Valuation Flashcards
Tell me what are the 5 methods of valuation.
- Comparable – most common method of valuation, used when there is suitable market evidence to use as comparable evidence
- Investment – used when there is an income stream to value
- Residual – used to value a site
- Profits – used when the value of a property is intrinsically linked to its use e.g. pub or hotel
- Depreciated Replacement Cost / Contractors– used for properties not frequently traded on the open market where no comparable evidence can be obtained
Tell me about how you would value a building using the profits method of valuation.
Used when the value of a property is intrinsically linked with the profitability of the business that is run there. E.g. hotels, pubs, petrol stations. Use three years of accounts.
Annual turnover
– costs = gross profits
– reasonable working expenses = net profit
– operators renunciation = EBITDA
X capitalise at an appropriate yield
Tell me about how you would value a building using the Depreciated Replacement Cost/ Contractors method of valuation.
Used for specialist properties that are not frequently traded on the open market.
Find the value of the land in it’s current form, add on the cost of replacing the building, take off value for deterioration and obsolescence.
Tell me about how you would value a building using the investment method of valuation.
Investment
Used when there is an income stream to value. The rental income is capitalised by an appropriate yield to produce a capital value.
• Layer and hardcore – overrented property
• Term and reversion – underrented property
• DCF – discounted cash flow, growth explicit model – estimate cash flow over the holding period less costs, estimate exit value, select a discount rate, discount the cash flow, value is the sum of the completed discounted cash flow to provide the NPV.
Tell me about how you would value a building using the comparable method of valuation.
This is the most common method of valuation and is the basis for all valuations. Search and select comparable evidence, verify the details, assemble in a schedule, adjust in relation to the subject property, analyse to form an opinion of value, report value.
Tell me about how you would value a building using the residual method of valuation.
Used to value sites.
1. Find the Gross Development Value – for commercial property capitalise the market rent by an appropriate yield
2. Deduct purchaser’s costs – Stamp duty, agents and legal fees
3. Deduct development costs – construction costs, professional fees,
4. Deduct developer’s profit – usually around 15%
= Site Value
What is PI Insurance (PII)? Why do surveyors need PII?
Professional indemnity insurance is designed for professional firms and people which covers them in the event of certain errors made during the course of their business. The policies available mainly cover professional negligence, errors or omissions, breach of professional duty and civil liabilities.
PI insurance will only cover your professional capabilities in certain areas. Rates for this insurance generally range from 0.25% up to 5% of fee income or annual turnover, depending on the usual risk factors and market competition.
Why?
To protect surveyors, clients and third parties against negligence claims where there is a duty of care breached and a claim for damages arises
Tell me about the RICS requirements in relation to PII.
Appendix A: Professional obligations to RICS
Firms must ensure that all previous and current professional work is covered by adequate and
appropriate professional indemnity cover that meets the standards approved by RICS.
What is run off cover?
Type of cover you need to cover a claim brought after a firm or member ceases to trade.
What is the Red Book?
The Red Book is issued by RICS and it contains mandatory rules, best practice guidance, and related commentary for all members undertaking asset valuations
Why does the Red Book exist?
Purpose:
- Provide consistency, objectivity and transparency
- Build public confidence and trust in RICS members’ valuations
- Ensure valuers are working to the latest international standards
- Provide an essential quality control check without the need for legislation
However, the Red Book does not instruct valuers how to value - it instead provides the framework for valuation to which each individual valuer will apply their own skills and experience.
Tell me about a factor which may impact value.
Size, location, condition, previous rents, views, local infrastructure.
What is your duty of care as a surveyor when undertaking a valuation?
Valuers owe a duty of care towards their clients, both in contract and in tort (for negligence). They may also owe a duty of care towards third parties, in certain circumstances.
Why is independence and objectivity important when valuing?
To adhere to professional and ethical standards… To promote consistency, and ensure transparency, and to provide an unbiased true valuation.
What challenges do valuers face?
Limited or infrequent transactions
Lack of up-to-date evidence
Evidence created by special purchasers, who may have paid more than the market because of an over-riding motivation
Lack of similar or identical evidence due to the complex nature of real estate
Lack of market transparency
When was the Red Book last updated?
RICS Red book Global 2022 Update (January 22)
When were IVS standards updated?
31st January 2022
What changes were made in Red book 2022?
The aim of the update is to reflect changes to the International Valuation Standards 2022, as well as clarifying certain sections of the existing Red Book Global.Valuers need to amend any valuation templates or proformas used, including reports and terms of engagement to reflect below changes.
Emphasising the need to agree clear and unambiguous terms of engagement.
The terms quasi, partial or non Red Book should not be used in terms of engagement or reporting. Instead, the exception should be specifically stated and explained in the terms of engagement and valuation report.
Requiring more detailed commentary on sustainability/resilience and environmental, social and governance (ESG) matters in VPGA 8 Valuation of Real Property Interests.
Various amendments are made to the VPGAs, in particular VPGA 4 Individual Trade Related Properties and the reference to IVS 230 Inventory.
What is the format of the Red Book?
Broadly, it is made up of 2 x Professional Standards and 5 x Valuation Professional Standards which are mandatory and 10 x Valuation Practice Guidance Applications which are not mandatory but are a guidance for best practice
- Introduction
- Glossary
- Professional Standards (PS)
- Valuation technical and performance standards (VPS)
- Valuation applications (VPGA)
- International Valuation Standards (IVS)
Which do you follow – the latest IVS or the Red Book Global?
IVS are produced by the IVSC (council) which is an international body
RICS Red Book adopts the IVS and provides an implementation an application framework for members and firms
When does the Red book apply?
The Red Book applies to written valuations, including the provision of an Automated Valuation Model (AVM) output. It does not apply to estimated replacement cost figures for insurance purposes. For oral valuation advice, the principles of the Red Book should still be observed as liability cannot be avoided in this way.
Which sections of the Red Book are mandatory and which are advisory?
Mandatory
2 x Professional Standards and 5 x Valuation Professional Standards
Advisory
10 x Valuation Practice Guidance Applications are not mandatory but are a guidance for best practice
What does PS1 and PS2 relate to?
PS1 – Compliance with standards and practice statements where a written valuation is required
- Anyone responsible for analysing or communicating a written opinion of value
- May produce but no sign reports
- Any departure must be covered by S.Assumption
PS2 – Ethics, Competency, Objectivity & Disclosure
- Experience, skill, judgement
- Act in a professional manner, free from bias, undue influence, conflict
- Responsibility for valuation
- Professional and ethical standards
- Member qualification
- Independence objectivity and conflicts of interest
- Strict separation between advisors
What does VPS1-5 relate to?
VPS1 – Term of Engagement
VPS2 – Inspections, Investigations & Records
VPS3 – Valuation Reports
VPS4 – Bases of value, assumptions and special assumptions
VPS5 – Valuation approach and methods
T TOE I NSPECTIONS, INVESTIGATION, RECORDS R EPORTS B ASES OF VALUE, ASSUMPTION, SPECIAL ASSUMPTIONS A APPROACH & METHODS
What does VPGAs relate to?
VPGA1 – Financial Statements
VPGA2 – Secured Lending
VPGA3 – Business & Business Interests
VPGA4 – Individual trade related properties
*Net adjusted profit
VPGA5 – Plant & equipment
VPGA6 – Intangible assets
VPGA7 – Personal property (including arts & antiques)
VPGA8 – Real property interests
VPGA9 – Portfolios, collections and groups of properties
VPGA10 – Valuation uncertainty
Tell me about VPS 1?
VPS1 – TOE (what needs to be included):
- Identity of client
- Identity of valuer and their status
- Asset to be valued
- Purpose of valuation
- Bases
- Date
- Extent of Investigations, Inspections
- Restriction on use
- Nature and source of information
- Compliance with IVSC/Global Valuations Standards 2017
- Assumptions & Special Assumptions
- PI Cover
- Disclosures
- Fee
- Complaints handling
Tell me about VPS 2?
VPS2 – Inspection & Investigation
- Must be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose
- Valuer should verify all information provided and clarify assumptions
- Any restrictions on inspection must be noted in TOE
- Re-valuation without inspection should only be done where value is certain no material changes have occurred. Should also be agreed with client and state in TOE
Tell me about VPS 3?
VPS3 – Valuation Reports
Similar minimum standards to TOE. Never formal or informal. Never described as ‘certificate of value’, ‘valuation certificate’ or ‘statement of value.
- Identity of client and valuer (plus status)
- The property
- Characteristics (location, description)
- Basis of valuation
- Valuation Date
- Report Date
- Inspection/Investigation
- Source of information
- Assumptions/Special Assumptions
- Restrictions on use
- PI Cover
- Disclosures
- Fee
- Compliance with IVS
- Valuation Approach, Methodology and rationale
- Amount of Valuation (in figures and words)
- Currency
Tell me about VPS 4?
VPS4 – Bases of Value, Assumptions, Special Assumptions
Must ensure the bases are suitable for the valuation.
Market Value – the estimated amount and asset or liability should exchange on the open market at the valuation date between a willing purchaser and a willing vendor in an arm’s length transaction after proper marketing and assuming both parties have acted prudently, knowledgably and without compulsion
Market Rent – the estimated amount an asset or liability will let on the open market at the valuations date between a willing lessor and a willing lessee in an arm’s length transaction, after proper marketing and assuming both parties acting knowledgably, prudently and without compulsion.
Investment Value – The value of an asset to an owner or prospective owner for individual or operational objectives.
Fair Value – IFRS the price that would be received to sell and asset or paid to transfer a liability in an orderly transactions between market participants at the measurement date.
IVSC – The estimated price for the transfer of an asset between identified knowledgeable and willing parties that reflects the respective interests of those parties.
Tell me about VPS 5?
Valuers are responsible for adopting and justifying, the valuation approach(es) and the valuation methods used.
When do VPS1-5 not apply?
There are no exemptions from compliance with PS 1-2 when providing valuation advice.
However, there are 5 specific circumstances where VPS 1-5 may be unsuitable or inappropriate to comply with:
Providing agency or brokerage advice for an acquisition or disposal
Acting as an expert witness
Performing statutory functions
Providing a valuation purely for internal purposes, without liability and without communication to a third party
Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate
Do I need to verify information I rely upon in my valuation?
Effectively, yes. VPS 2 (Inspections, investigations and records) confirms that you must take ‘reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be made.
While a client may request, or consent to, an assumption being relied on, nevertheless if – following inspection – the valuer considers that such an assumption is at variance with the observed facts, then its continued adoption could, providing that it is realistic, relevant and valid for the particular circumstances of the valuation become a special assumption’.
Can I revalue without reinspecting?
Revaluation without reinspection cannot be undertaken unless you are satisfied that there have been no material changes to the physical or locational nature of the property since the last valuation. See Section 2 of VPS 2 for further specific detail.
What do I have to include in my valuation report?
VPS 3 (Valuation reports) sets out what you need to include in your valuation report:
Identification and status of the valuer
Identification of the client(s) and other intended users
PurposeIdentification of the asset(s)/liability(ies) being valued
Basis of value (see VPS 4)
Valuation date
Extent of investigations
Nature and source of information relied upon
Assumptions and special assumptions
Restrictions on use, distribution and publication
Confirmation of compliance with IVS
Valuation approach and reasoning
Amount of the valuation (s)
Date of the valuation report
Commentary on material uncertainty
Any limitations on liability agreed
What type of advice does the Red Book cover?
The Red Book does not instruct valuers how to value - it instead provides the framework/procedural rules and guidance for valuation to which each individual valuer will apply their own skills and experience.Red book Global imposes the mandatory obligations for competence, objectivity, transparaency and performance.
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
• the opinion is provisional and subject to completion of the final report
• the advice is provided for the client’s internal purposes only and
• any draft is on no account to be published or disclosed.
If any matters of fundamental importance are not reflected, their omission must be
declared.
What type of valuations might be relied upon by a third party?
regulated purpose valuation
What is the difference between an assumption and a special assumption?
Assumption:
A supposition taken to be true. It involves facts, conditions or situations affecting the subject of, or approach to, a valuation that, by agreement, do not need to be verified by the valuer as part of the valuation process. Typically, an assumption is made where specific investigation by the valuer is not required in order to prove that something is true.
Special assumption:
An assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.
What sources of information would you consider when preparing a valuation report?
Internal database.
Property price register.
Daft, MyHome.
Call local agents
What pre-instruction checks should I carry out?
Before accepting an instruction, you need to ensure you comply with PS 2 - Ethics, competency, objectivity and disclosures:
Check you are sufficiently competent, knowledgable and experienced to provide the required valuation advice
Ensure no conflicts of interest exist or that they are managed appropriately
Undertake the required money laundering checks on your client
Issue Red Book compliant Terms of Engagement (see VPS 1) and hold a signed copy on file
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Certain types of valuation require additional disclosures to be made (under PS 2):
Published financial statements Stock exchange Publication, prospectus or circular Investment schemes Takeovers or mergers
The additional disclosures may include the following:
Relationship with the client and previous involvement
Rotation policy
Time as signatory
Proportion of fees
For secured lending valuations, modified or extended requirements may apply under VPGA 2.
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
An arrangement for the valuation to be periodically reviewed at intervals not greater than seven years by another member would assist in demonstrating that the member is taking steps to ensure that objectivity is maintained and thus mayretain the confidence of those relying on the valuation. (not mandatory)
When might a conflict of interest exist in relation to a valuation instruction?
There must be strict separation between advisors of the individual instructing the valuation and the valuer. For example; a friend might approach a valuer and ask to undervalue the family home when going through a divorce. This is strictly prohibited as there is no objectivity and it is a conflict of interest.
What is a restricted valuation service and can you provide one?
A client may require a restricted service; for example, a short timescale for reporting may make it impossible to establish facts that would normally be verified by inspection, or by making normal enquiries; or the request may be for a valuation based on the output of an automated valuation model (AVM). A restricted service will also include any limitations on assumptions made in accordance with VPS 2. often referred to as ‘drive-by’, ‘desk-top’ valuations.
What RICS guidance relates to the use of comparable evidence?
RICS Guidance Note, Comparable Evidence in Real Estate Valuation (1st Edition, October 2019).
What is an internal valuer?
Internal valuation is a valuation carried out by a valuer who is employed by either the entity that owns the assets or a related company or manager.
Can an external valuer provide an internal purposes valuation?
External Valuer – A valuer who, together with any associates, has no material links with the client, an agent acting on behalf of the client or the subject of the
assignment.
Yes an external valuer can provide an internal valuation.
What happens if market conditions change between the valuation date and report date?
the valuer should draw attention to this in the special assumptions. Valuation date and report date must be clearly distinguished in the report.
What is a ‘special purchaser’?
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market.
Is special value from a special purchaser reflected in MV? Where does the definition of fair value come from?
Market value Ignores any price distortions caused by special value or marriage value.
Does this differ from MV? When is fair value used?
Fair value refers to the actual worth of an asset, which is derived fundamentally and is not determined by the factors of any market forces. Market value is solely determined by the factors of the demand and supply, and it is the value that is not determined by the fundamental of an asset.
Fair value is used when valuing a property for accounting purposes.
What are the 3 approaches under VPS5?
- Market approach (Comparable)
- Income approach (Investment, profits)
- Cost approach (Residual , DRC)
What is the Valuer Registration Scheme?
Valuer Registration is a risk monitoring and quality assurance programme which audits compliance with the RICS Red Book.
Are there any instances where certain sections of the Red Book may not apply?
There are no exemptions from compliance with PS 1-2 when providing valuation advice.
However, there are 5 specific circumstances where VPS 1-5 may be unsuitable or inappropriate to comply with:
Providing agency or brokerage advice for an acquisition or disposal
Acting as an expert witness
Performing statutory functions
Providing a valuation purely for internal purposes, without liability and without communication to a third party
Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate
What is the basis of value under FRS 102?
Fair value.
What is a SORP?
What does SORP mean?
SORP is the Statement of Recommended Practice (SORP) on Accounting and Reporting for charities which prepare their accounts on an accruals basis.
When would you use EUV? What is the definition of EUV?
EUV is effectively the value of land in it’s existing use. This is not the same as the price paid and it must disregard any hope value.
What additional criteria apply to secured lending valuations?
Disclosure of any conflicts in terms of engagement and arrangements to manage the conflict (last 2 years)
- Valuation method adopted, supported with the calculation
- When a recent transaction at the property has occurred/provisionally agreed price disclosed, the extent to which that information has been accepted as Market Value
- Comment on the suitability of the property for lending
- Any circumstances of which the valuer is aware that could affect the price
- if the property is, or is intended to be, the subject of development or refurbishment for residential purposes, the impact of giving incentives to purchasers
- Potential and demand for alternative uses
- Occupational demand for the property
What information should you specifically request for a secured lending valuation?
. Information and references to the volatility in specific markets is a pre-requisite of a well documented valuation.
What is a regulated purpose valuation?
A valuation relied on by third parties who have not commissioned the valuation and they are subject to valuation monitoring.
What additional disclosures must be made for a regulated purpose valuation?
Proportion of total fees in the preceding financial year paid by the client to the total fee income expressed as either less than 5%, or, if more than 5%, then within range of 5%
Where, since the end of the last financial year, if it is anticipated that there will be a material increase in the proportion of fees payable by a client, the valuer must include a statement to this effect
What is the basis of value for a statutory valuation? What might a statutory valuation relate to?
- Financial statements (company accounts) 2. Stock Exchange listings 2. Takeovers and mergers 4. Collective investment schemes 5. Unregulated property unit trusts
What is a yield?
A measure of risk and return on an investment property that generates income, expressed as a percentage.
What is an equated yield?
Target rate of return. Internal Rate of Return. Used in DCF.
What is an equivalent yield?
The weighted average of the Initial Yield and the Reversionary Yield representing the return a property will produce based upon the timing of the income received.
How would a yield reported from auction differ from a Net Initial Yield?
Auction results (beware that these are gross prices, and may also be special purchaser/insolvency sale)
How would you value a property in uncertain market conditions – does the Red Book give any guidance?
In the case of uncertainty, the Red Book states that ‘valuers should not treat … a statement expressing less confidence in a valuation than usual as an admission of weakness … it is … a matter entirely proper for disclosure’. Valuers should, therefore, ensure clients understand that unusual market conditions may lead to uncertain valuations, but that this will help them to make better informed business decisions.
How could you value a long leasehold interest?
I would deduct the Ground Rent from the Gross Income to calculate the Net Income.
Capitalise Net Income at a yield for the remaining length of the lease to create a Market Value of the Leasehold Interest.
Typically, single rate yield discounted to reflect risk that a Leasehold interest a ‘wasting asset’; depends on the length of the lease remaining. Long leasehold interests do not realistically require a discount.
Graphs of relativity show relationship between lease term remaining and the % of Freehold value. Under 50 years; treated as a ‘wasting asset’.
How does a term and reversion and DCF differ?
Both are types of investment method of valuation.
T & R = Since market rents tend to rise and fall, if the current passing rent is less than the market rent, the investment is said to be ‘reversionary’.
Discounted cash flow (DCF) is used to estimate the value of an investment based on its expected future cash flows. It calculates what is the value of an investment today, based on projections of how much money it will generate in the future.
What is the difference between a growth explicit and a growth implicit yield?
Implicit used in ’trad’ investment vals, explicit in DCFs where you explicitly forecast rental growth (it is built into the yield for implicit yields and the trad method)
When would you use a dual rate investment calculation?
Long leashold.
Give examples of each of these types of yield.
Gross yield 5.65%
Net yield 4.96%
How would you value an under/over rented investment property?
Hardcore and topslice.
Where can you find yield evidence from?
no different to rent or sales comps.
What is the hierarchy of evidence?
RICS have categorised comparables into three categories, forming a hierarchy of evidence:
Category A – direct transactional evidence
Category B – general market data providing guidance rather than a direct indication of value, such as evidence from published sources, commercial databases, indices, historic evidence and demand/supply data
Category C – other sources, such as transactional evidence from other property types and locations and other relevant background data
What would you do if comparable evidence was limited?
A lack of robust evidence should not prevent a valuation being provided, this is where the skills and experience of the valuer become even more important. Valuers can also look further afield and at a wider range of evidence or indicators where direct comparables are limited.
In the case of uncertainty, the Red Book states that ‘valuers should not treat … a statement expressing less confidence in a valuation than usual as an admission of weakness … it is … a matter entirely proper for disclosure’. Valuers should, therefore, ensure clients understand that unusual market conditions may lead to uncertain valuations, but that this will help them to make better informed business decisions.
What is NPV?
Net present value. NPV is defined as the present value of all future expected income and capital flows, discounted at the investor’s target or required rate of return.
What is IRR?
Internal Rate of Return. IRR is a metric used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero
What is a term and reversion? What is a hardcore and topslice?
Used for under/ over-rented properties
- The income flow is divided horizontally
- Top slice = passing rent less The market rent
- Bottom slice = market rent
- Top slice is capitalised until The next rent review/end of term
- Bottom slice is capitalised into perpetuity
- Higher yield applied to The Top slice
What is a Discounted Cash Flow (DCF)?
DCF discounts back to the future value of the property’s future income stream, allowing for rental growth and taking account of the timing of receipts/payments.
When would you use a DCF?
A DCF analysis is appropriate in any situation wherein a person is paying money in the present with expectations of receiving more money in the future. Example a hotel.
What are the advantages of a DCF? What are the disadvantages of a DCF?
PROs
- Theoretically the most sound method if the analyst is confident in his assumptions
- Not significantly influenced by temporary market conditions or non-economic factors
- Especially useful when there is limited or no comparable information
CONS
- Valuation obtained is very sensitive to a large number of assumptions/forecasts, and can thus vary over a wide range
- Often very time-intensive relative to some other valuation techniques
- Involves forecasting future performance, which is very difficult
What is marriage value?
The additional value created when combining two or more assets together rather than the value of them separately.
When would you include an element of hope value in a valuation?
An additional value applied to land in the hope of conversion to an alternative and higher value use.
Example:
Hibernia REIT’s purchase of 90 acres at Newlands Cross area for €27m. The land is zoned agri and adjoins other holdings owned by Hibernia. There is a hope that given the location, access etc and the hosing crisis that these lands will be rezoned for residential use. Interestingly, the IRFU have retained an interest in the land in this regard – Should the lands be re-zoned in the next 10 years, the IFRU will be entitled to an additional payment equal to 44% of the market value of the lands at that date, minus the initial purchase price and subject to certain minim payments.
What is market value?
It is the estimated amount at which an asset or liability should be exchanged for on the open market on the valuation date between a willing vendor and willing buyer, in an arm’s length transaction, after proper marketing, and where the parties acted knowledgeably, prudently and without compulsion.
Tell me what the definition of investment value?
The value of an asset to an owner or prospective owner for individual or operational objectives.
Tell me what the definition of fair value?
The estimated price for the transfer of an asset between identified knowledgeable and willing parties that reflects the respective interests of those parties. Fair value refers to the actual worth of an asset, which is derived fundamentally and is not determined by the factors of any market forces.
Fair value is used when valuing a property for accounting purposes.
How does market value differ to investment value/fair value?
Market Value is achieved in an arm’s length transaction so disregards any advantages or disadvantages for each party gains from the transaction, whereas fair value is the assessment of price between two identified parties and can take these advantages and disadvantages into account.
Definition of Market Rent
Is it the estimated amount at which an asset would be leased on the open market between a willing lessor and a willing lessee, in an arm’s length transaction, after proper marketing and where both parties have acted knowledgeably, prudently and without compulsion
What is gross yield?
The yield is not adjusted for purchasers’ costs
What is net yield?
The resulting yield adjusted for purchasers’ costs
Definition of Reversionary Yield
The yield a property will fetch once the rent returns to Market Rent in the future. Found by dividing the Market Rent by the current price
What are purchasers’ costs?
The costs associated with purchasing the property, namely Stamp Duty which is 7.5% on commercial properties, agents and legal fees which are approximately 1% each.
What is a dual capitalisation rate and when would you use one?
Capitalisation Rate (or Cap Rate) is a ratio used to estimate the value of income producing properties. Put simply, the cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage. Use for investment properties.
Is the profits/DRC method used for specialised or specialist property?
DRC.
What type of properties would you use the profits method for?
Profits - A nursing home/ hotel
What is intangible goodwill?
Goodwill is an intangible asset that accounts for the excess purchase price of another company. Items included in goodwill are proprietary or intellectual property and brand recognition, which are not easily quantifiable.
What is net profit?
Net profit is the amount of money your business earns after deducting all operating, interest, and tax expenses over a given period of time. To arrive at this value, you need to know a company’s gross profit. If the value of net profit is negative, then it is called net loss.
What is gross profit ?
Gross profit is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services. You can calculate gross profit by deducting the cost of goods sold (COGS) from your total sales.
What is turnover?
Turnover is the total amount of money your business receives as a result of the sales from your goods and/or services over a certain period of time. The calculation doesn’t deduct things like VAT or discounts, which is why it’s also referred to as ‘gross revenue’ or ‘income’
What are the steps to providing a profits valuation?
Profits method.
- Review company accounts
- Take net profit and add charges that are specific to the operator (finance, depreciation etc to arrive at ‘’Adjusted Net Profit”
- Apply a multiplier
What is Fair Maintainable Turnover?
The majority of public houses are valued taking into account the level of trade generated; referred to as the fair maintainable turnover. The age, style of property, location and other factors are also taken into account, together with income streams such as wet trade, dry trade, accommodation and other receipts.
What is a Reasonably Efficient Operator?
This is a concept where the valuer assumes that the market participants are competent operators, acting in an efficient manner, of a business conducted on the premises.
What is personal goodwill?
Personal goodwill is the intangible value that arises from the efforts or reputation of a business owner or other individual. It means that the value is only associated with the person working within an organization and not the business itself. In accounting and finance, goodwill is an intangible asset, whose value cannot be traced to a distinct and identifiable source.
When assessing future trading potential, the valuer should exclude any turnover and costs that are attributable solely to the personal circumstances, or skill, expertise, reputation and/or brand name of the existing operator (i.e. personal goodwill).
What is trading potential?
The essential characteristics of properties that are sold on the basis of their trading potential are that they are designed for a specific use and that ownership of the property normally passes with the sale of the business as a going concern. The approach that lends itself best to valuing such a property, ensuring that the valuer has a thorough understanding of that business, is the earnings capitalisation approach by use of the discounted cash flow (DCF) model.
