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APC > Valuation > Flashcards

Valuation Flashcards

1
Q

Tell me what the 5 methods of valuation are

A

Comparable, Investment, Profits, Depreciated Replacement Cost, Residual

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2
Q

Tell me about how you would value a building using the profits method of valuation

A
  • Specialist properties, such as hotels, golf courses, petrol stations, care homes and some restaurants. Usually sold as part of a business and are designed specifically for the intended use. Their value will depend on business profitability and trading potential, also known as intangible goodwill.
  • Valuer would establish fair maintainable operating profit (FMOP) a market-based profit multiplier is then used to convert FMT into a capital value.
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3
Q

Tell me about how you would value a building using the DRC method

A

Used for owner-occupied or specialised property rarely sold on the open market. The method of last resort. Assess the cost to replace the land and the building (modern equivalent) before making appropriate deductions for depreciation and obsolescence.

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4
Q

Tell me about how you would value a building using the investment valuation

A

Where there is an income stream to value, i.e. the property is tenanted I would assess rental values (market rent) and a market-based yield to find the capital value. Term and reversion for under-rented income streams and a hardcore and layer for over-rented income streams (implicit), or DCF (explicit)

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5
Q

Tell me about how you would value a building using the residual method of
valuation

A

The residual method is typically used for property or land with development potential. The output is market value of the land. GDV less costs, profit and finance. Should cross-check valuation using the comparable method based on land sales

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6
Q

Tell me about how you would value a building using the comparable method of
valuation

A

Where there is a good body of recent, reliable comparable rental, yield or sales evidence. I would collate, analyse and adjust comparable evidence to reflect differences with the subject property

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7
Q

How do you decide which valuation method to apply?

A

Understand the type of property, the market for this property ie. who is the likely purchaser and is there comparable evidence or not

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8
Q

What is a Years Purchase?

A
  • Calculated by dividing 100 by the yield
  • This is the number of years required for its income to repay its purchase price
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9
Q

What is a yield?

A

A measure of annual return on investment expressed as a percentage of capital value.

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10
Q

What is PI Insurance (PII)?

A

Insurance to cover the cost of compensating clients for loss or damage resulting from negligent services or advice provided by a business or an individual.

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11
Q

Why do surveyors need PII?

A

It is a mandatory requirement for members

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12
Q

Definition of market rent

A

estimated amount real property should be leased on valuation date between willing parties on appropriate terms in arms length transaction after proper marketing with parties acting knowledgeably

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13
Q

What is run-off cover

A

A form of insurance that can be bought to provide cover for claims arising after a firm or individual has ceased trading

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14
Q

What kind of costs would you allow for in a residual valuation?

A

Site preperation, construction, professional fees (10-15% build costs), finance costs (7%), letting/marketing costs (10-15% rental), contingency (5% build costs), profit (15-25% of build cost or proceeds of sale)

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15
Q

What is Investment Value

A

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

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16
Q

What is Fair Value

A

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. For most practical purposes the concept of fair value is consistent with that of market value, and so there would ordinarily be no difference

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17
Q

What is an assumption

A

Something 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

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18
Q

Meaning of special assumption

A

A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date. Need to be realistic, relevant and valid for the
particular circumstances of the valuation.

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19
Q

What are the different basis of value

A
  • market value
  • market rent
  • investment value (or worth)
  • equitable value (previously, IVS-defined fair value)
  • synergistic value and
  • liquidation value
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20
Q

What is synergistic value

A

The result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values

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21
Q

Why is valuation called an art and a science

A

an art because of the need to make value judgments
concerning the intangible features that attract certain buyers
a science because it is possible to establish trends and analyse how these are interpreted by buyers and sellers

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22
Q

What additional guidance did you consider in Coventry given that the valuation was for loan security purposes?

A

VGPA 2 Valuation of interests for secured lending

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23
Q

What is informed consent?

A
  • The affected party can only give informed consent if the person explaining the position to them is entirely transparent, and also that the person explaining the position is sure that the party affected understands what they are doing – including the risks involved and any alternative options available – and is doing it willingly.
  • Members should keep records of the decisions made in obtaining informed consent.
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24
Q

Your valuation in Coventry what yield did you apply to the term and what to the reversion?

A

NIY 6.00%
Reversionary 6.89%

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25
Q

Your valuation in Coventry what void period did you adopt and why?

A

3 month void

  • The demand in the local area for industrial space is very strong which is reflected in the few voids in the wider estate. Discussions with several local agents confirmed that the subject is one of the better units on this well established industrial estate and would be expected to receive a lot of interest if it were to be put onto the market for rent or sale.
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26
Q

What was the market rent at Coventry?

A

£7.50 per square foot

  • comparables ranged from £6.14 to £8.50
  • unit 17 achieved £95.00 psf May 2022 with 3 weeks marketing period
27
Q

Using the hierarchy of evidence how would you rank different types of evidence?

A
  1. Open market lettings
  2. Lease renewals
  3. Rent reviews
  4. Third party determinations
  5. Sale and leasebacks
  6. Inter-company transactions
28
Q

Talk me through the methodology for the comparative method

A
  1. Search and select comprable
  2. Confirm/verify details and anaylse headline rent to give net effective rent
  3. Assemble comprables in a schedule
  4. Adjust comparables using hierarchy of evidence
  5. Report value and prepare file notes
29
Q

What makes a good comparable?

A

Local, recent, open market
Auction may be special purchaser or insolvency and sale price is gross of costs

30
Q

How did you carry out the term and reversion?

A
  • Term capitalised until next review/break/expiry at initial yield
  • Reversion to market rent valued in perpetuity at a reversionary yield (higher yield more risk)
31
Q

What if the property you were valuing had been under rented?

A
  • Use hardcore and layer
  • Income flow divided horizontally
  • Bottom slice = market rent
  • Top slice = rent passing less market rent
  • Higher yield applied to top slice to reflect additional risk
32
Q

What are investment factors which influence a yield?

A

Risk is the major factor relating to:
- quality of location
- quality of covenant
- use of the property
- lease terms
- obsolescence
- voids
- security and regularity of income
- liquidity
- prospects of rental and capital growth

33
Q

Define all risks yield

A
  • A growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.
34
Q

Define a true yield

A
  • Assumes all rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears)
35
Q

Define a nominal yield

A
  • Initial yield assuming rent is paid in arrears
36
Q

Define a gross yield

A
  • The yield not adjusted for purchasers costs (such as an auction result)
37
Q

Define a net yield

A
  • The resulting yield adjusted for purchasers costs
38
Q

Define equivalent yield

A
  • Average weighted yield when a reversionary property is valued using an initial and reversionary yield
39
Q

Define initial yield

A
  • Simple income yield for current income and current price
40
Q

Define reversionary yield

A
  • Annual return on investment in relation to the capital value
  • what the yield will increase to once rent reaches ERV and property fully let
  • Market rent / current price
41
Q

Define a running yield

A

The yield at one moment in time

42
Q

What is the purpose of a profits method valuation

A
  • Used for trade related property
  • Where the value of the property depends upon the profitability of its business and its trading potential
  • Must have accurate and audited accounts if possible for 3 years
  • Use estimates/business plan for a new business
43
Q

What is the methodology of a profits method valuation

A
  • Annual turnover
    Less costs/purchases
    = Gross profit
    Less reasonable working expenses
    = Unadjusted net profit
    Less operators remuneration
    =Adjusted net profit known as FMOP
  • Capitalised at appropriate yield (YP)
    Equals Market Value
44
Q

What does VPGA 2 say about conflicts of interest?

A
  • 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 2 years but maybe longer in some cases.
  • examples of involvement are:
    1. longstanding professional involvement with borrower or owner
    2. valuer will gain a fee for introducing transaction to lender
    3. valuer has a financial interest in the property or borrower
    4. valuer is retained to dispose or let the property
  • if the conflict can be avoided by introducing arrangements to manage the instruction, these must be recorded in writing and included in ToE and valuation report
45
Q

What does VPGA 2 say about reporting procedures?

A
  • Disclosure of any involvement with the borrower or property, any arrangements agreed for avoiding the conflict. Or a statement that the valuer is not involved.
  • Valuation methodology adopted, supported with the calculation
  • Where a recent transaction on the property has occured or provisionally agreed price disclosed, the extent to which that information has been accepted a MV
  • Comment on environmental and sustainability consideration
  • Any circumstances which could affect the price
46
Q

How did you adjust your comparable evidence in Milton Keynes and why?

A
  • I searched for the evidence and selected appropriate comparable properties
  • I verified the information with the marketing agents and adjusted the headlines to give the net effective rent
  • I assembled the comparables in a table using the Hierarchy of Evidence
  • Analysed the comparables to to form an opinion of value based on property factors for the market rent and investment factors for the yields
47
Q

How did you assess the tenant covenants in Milton Keynes? What documents did you use and why?

A

I obtained Creditsafe reports to assess the covenant strength

48
Q

At Milton Keynes why did you use a term and reversion instead of an ARY?

A

2 of the leases were rack-rented and I used an ARY
2 were under-rented I used a T&R
1 was vacant I used an ARY following a 6m void and 3m marketing period
On reflection I could have used an ARY for each of the leases and I would approach the valuation like that in future

49
Q

Tell me why Terms of Engagement are important

A

help to avoid later misunderstandings with your client. They ensure that both the client and firm are clear about:

  • the scope and nature of the service being commissioned and any limitations
  • the framework within which it has been agreed to be carried out
50
Q

What checks do you carry out before accepting a valuation instruction?

A
  • Am I competent to carry out the work?
  • Conflict of interest check
  • Agree terms of engagement
51
Q

How do you ensure you know who your client is when undertaking a valuation instruction?

A

Ensure this is clarified and documented clearly on the terms of engagement and within the valuation report

52
Q

Talk me through an example of when you have agreed terms of engagement with a client?

A
  • When carrying out valuation work the clients I worked with were on service agreements and ToE were not required each time a valuation was carried out.
  • However I am familiar with the content of ToE through VPS1 and the importance of both firm and client being clear about services being provided and any limitations to these.
53
Q

What does the Red Book say about Terms of Engagement?

A
  • should convey a clear understanding and should be couched
  • anticipated marketing constraint must be agreed and set out in the terms of engagement
  • Firms may have a standard form of terms of engagement or standing terms of engagement in place that may include several of the minimum terms required by the global standard
  • Valuers must prepare written terms of engagement for all valuation work.
  • Stresses the risks that can potentially arise if queries are subsequently raised and the parameters for the valuation assignment are insufficiently documented
54
Q

What does the Red Book say about inspections?

A
  • The nature of any restriction must be agreed in writing in the terms of engagement
  • any valuation implications of the restriction in writing before the value is reported and referred to in the report
  • A revaluation without a re-inspection must not be undertaken unless the valuer is satisfied that there have been no material changes
  • Record properly in an appropriate business format.
55
Q

How would you value a retail unit?

A

If on the high street:
- Measure floor area
- Analyse floor area using zoning technique
- Use rental evidence to find ITZA Zone A rent
- Calculate MR
- Use market evidence to find appropriate yield and capitalise the rent on existing/appropriate lease terms

56
Q

Please explain another method of valuation you have used (Not comparative or investment method)

A

Residual - at market harorough

57
Q

What did you do to access the demand for the proposed development at Market Harborough?

A
  • spoke to local agents internal and external
  • used inspection to understand if there was much supply locally and what the demand would be
58
Q

What does the Red Book suggest we consider in regards to loan security?

A

Conflict of interest checks
Taking instructions
Basis of value
Assumptions and special assumptions
Reporting and disclosures

59
Q

What finance rate did you use within the subject valuation?

A
  • 7% across all costs
  • Would generally use 4-5% over base rate
60
Q

Did you reflect void costs at Silbury Avenue

A

where appropriate I did – there was a vacant unit for which I allowed for empty rates and letting fees.

61
Q

At Silbury Avenue upon checking void service charge costs was the service charge at a reasonable level?

A

Yes they were, the managing agent at LSH who is active in the market and did recent deals close by, confirmed that

62
Q

What is the equivalent yield?

A

the weighted average return a property will produce

63
Q

What is the true equivalent yield?

A

the weighted average return a property will produce assuming rent is received quarterly in arrears

APC (11 decks)

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