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James APC > Valuation > Flashcards

Valuation Flashcards

1
Q

When is the profits method used and how is this undertaken?

A

Profits method derived from trade related properties, value derived from trading potential.
Trade potential is the profit that a reasonably efficient operator would expect to realise from occupying the property.
Used for hotels, cinemas and theatres.
Common characteristic is that these properties have been designed for a specific use and the value is linked to what the owner can generate from the property.
The value therefore reflects the trading potential of the property and it includes the property interest, business, location, good will, fixtures and fittings all reflected as a single figure.
Income and expenditure forecast based on historical and comparable information.
This forecast represents the FMT and FM operating profit (FMOP) that a reasonably efficient operator would hope to achieve.
This is considered a reasonably accurate forecast of the properties trading potential.
The actual performance is compared with similar trading properties to determine whether the FMT is realistic based on current market conditions.
Final step - FMOP is capitalised at the appropriate rate of return to reflect the risks and rewards of the property to determine its trading potential. Evidence of accurate comparable market data should be analysed and applied.

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2
Q

What is the depreciated replacement cost (contractors/method of last resort) method of valuation and how does this work?

A

Used to value properties where there is no active market such as mosques, wharfs or refineries.
RALDS
Replacement cost - using new and cost effective building materials
Age and obsolescence adjustment
Land value
Decap rate
Stand back and look

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3
Q

What is the comparable method of valuation and how does it work?

A

Focuses on sales data of properties that have recently sold, focusing on assets that have similar size, location, condition, features and specifications.
Underpinned by comparable evidence that can stand scrutiny from the client and market.
Valuer will compile a schedule of evidence that will contain details about the property such as building age, quality, location, tenure, size, transaction price, date of sale, price per sq.ft - all of which used as comparison for other similar properties.
Should be comprehensive, recent and very similar and consistent with local market practices.

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4
Q

What are the different purposes of valuation?

A

Valuation for financial reporting, commercial secured lending purposes, residential mortgage purposes, capital gains tax, inheritance tax, stamp duty land tax, compulsory purchase and statutory compensation.

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5
Q

What is the Red Book?

A

Contains mandatory rules and best practice guidance for members who undertake asset valuations.

Includes: international valuation standards, Red Book UK (issued since 2015)

Key sections: intro, mandatory valuation standards, advisory valuation standards, valuation for financial reporting, valuation for charity assets, valuation for commercial secured lending purposes, valuation for compulsory purchase and statutory compensation.

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6
Q

What steps would you take following your valuation instruction?

A

Obtain details of the property
Undertake COI check
Obtain signed letter of instruction
Confirm the purpose of valuation
Undertake information gathering including confirmation of the purchase price
Identify ratings, planning and environmental information
Carry out inspection and measurement
Research market values
Compile valuation report
Check valuation internally including sign off with any relevant signatories
Report to the client and address any queries
Submit an invoice

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7
Q

What are the different methods of valuation?

A

Comparable
Investment
Profit
Residual
Contractors (Depreciated Replacement Cost)

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8
Q

What is meant by the term market value?

A

Estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

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9
Q

What is the definition of market rent?

A

The estimated amount for which a property or space within a property should lease (let) on the date of valuation between a willing lessor and lessee on appropriate lease terms in an arm’s length transaction and after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.

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10
Q

What is hope value?

A

Market value of land based on the expectation of getting planning permission for developing on it.

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11
Q

What is marriage value?

A

The extra value from the merger of two physical or legal interests.

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12
Q

Definition of special value?

A

An extraordinary element of value over and above market value.

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13
Q

What is the difference between market rent and estimated rental value?

A

Market rent assumes vacant possession and is the amount of rent anticipated for the use of the property in comparison with similar properties in the same area.
Estimated rental value takes into account further considerations about the property assuming the building is occupied, e.g consideration of specific lease terms.

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14
Q

When would you use term and reversion vs hardcore?

A

These valuations are used when the terms of the lease and incoming rental income are expected to change in the near future.

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15
Q

What is the All Risk Yield (ARY)?

A

The rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to the particular investment.

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16
Q

What is the True Yield?

A

Assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears).

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17
Q

What is the Normal Yield?

A

Initial yield assuming rent is paid in arrears.

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18
Q

What is the Gross Yield?

A

The yield not adjusted for purchasers’ costs (such as an auction result).

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19
Q

What is the Net Yield?

A

The resulting yield adjusted for purchasers’ cost.

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20
Q

What is the Equivalent Yield?

A

Average weighted yield when a reversionary property is valued using an initial and reversionary yield.

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21
Q

What is Initial Yield?

A

Simple income yield for current income and current price.

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22
Q

What is Reversionary Yield?

A

Market rent (MR) divided by current price on an investment let at a rent below the MR.

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23
Q

What is the Running Yield?

A

The yield at one moment in time.

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24
Q

What is the Discounted Cash Flow technique?

A

Growth explicit investment method of valuation
Projects estimated cash flow over an assumed investment period, plus exit yield at the end of the period usually arrived at on a conventional ARY basis.
Cash flow is then discounted back to the present day at a discount rate that reflects the perceived level of risk.
The approach separates out growth assumptions rather than incorporating them within an ARY.

25
Q

When is the DCF method used?

A

Used where the projected cash flows are explicitly estimated over a finite period, such as:
Short leasehold interests and properties with income voids or complex tenures.
Phased development projects.
Some alternative investments
Non-standard investments (e.g 21 year rent reviews)
Over-rented properties and social housing

26
Q

Are there any RICS documents that covers DCF?

A

The RICS Guidance Note on Discounted Cash Flow for Commercial Property Investments 2010

27
Q

What is the simplified method to determine market value?

A

Estimate the cash flow (income less expenditure)
Estimate the exit value at the end of the holding period
Select the discount rate
Discount cash flow at discount rate
Value is the sum of the completed discounted cash flow to provide the NPV

28
Q

What is the Net Present Value (NPV)

A

Sum of the DCF of the project
NPV used to determine if an investment gives a positive return against a target rate of return.
When NPV + investment has exceeded the investor’s target rate of return.
When NPV - it has not achieved the target rate of return.

29
Q

What is the Internal Rate of Return?

A

Rate of return at which all future cashflows must be discounted to produce an NPV of zero.
Using a computer or linear interpolation to calculate the total return from an investment opportunity.
Assumptions made on rental growth, re-letting and exit assumptions.

30
Q

When is the Profits method of valuation used?

A

Trade related properties
Where value of property depends on profitability and trading potential
Pubs, petrol stations, hotels, guest houses, nurseries, leisure and healthcare properties, care homes.

31
Q

What is the Profits method used for?

A

Principle is that it is based on the profit generated from the business and not the physical building or location.
Requires accurate audited accounts if possible for 3 years.
Audited accounts superior to management accounts.
Can use forecasts for new businesses.
Adjust for maturity and any items of expenditure deemed unacceptable or exceptional.

32
Q

What are the steps of the Profits method?

A

Annual turnover (income received)
Less Costs/purchases
= Gross Profit

Less Reasonable working expenses
= Unadjusted net profit

Less Operator’s remuneration
= Adjusted net profit known as Fair Maintainable Operating Profit (FMOP)

*Can be expressed at the EBITDA (Earnings Before Interest, Taxation, Depreciation, Amortisation)
*Capitalised at appropriate yield (YP multiplier) to achieve market value.
*Cross check with comparable sales evidence if possible.

33
Q

What is the IVSC?

A

The International Valuation Standards Committee.
Published valuation standards and procedural guides for valuation of assets for financial statements.

34
Q

What are the two IVSC standards and two applications?

A

IVS1 - market value basis of valuation
IVS2 - valuation bases other than market value

IVA1 - valuations for financial reporting
IVA2 - valuation for lending purposes

35
Q

What is the difference between market rent and estimated rental value?

A

Market rent - assumes vacant possession and is the amount of rent anticipated for the use of the property, compared to others.
Estimated rental value - assumes building is occupied and other considerations such as specific lease terms.

36
Q

When would you use term and reversion vs hardcore?

A

Used when terms of the lease and incoming rental income are expected to change in the near future.

37
Q

What is the term and reversion approach?

A

Used for properties with an existing lease in place that’s due to expire.
Existing lease terms considered separate from expected lease terms.
Looks at vertical slices of income.

38
Q

What is the hardcore/layer approach?

A

It considers the current market rent being received on a perpetual basis.
Looks at horizontal/layers of income.
Good for when the property is over rented.

39
Q

What is the equated yield?

A

Yield on a property investment which takes into account growth in future income.
Not applicable to reversion any situations where the increase in income on reversion is to the market value as estimated at the present time.

40
Q

What is goodwill?

A

Value within a transaction that is higher than the sum of the net fair value.
Creates a special value over and above the value of the land or building being exchanged.

41
Q

What are the different types of goodwill?

A

Purchased goodwill - when an asset is purchased for more than the fair market value and shown as an asset on the balance sheet.

Inherent goodwill - such as location, reputation (brand image/name).

42
Q

What are the differences between a residual valuation and a development appraisal?

A

DA not part of red book.
DA are based on worth, multiple valuations couple with professional advice, analysis and opinion.
DA take into account time phasing of money.
DA uses client and agent input, residual uses market lead inputs.
DA used to determine if profit levels are obtained, residual used to determine market value.

43
Q

When would you use the discounted cash flow valuation method?

A

Where there are no comparable market transactions.
Where there is expected short-term volatility such as tenant due to terminate their lease.
Can be used to compare multiple investments side by side to support long term investment decisions.

44
Q

How do you perform a DCF?

A

Estimated cash flows projected over an assumed investment period and exit value at the end of the period.
Cash flow then discounted back to present day at a discount rate (aka desired rate of return) that reflects the perceived level of risk.
A discount rate is applied to reflect market and property specific risks.
To arrive at the estimated revenue cash flow, regard must be had to rent reviews, lease renewals or re-lettings on lease expiries and void costs.
Exit valuation needs to reflect the rental growth and unexpired terms of the leases at the exit date.
Assumptions and forecasts need to be set out clearly.

45
Q

How would you value a property where there are no comparable?

A

DCF can be used where there are no comparable market transactions.
Estimated cash flows projected over an assured investment period in addition to an exit value at the end of investment period.
Cash flow then discounted to present day at a discounted value (aka desired rate of return) that reflects the perceived risk.
The assumptions and forecasts need to be set out clearly.

46
Q

What factors effect yield?

A

Covenant
Location
Specification
Rent levels
Growth potential
Asset management & development value

47
Q

What is face rent and effective rent?

A

Face rent - rent that excludes incentives such as rent-free periods or rent reductions or fit-out contributions.
Effective rent - takes into consideration the incentives.

48
Q

What are deleterious materials and how do they effect value?

A

Prohibited materials that can have an effect on the structural integrity and longevity of a property.
Can cause non-compliance with building regs.
Decrease the property value.
Can cause health problems to those exposed to the material.

49
Q

Name some deleterious materials?

A

Asbestos
Vermiculite - insulation containing asbestos
Silica dust - next biggest risk after asbestos, contained in bricks and concrete.
Greenhouse gases - used to insulate pipes such as CO2, methane and nitrous oxide.
Lead
Mercury
Urea formaldehyde - causes skin irritation and used for insulation or adhesives.

50
Q

How would structural defects be reflected in your valuation report?

A

Draw clients attention to them.
Advise them to have structural survey done.
Can’t comment on area outside of one’s expertise.
Seek and obtain cost input to remediate and include within report.

51
Q

Are you allowed to know the purchase price when valuing?

A

Yes
Valuer must request this and verify it.
If your valuation differs you must state why.
Must be based on market evidence.

52
Q

You are found to be negligent in your valuation, what can your client do?

A

The complainant can demonstrate the losses and pursue the difference at court.
Merrett v Babb provides that valuers and not firms can be pursued.
Highlights the importance of having Personal Indemnity Insurance and run-off cover.

53
Q

What would you caveat in a valuation report?

A

Publication
Confidentiality
Deleterious materials
Planning
Taxation
Information supplied
Environmental matters

54
Q

What is in your valuation report and not in your terms of engagement?

A

Opinion of value
Valuation approach

55
Q

What items are contained within your terms of engagement but not referenced within your valuation report?

A

Professional fees for undertaking the valuation.

56
Q

Please provide examples of conflicts of interest?

A

Acting for buyer and seller in the same transaction.
Acting for two or more parties competing for an opportunity.
Valuing for the lender where advice is also being provided to the borrower.
Valuing a property previously valued for another client.
Valuing both parties interest in a leasehold transaction.

57
Q

What is meant by the term passive rent?

A

Annual rental income currently generated and recorded on a balance sheet for that property.
Passing rent may be more or less than the estimated rental value.
Passing rent excludes any rental income when a rent free period is in effect and is based on actual income received.

58
Q

Why does the report include an opinion and not an actual valuation?

A

Case law that providing valuations in accordance with RICS red book cannot be wrong as it is an opinion, provided it is within reasonable tolerance.
If valuation based on an actual value which is later deemed inaccurate, could lead the Valuer to be sued.

James APC (6 decks)

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