Valuation Flashcards by Nico Haritou

Tell me what the 5 methods of valuation are

Comparable method
Investment method
Profits method
Residual method
Depreciated replacement cost method

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Tell me when you would use the residual method of valuation

To work out the value of land

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What types of properties would you use the profits method for?

Unique Income producing properties where the value is determined by the business profits

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Give me an example of a property you would use the profits method on?

Pub
Casino
Cinema

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Tell me why the contractor method is considered the method of last resort?

Because there are minimal comparables available and therefore less accurate

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What properties would you use the contractors method on?

Church
Lighthouse
Submarine base

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If you were to carry out a valuation for accounting purposes, what bases of value would you use?

Fair value

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What are some purposes of valuation?

Loan security
Investment
Taxation
Internal purposes

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Tell me what is the relevance of the fact that a valuation is carried out for internal purpose?

It is an exception from the Red Book

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What are the exceptions to the red book

Agency and brokerage
Statutory purposes
Internal purposes
Litigation or negotiation
Acting as expert witness

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If you want to undertake a valuation that is an exception to the Red Book, what d you have to do?

Set it out in the terms of engagement

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What do you need to state in the terms of engagement in relation to exceptions?

What the reason for the exception is and that the Client has agreed to the exception

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Tell me the bases of value as defined in the Red Book

Fair value
Market rent
Market value
Investment value (worth)

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Define market value

The estimated amount real interest in property will exchange for on the valuation date between a willing buyer and willing seller in an arms length transaction after proper marketing, given both parties have acted knowledgeably, prudently and compulsion

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What does proper marketing mean?

Appropriate exposure to the market – marketing for the appropriate amount of time and correct method of sale for the property.

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You undertook a Red Book valuation, talk me through, what did you do?

Check competency
Conflicts of interest check
Issue terms of engagement

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Where does it tell us the definition of competency in valuation?

Red Book – Professional Standards 2 – defined as having the appropriate knowledge and experience of dealing with a particular property

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How do you as a valuer, check to make sure there is no conflicts of interest?

Check internal database and files to see if the property has been acted on before
Send an email round the office

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How would a conflict arise if you were to undertake a Red Book valuation?

If you are valuing the property but someone else in the office/firm is instructed in the sale once the property has been valued

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Talk me through the terms of engagement for a Red Book valuation?

Identification of property
Identification of Client
Identification of valuer
Bases of value
Method of valuation
Purpose of valuation
Limitations on inspection
Assumptions
Special assumptions
Complaints handling procedure
Currency
Valuation date
Fee

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Give me an example of what an assumption might mean

Property has all relevant planning
No contamination or hazardous substances
Condition of the building

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Give me an example of a special example

Planning consent has or will be granted
Property has changed in a defined way
Property is Vacant when let on the valuation date
Property is let on defined terms when vacant at the valuation date

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Talk me through what statutory due diligence would you carry out prior to undertaking your valuation

Asbestos register
EPC check
Flooding risk
Planning
Rateable Value
H&S compliance
Equality Act and Building reg compliance

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What Is the hierarchy of evidence

Open market lettings
Lease renewals
Rent review
Independent expert determination
Arbitrator award
Sale and lease back

Why does a lease renewal come above a rent review in the hierarchy of evidence

The tenant can walk away and the rent can go up or down, whereas a rent review is usually upwards only

Where would you put sublettings in the hierarchy of evidence ?

Above lease renewal as subletting you go to the market whereas lease renewal is between 2 parties

What would you consider to be an appropriate capitalization rate for an industrial warehouse in Coventry

Depends on covenant strength Depends on length of lease Depends on other terms such as repairing and insuring liability Depends on the building itself – size, location, specification

How do you capitalize an income stream in order to arrive at a Gross value?

Multiply the market rent by the years purchase into perpetuity and chosen yield

How do you establish the years purchase

100 divided by the yield

What is the yield a factor of?

Risk

You have a gross value, how do you arrive at a net value?

Deduct purchasers costs

Broadly, what are purchasers costs?

SDLT Agents fees Legal fees VAT on agents and legal fees

If a property was under-rented, hat valuation technique might you use?

Term and reversion

Explain briefly how you do a term and reversion

Capitalise the passing rent for the remaining term at the chosen yield / capitalization rate Capitalise the market rent into perpetuity at a higher reversionary yield. Present value of £1 for the length of term to value the future sum of money.

What is the differential in yield between the term and reversion

Reversion is at a higher yield due to additional risk

How do you find out what the value of the term and reversion is today?

Multiply by the present value of £1

If a property was over rented, what technique would you use?

Hardcore / layer method

How do you do a valuation with vacant possession?

Comparable method or investment method

How do you do a valuation with vacant possession using the investment method?

Ascertain appropriate market rent and capitalize using appropriate yield – higher yield as higher risk due to vacancy

If you didn’t want to increase the yield in your vacant possession valuation, what else can you do?

Could do a term and reversion where the term is valued at £0 rent for however long the vacant period is

Residual valuations are used for the valuations of land, talk me through the method of a residual valuation

Capitalise market rent of the property to achieve GDV. Deduct disposal costs, development costs and developers profit. Deduct purchasers costs to provide land value

How do you work out gross development value in a residual valuation

Comparable evidence to ascertain market rent and yield – capitalize market rent at appropriate yield to give GDV

What costs would you expect to include in your residual valuation?

Demolition costs Contingency Building costs

Where do you find your building costs?

Building cost information service – run by the RICS

What unit of measurement does BCIS refer to?

Metres squared

What basis of measurement does BCIS refer to?

Gross external area

What other costs are involved in a residual land valuation?

General professional fees and finance costs

What interest rate would you assume in your residual valuation for a development at the moment?

7-8%

What are interest rates based on in a residual land valuation?

1% a month for the development (roughly) – based on risk LIBOR + Risk

What do banks consider in terms of their lending rate?

Risk

Tell me about the different types of funding that might be available to a developer

Senior debt Mezzanine/Bridging

If senior debt is 6-7%, where would you put mezzanine or bridging finance?

Higher – 8-11%

Where does the mezzanine funder sit in terms of charge?

2nd charge – behind senior lender

Tell me about fees in a residual valuation

Architect fees General professional fees

Can you please expand on general professional fees – what does it include?

Project manager Independent monitoring surveyor Building surveyor Quantity Surveyor Civil engineer

As a rough guide, what % would you put your professional fees at?

12.5%

What % would you apply to contingency?

2-10% of construction costs – very dependent on risk

How do you calculate developers profit?

15% of GDV or 20% of total development costs