undertake statutory due diligence for valuations?
A
Confirm that there are no material matters which could impact on the valuation
5
Q
What types of statutory due diligence checks would you undertake when valuing a property?
A
- Asbestos register
- Business rates / Council tax
- Contamination
- Equality Act Compliance
- Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)
- EPC rating if available
- Flooding
- Fire safety compliance
- Health and safety compliance
- Highways (check roads adopted with the local highways agency)
- Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
- Public rights of way (from an OS sheet)
- Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)
6
Q
What are the FIVE main methods of valuation?
A
- Comparable method
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost method
7
Q
What are the THREE valuation approaches set out in IVS 105?
A
- Income approach - converting current and future cash flows into a capital value
- Cost approach - reference to the cost of the asset whether by purchase or construction
- Market approach - using available comparable evidence
8
Q
What are the SIX steps used when collecting comparable evidence?
A
- Search and select comparables (agent’s boards, online databases)
- Confirm / verify information with a party directly involved in the transaction
- Assemble comparables in a schedule
- Interpret comparables using hierachy of evidence
- Analyse comaprables to form an opinion of value
- Report value and prepare file note
9
Q
What guidance did the RICS recently release on using comparable evidence?
A
RICS Comparable evidence in real estate valuation, 2019
10
Q
What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?
A
Category A: direct comparables
Category B: general market data
Category C: other sources
11
Q
What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?
A
- Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property)
- Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
- Contemporary, completed transactions of similar real estate for which full data may not be available
- Similar real estate being marketed where offers have been made but a binding contract has not been completed
- Asking prices (with careful analysis)
12
Q
What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?
A
- Information from published sources or commercial databases
- Other direct evidence (e.g. indices)
- Historic evidence
- Demand/supply data for rent, owner-occupation or investment
13
Q
What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?
A
- Transactional evidence from other real estate type and locations
- Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)
14
Q
When would you use the investment method of valuation?
A
Used when there is an income stream to value
15
Q
How does the conventional investment method work?
A
- Rent received (or Market Rent) x Years Purchase = Market Value
- Assumes growth implicit valuation approach
16
Q
When would you use a Term and Reversion method? How does it work?
A
- Used for reversionary investments i.e. where Market Rent is more than passing rent
- Term capitalised until next rent review / lease expiry at an initial yield
- Reversion to Market Rent valued into perpetuity at reversionary yield
17
Q
When would you use the Layer / Hardcore method? How does it work?
A
- Used for over-rented investment i.e. where passing rent is more than Market Rent
- Income flow divided horizontally
- Bottom slice = Market Rent
- Top slice = passing rent - Market rent until the next lease event
- Higher yield applied to the top slice to reflect additional risk
- Different yields used depending on comparable investment evidence and relative risk
18
Q
What is a yield?
A
- Measure of investment return, expressed as a percentage of capital invested
- Calculated as income divided by price x 100
19
Q
How would you calculate Years Purchase? What does this show?
A
- Divide 100 by the yield
* Number of years required for the income to repay the purchase price
20
Q
What factors would you considering when determining a yield?
A
- Prospects for rental and capital growth
- Quality of location and covenant
- Use of the property
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity
21
Q
What is an All Risks yield?
A
Yield which encompasses all the prospects and risks attached to a particular investment
22
Q
What is a True yield?
A
Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)
23
Q
What is a Nominal yield?
A
Initial yield assuming rent is paid in arrears
24
Q
What is a Gross yield?
A
Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)
25
What is a Net yield?
Yield based on the gross purchase price (i.e adjusted for purchasers' costs)
26
What is an Equivalent yield?
Average time weighted yield reversionary property is valued using an initial and reversionary yield
27
What is an Initial yield?
Simple income yield for current income and current price
28
What is a Reversionary yield?
Market Rent divided by current price on an investment that is under rented
29
What is a Running yield?
Yield at one moment in time
30
When would you use the profits method of valuation?
Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children's nurseries, leisure, healthcare properties and care homes
31
What do you require to conduct the profits method of valuation?
Accurate and audited accounts for 3 years
32
How would you use the profits method of valuation to value a new business?
Use estimates / business plan
33
What is the methodology for the profits method of valuation?
EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield
34
How should you verify a value obtained using the profits method of valuation?
Cross check with comparable sales evidence if possible
35
When would you use the depreciated replacement cost method of valuation?
Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.
36
What is the purpose of the depreciated replacement cost method of valuation?
* Used for owner-occupied properties
* For accounts purposes for specialist properties
* For rating valuations of specialist properties
37
What are the TWO steps of the depreciated replacement cost method of valuation?
1. Value land in its existing use (assume planning permission exists)
2. Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration
38
How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?
1. Physical obsolescence - result of deterioration / wear and tear over the years
2. Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed
3. Economic obsolescence - due to changing market conditions for the use of the asset
39
Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?
* Not suitable to be used for valuations for secured lending purposes
* Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements
40
When reporting a valuation carried out using the depreciated replacement cost method, what must the valuer state with regards to alternative use?
* If higher, the valuer must state the Market Value for any readily identifiable alternative use
* If appropriate, they must state that the Market Value must be materially lower on cessation of the business
41
What guidance has the RICS produced on the depreciated replacement cost method of valuation?
RICS Depreciated replacement cost method of valuation for financial reporting, 2018
42
When did the new RICS Valuation - Global Standards become effective as of?
31st January 2020
43
What has changed with regards to the naming convention of the RICS Valuation - Global Standards?
* Date has been dropped form the title
| * Now referred to as the "Red Book Global" (as opposed to the "Red Book")
44
Why was a new version of the RICS Valuation - Global Standards ("Red Book Global") released?
To reflect updates to the International Valuation Standards
45
What are the SIX parts of the RICS Valuation - Global Standards ("Red Book Global")?
1. Introduction
2. Glossary
3. Professional Standards (PS)
4. Valuation technical and performance standards (VPS)
5. Valuation applications (VPGA)
6. The International Valuation Standard (IVS)
46
What are the material changes that have been included in the Red Book Global?
* PS1: "Written" means any valuation conveyed by paper, any electronic or digital means or in the form of recorded media. This could include the output of valuation software e.g. an AVM
* PS2: Reinforces that valuers must apply independence and objectivity to their work and "professional scepticism" when reviewing information and data
* VPS3: Valuation reports must clearly state the valuation approach and relevant reasoning which led to their findings. Where appropriate, sustainability and environmental matters should form an integral part of the valuation approach
* VPS5: Reinforcement of the obligation to ensure that the valuation model is appropriate for the basis of value, that this is recorded and the model's assumptions are understood (as per new IVS 105)
* IVS410: requirement for valuers of development property to apply a minimum of two method of valuation
47
What does PS1 of the Red Book Global cover?
Requirements on when a valuation has to be Red Book Global Complaint
48
What are the FIVE exceptions, where a valuation does not have to be Red Book Global compliant?
1. Advice is provided in preparation for, or during the course of negotiations or litigation
2. Statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority
3. Internal purposes, without liability and not communicated to any third party
4. Agency and brokerage work in anticipation of receiving instructions to dispose of or acquire and asset (except where a purchase port is required which includes a valuation)
5. Expert witness
49
What does PS2 of the Global Red Book cover?
Ethics, competency, objectivity and disclosures
50
What does PS2 of the Global Red Book state with regards to Professional and Ethical Standards?
All members undertaking valuations must act in accordance with the RICS Global Professional and Ethical Standards, 2015 and be bound by the RICS Rules of Conduct, 2007 (as amended)
51
What does PS2 of the Global Red Book state with regards to independence, objectivity and the identification and management of conflicts of interest?
* Valuers and firms must act objectively and independently
* Should apply "professional skepticism" when reviewing information and data before relying on it
* Identify and manage conflicts of interest
52
What does PS2 of the Global Red Book state with regards to Terms of Engagement?
* Members must understand the client's requirements and comply with the minimum terms of engagement
* Members must be able to demonstrate professional competence
53
What is the hierarchy of evidence for establishing Market Rent?
1. Open market lettings
2. Lease renewals
3. Rent reviews
4. Third party determinations
5. Sale and leasebacks
6. Inter-company transactions
54
What does VPS 1 of the Red Book Global cover?
Minimum matters that must be confirmed in writing to the client prior to commencing a valuation
55
According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?
a. Identification and status of the valuer
b. Identification of the client
c. Identification of any other intended users
d. The asset to be valued
e. Currency
f. Purpose of the valuation
g. Basis of value
h. Valuation date
i. Extent of investigation
j. Nature and source of the information to be relied upon
k. Assumptions and special assumptions to be made
l. Format of the report
m. Restrictions for use, distribution and publication
n. Confirmation of the Red Book Global / IVS compliance
o. Fee basis
p. Complaints handling procedure to be made available
q. Statement that the valuation may be subject to compliance by the RICS
r. Limitation on liability agreed
56
What is an Assumption, as defined in the Red Book Global?
Supposition taken to be true and accepted as fact without the need for specific investigation
57
What is a Special Assumption, as defined in the Red Book Global?
Supposition taken to be true and accepted as fact, even though it is not true
58
What does VPS 2 of the Red Book Global cover?
Inspections, Investigations and Records
59
According to VPS 2, what does it state with regards to the necessity to inspect properties?
Valuers must take the steps to verify the information being relied upon for a valuation to ensure the information if professionally adequate for its purpose
60
If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?
Yes, as long as it does not meet any of the criteria outlined in the PS 1
61
When a valuer conducts a valuation on the basis of restricted information or without a physical inspection, what FOUR factors should they do?
1. Nature of the restriction must be agreed in writing in the Terms of Engagement
2. Possible valuation implications of the restriction confirmed in writing before the value is reported
3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
4. The restriction must be referred to in the report
62
According to VPS 2, is it permitted for a valuer to conduct a revaluation without re-inspecting the property?
Must not be undertaken unless the valuer is satisfied that there has been no material changes to the property or nature of its location since its last inspection (this must be confirmed in the Terms of Engagement and in the valuation report)
63
What does VPS 2 state with regards to the holding of records?
A proper record must be kept of inspections and investigations, and of other key inputs in an appropriate business format
64
What does VPS 3 of the Red Book Global cover?
Minimum requirements to be stated within a valuation report
65
According to VPS 3, what are the minimum requirements to be stated within a valuation report?
a. Identification and status of the valuer
b. Client and any other intended users
c. Purpose of valuation
d. Identification of the asset to be valued
e. Basis of value
f. Valuation date
g. Extent of investigation
h. Nature & source of information relied upon
i. Assumptions and special assumption
j. Restrictions on use, distribution and publication
k. Instruction undertaken in accordance with IVS standards
l. Valuation approach and reasoning
m. Valuation figure(s)
n. Date of valuation report
o. Comment on market uncertainty
p. Statement setting out any limitations on liability that have been agreed
66
According to VPS 3, is preliminary valuation advice able to be given?
Can be given but must be marked as a draft, for internal purposes only, which cannot be relied upon and on no account, can it be published or disclosed
67
According to VPS 3, can a draft report be provided to a client?
* Yes, although the valuer is not to be influenced by the client in any way with respect to the final valuation figure stated in the report
* A draft report provided to a client must state that it is a draft and it is subject to the completion of the final report
* Any changes made to a preliminary valuation must be noted on file and reasons provided
68
What does VPS 4 of the Red Book Global cover?
Basis of Value, Assumptions and Special Assumptions
69
What is the definition of Market Value according to VPS 4 of the Red Book Global?
The estimated amount for which an asset or liability should exchange
• On the valuation date
• Between a willing buyer and a willing seller
• In an arm's length transaction
• After proper marketing
• Where the parties had each acted knowledgeably, prudently and without compulsion
70
What is the definition of Market Rent according to VPS 4 of the Red Book Global?
The estimated amount for which an interest in real property should be lease
• On the valuation date
• Between a willing lessor and willing 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
71
What is the definition of Fair Value (IFRS 13) according to VPS 4 of the Red Book Global?
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
72
When would you be required to report Fair Value?
Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client
73
What is the difference between Fair Value and Market Value?
* RICS view that Fair Value is generally consistent with the definition of Market Value
* Fair value relates to the actual worth of an asset and would be the mutually beneficial value between the buyer and the seller
* Market value is the price which the asset will exchange between parties in the market and is influenced by market forces
74
What is the definition of Investment Value according to VPS 4 of the Red Book Global?
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives i.e. the measure of worth to reflect the value against the client's own investment criteria
75
What is the definition of Equitable Value (IVS 104) according to VPS 4 of the Red Book Global?
* The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties
* Not used in the UK
76
What is the definition of Liquidation Value according to VPS 4 of the Red Book Global?
* Used for a group of assets sold on a piecemeal basis considering the cost of getting the assets into a saleable condition
* Not used in the UK
77
What does VPS 5 of the Red Book Global cover?
Valuation Approaches and Methods (IVS 105)
78
What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?
* Valuers are responsible for choosing and justifying their valuation approach and use of model
* More than one valuation approach may be appropriate in some cases
79
What do the VPGAs in the Red Book Global cover?
Valuation Applications (Valuation Practice Guidance Applications)
80
What does VPGA 1 of the Red Book Global cover?
Valuation for inclusion in financial accounts
81
According to VPGA 1, what must you do when valuing for inclusion in financial accounts?
Where the entity has adopted IFRS, the basis of value will be Fair Value
82
What does VPGA 2 of the Red Book Global cover?
Valuations for secured lending
83
What does VPGA 2 state with regards to dealing with conflicts of interest for secured lending valuations?
* Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender
* "Previous involvement" is defined as normally being within the past two years but under certain circumstances it can be longer
* If the valuer or the client considers that any involvement creates a conflict that cannot be avoided, then the instruction should be declined
84
What examples does VPGA 2 give of involvement that may result in a conflict of interest?
* Having a longstanding professional relationship with the prospective borrower or owner
* 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
85
According to VPGA 2, whose responsibility is to decide whether or not to proceed with an instruction? What should they have regard to?
* Valuer's responsibility to decide whether or not to accept the instruction
* Should have regard to RICS Rules of Conduct
86
According to VPGA 2, if it is agreed that any potential conflict can be avoided by introducing arrangements, what must be done?
The arrangements must be recorded in writing and included in the terms of engagement and valuation report
87
According to VPGA 2, as well as the minimum requirements of a valuation report, what additional information must the report include?
* Disclosure of any conflict of interest identified in the terms of engagement, or that has been subsequently discovered, including the arrangement that have been made. Alternatively a statement that the valuer is not involved
* Valuation methodology adopted, supported where appropriate or requested, with the calculation
* Where a recent transaction on the property has occurred or been provisionally agreed, the extent to which that information has been accepted as Market Value
* Where the enquiry does not reveal any information, the valuer will make a statement to that effect in the report
* Comment on any environmental considerations
* Comment on the suitability of the property for mortgage purposes
* Any circumstances the valuer is aware of that could affect the price
* Any other factor that potentially conflicts with the definition of Market Value or its underlying assumptions
88
According to VPGA 2, what must you do if your valuation for secured lending purposes is subject to a Special Assumption?
Must be a comment on any material difference between the reported value with and without that special assumption
89
According to VPGA 2, how should you take account of sustainability factors?
Comment on the maintainability of the income over the life of the loan in a broader sustainability context (e.g. environmental risks, matters of design, accessibility)
90
According to VPGA 2, what should you comment on in relation to the end of the occupational lease?
Any potential for redevelopment or refurbishment
91
What does VPGA 8 of the Red Book Global cover?
* Valuation of real property interests
| * Covers inspections and investigations, with particular emphasis on environmental constraints and sustainability issues
92
What does VPGA 10 of the Red Book Global cover?
Matters that may give rise to material valuation uncertainty
93
What does VPGA 10 state that valuation reports must not be?
Misleading
94
According to VPGA 10, what should a valuer do/not do when it comes to material uncertainty?
* Valuer should clearly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation on the specified date relating to the risk surrounding the valuation of the asset
* A standard caveat should not be used
95
What does part 6 of the RICS Valuation - Global Standards ("Red Book Global") cover?
* International Valuation Standards, 2020
* "General Standards" addressing matters such as terms of engagement, approaches to, bases and methods of valuation as well as reporting
* "Asset Standards" which provide requirements relating to specific types of asset, such as real property and development property
96
What is the relationship between the Red Book Global and the RICS Valuation - Global Standards (UK National Supplement, 2018)?
* The UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not a substitute for it
* Provides requirements for members on the application of the RICS Valuation - Global Standards in the UK jurisdiction
97
What were the key changes introduced in the UK National Supplement, 2018?
* More user friendly with clear advice on what is and is not mandatory
* New UK VPGAs have been included for the valuation of central government assets, local authority assets and registered social housing providers' assets
* For financial reporting valuations, there is greater differentiation between UK GAAP and IFRS requirements
* New section on valuation for commercial lending (UK VGPA 10)
98
What are the FOUR parts of the UK National Supplement, 2018?
1. Introduction
2. UK Professional and Valuation Standards (Mandatory)
3. UK Valuation Practice Guidance Applications (Advisory)
4. Summary of changes from Red Book UK, 2014 (revised 2015)
99
What does UK VPS 3 of the UK National Supplement cover?
Regulated purpose valuations
100
According to UK VPS 3, what are regulated purpose valuations?
Valuations relied on by third parties who have not commission the valuation and are subject to valuation monitoring
101
According to UK VPS 3, what are the FIVE regulated purpose valuations?
1. Financial reporting (company accounts)
2. Stock Exchange listings / inclusion in prospectuses and circulars
3. Takeovers and mergers
4. Collective investment schemes
5. Unregulated property unit trusts
102
According to UK VPS 3, are valuations for secured lending purposes considered a regulated purpose valuation?
No
103
According to UK VPS 3, how does the RICS monitor regulated purpose valuations?
* Inspections by RICS professional regulation team
* Members must declare the length of time the valuer has acted for the client for regulated valuation purposes and the extent and duration of the firm's relationship with the client
* Whether in the last financial year, the percentage of the fee income from the client is more or less than 5% of the total fee income
* Whether this has changed since the end of the last financial year or will likely change
104
According to UK VPS 3, what does the RICS recommend with regards to valuer selection for regulated purpose valuations?
* Should be a policy in place on the rotation of valuers when the asset is regularly valued
* RICS recommends a 7-year maximum rotation policy
105
According to VPS 3, when is a valuer unable to act on behalf of a client in relation to regulated purpose valuations?
Where the property was acquired by the client within the last 12 months and the valuer's firm received an introductory fee or negotiated the purchase on behalf of the client
106
Why are building cost reinstatement valuations/estimations required?
Building insurance purposes
107
What do building cost reinstatement valuations/estimation show? What would they be based on?
* Cost of the reinstatement of the building without a profit
* Use of RICS Building Cost Information Service (BCIS) adopting GIA for commercial properties and GEA for residential
* Add VAT, demolition costs, professional fees, planning and building regulation fees and inflation allowance if applicable
108
Why does a replacement cost figure provided for insurance purposes, whether separately or within a valuation report, not have to be Red Book Global compliant?
It is not a "written opinion of value"
109
What is hope value?
The value arising form any expectation that future circumstances affecting the property may change
110
Provide some examples of where hope value may arise.
* Future prospect of securing planning permission for the development of land, where no planning permission exists at the present time
* The realisation of marriage value arising from the merger of two interests in land
111
What must charities do when seeking to buy or sell property?
Obtain a Section 119 of the Charities Act 2011 valuation
112
What must a valuer do when conducting a valuation on behalf of a charity?
* Follow guidance contained in UK VPGA 8
* Comment whether the purchase or sale is in the charity's best interest
* State whether the terms agreed are the best that can be reasonably obtained
* Basis of valuation must be Market Value or Market Rent
* Valuer must follow Section 119 of the Charities Act 2011
113
What are the typical purchasers costs deducted from the gross market value?
* Stamp Duty Land Tax: at prevailing rate
* Agent's fees: 1% of purchase price (+ VAT)
* Legal fees: 0.5% of purchase price (+ VAT)
114
What is marriage value? How do you calculate the level of marriage value?
* Created by the merger of interest - can be physical or tenurial
* Undertake a before and after valuation and calculate the level of marriage value created
115
How is marriage value typically split between parties?
Typically split the marriage value create 50:50 or on a pro-rata basis using the value of the individual interests
116
How would you value a long leasehold interest?
Deduct ground rent from the gross rent to calculate the net rent received. Then can either:
• Capitalise at a yield for the remaining length of the lease
• Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments
• Discounted cash flow (DCF)
• Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset
117
What is the significance of rent received and rent receivable when calculating the value of a leasehold interest?
* Ground rent can be calculated on a geared basis, using the rent from the leasehold interest
* Rent "received" will be where ground rent is payable on rent actually received by the leaseholder
* Rent "receivable" will be where the ground rent payable is based on the potential return as opposed to the actual return i.e. the tenant takes on the risk of voids
118
What is a premium in relation to a transaction?
A capital payment made by one party to another
119
In what instances do premiums commonly arise?
* Key money paid by an in-going tenant of a retail property to secure a prime shop
* Sum of money to represent fixtures and fittings within a building, paid by an in-going tenant
* Sum of money paid by an in-going tenant for a leasehold interest, to represent the positive difference between the passing rent and the market rent of the property. This is the profit rent
* In the event that there is a negative difference, a reverse premium may be paid by the out-going tenant to the new tenant
* The sum of money paid by a landlord to a tenant for the surrender of a leasehold interest and the granting of a new lease
120
What is the WAULT?
Weighted average unexpired lease term remaining to the first break or expiry of a lease
Weighted by the contracted rent
121
What is a ransom strip?
Piece of land which controls the access to another piece of land
122
What is the generally accepted valuation for ransom strips?
* 15-50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme
* In some cases a fixed sum has been awarded
* Upper Tribunal (Lands Chamber) assesses each case on its own facts
123
What is the rate of stamp duty for the transfer of non-residential and mixed-use property?
Up to £150,000: Zero
£150,001 - £250,000: 2%
+ £250,000: 5%
124
What is ATED? What does it aim to stop?
Annual Tax on Enveloped Dwellings (ATED)
Aims to stop on-shore and offshore individuals using companies to avoid SDLT for residential property. Current threshold is £500,000
125
How is SDLT calculated on the granting of new leases and premiums payable?
Calculated on the Net Present Value (NPV) of the leases (using RPI as a discount rate). For commercial property the rate paid on the NPV is:
Up to £150,000: Zero
£150,001 - £5,000,000: 1%
+ £5,000,000: 2%
Calculator available on the HMRC website
126
How are break clauses accounted for in SDLT calculations for the transfer or leasehold properties?
They are excluded from the calculations
127
Explain the principle of Zoning?
* Used for retail properties to create a unit of comparison for different sized buildings
* Rationale – the rental value of the property reduces away from the street i.e. the area at the front of the shop is most valuable to a retailer as it will generate most sales
* Zone A closest to the window is most valuable with the value deceasing with distance from the frontage.
* Halving back principle with 6.1m (20 ft) zones
128
On which retail pitches are 30ft zones used?
Some London retail streets (e.g. Oxford Street, Regent Street and Bond Street) and certain prime shopping streets in Scotland
129
How are basement and first floor areas usually treated in retail properties?
A/10 depending upon the comparable evidence
130
What types of unit will allowances typically be made for when zoning?
Those with split levels, excessive front to depth ratio and hard frontages (e.g. banks) depending on the comparable evidence
131
How are return frontages typically dealt with?
* 2.5-10% uplift depending on the comparable evidence and footfall
* Use mirror zoning i.e. zone from both frontages
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What is natural zoning?
When the property zones reflect physical changes in the building such as steps
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What is masking?
The valuation of 'hidden' / obscured areas
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How does the Red Book Global define a Special Purchaser?
A particular buyer for who a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market
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How does the Red Book Global define Special Value?
An amount that reflects particular attributes of an asset that are only of value to a special purchaser
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Provide examples of when a Special Purchaser would arise?
* Tenant purchasing the freehold interest
| * Association with the property e.g. owning an adjacent property
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How does Market Value reflect Special Value?
Ignores any price distortions caused by Special Value
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What is a net effective rent?
This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction
Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period
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What are the THREE approaches used for calculating net effective rent?
1. Straight line method
2. Straight line method assuming time value of cash flow using a yield
3. Use of DCF
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What is a party wall?
Stands astride the boundary of land belonging to two or more different land owners
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What is included in the Party Wall Act 1996?
* Provides a framework for resolving disputes relating to party walls, boundary walls and excavations near neighbouring buildings
* Provides a building owner who wishes to carry out various sorts of work to an existing party wall with additional rights
* Must inform all adjoining owners of your intentions to undertake works on the party wall
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What is a right of light? When does it arise?
* Arises after twenty years uninterrupted enjoyment of light without the consent of a third party by way of an easement with a prescriptive right
* If a right to light infringed, an injunction can be granted or damages awarded
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What schemed did the RICS introduce in October 2011 for the regulatory monitoring of all valuers carrying out Red Book valuations?
RICS Valuer Registration Scheme (VRS)
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What are the THREE aims of the RICS Valuer Registration Scheme (VRS)?
1. Improve the quality of valuation and ensure the highest possible professional standards
2. To meet the RICS requirement to self-regulate effectively
3. To protect and raise the status of the valuation profession as the leading expertise in valuation
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What should clients be able to expect from a RICS valuation following the introduction of the RICS Valuer Registration Scheme (VRS)?
* Openness and transparency
* RICS protection and international valuation standards
* Expertise and clear reporting
* World class regulations
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Which newly qualified members are eligible to apply for the RICS Valuer Registration Scheme (VRS)?
* Those who have completed the APC valuation competency to Level 3 qualify for registration
* There is an alternative route post qualification to be a Registered Valuer for candidates who have taken Valuation to only Level 2. This includes undertaking more valuation experience (up to 100 days) and a case study submission
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Who is registration mandatory for under the RICS Valuer Registration Scheme (VRS)?
* Those undertaking valuation work in compliance with the Red Book Global
* Registration is not mandatory for work excluded from the Red Book Global
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What information must be provided under the RICS Valuer Registration Scheme (VRS)?
* Type of valuations
* Purpose of valuations
* Number of valuations
* Firm's total fee income from Red Book Global valuations in the last year
* What data sources used
* Quality assurance audit procedures in place
* History of any negligence claims and notifications
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How do the RICS monitor those signed up to the Valuer Registration Scheme (VRS)?
* Publishes a register of registered valuers
* Monitor valuers through the submissions of their firms annual return
* Risk based reviews, ranging from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on the risk identified
* Head of Regulation has the power to remove a valuer from the scheme
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What are the different types of ground rent?
* Fixed
| * Geared (rent received/receivable)
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What would a lender be concerned about with regards to the valuation of an over rented property?
The quantum of the over-rent i.e. how much the rent would decrease by at the next break option or lease expiry
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What is the generally acceptable upper limit for ground rent when it is calculated on a rent received or receivable basis?
10-15% of the passing rent or market rent
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What are the issues associated with the layer / hardcore method of valaution
* Subjective yield selection - based on received tenant covenant strength and length of the over rent. Has to be done intuitively
* Double-counting - as the ARY applied to the bottom layer will be growth implicit, the size of the over rent will reduce over time
* Unrealistic split of income - risk of non-receipt is attached tot he whole income
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Are you qualified to comment on covenant strength?
No, I am able to comment on how the market would likely perceive the tenant covenant
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When making a discount to the rent for masking in a property, how much discount would you generally apply?
Would generally discount at the rate between the zone the floorspace is in and the rate of the zone behind i.e. if in the second zone, would discount at A/3 or if in the third zone, would discount at A/6
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Can you undertake valuation work on behalf of a lender that you are already instructed by on other loan security work? In what instances might you be conflicted due to a relationship with the lender?
Yes, it is permitted to undertake multiple loan security valuations on behalf of the same lender. You may, however, be conflicted if your firm had open litigation with that lender or were involved in their corporate restructuring, for example.
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How would you carry out a valuation differently if you were instructed today as a result of Covid-19?
Impact of Covid-19 on valuation:
• Would be unable to inspect the property so would have to make this restriction on information clear in the ToE and the report
• Include a material uncertainty clause in accordance with VPGA 10. Use wording recommended by the RICS
• Increase length of void periods as reletting is likely to take longer, particularly for retail and leisure uses
• Market rent and yield selection would be impacted, although unlikely to be the transactional evidence to support this. Would judge market sentiment from agents
• Ensure I had the correct PII in place that would cover valuation practice in the current environment and that I had capped liability
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What is a material uncertainty clause?
* Used when the degree of uncertainty falls outside any parameters that might normally be accepted
* Does not mean to suggest that the valuation cannot be relied upon
* Less certainty can be attached to the valuation that would otherwise be the case
