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APC Commercial > Valuation > Flashcards

Valuation Flashcards

1
Q

What is an Internal Valuer?

A

-Employed by company to assist in valuation of assets.
-Valuation for internal use only.
-No third party reliance

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2
Q

What are the first 3 steps to take before commencing a valuation instruction?

A
  1. Competence: Are you competent?
  2. Conflicts: Are there any conflicts?
  3. Terms of Engagement.
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3
Q

What is an External Valuer?

A

Has no material inks with asset being valued or the client.

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4
Q

What are some examples of statutory due diligence for valuations?

A
  1. Asbestos Register
  2. Business Rates/Council Tax
  3. Contamination
  4. Equality Act 2010
  5. Environmental Matters
  6. EPC rating
  7. Flooding check
  8. Fire safety compliance
  9. Health and safety compliance
  10. Highway check
  11. Legal title and tenure
  12. Public rights of way
  13. Planning history and compliance
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5
Q

Go through the timeline of valuation instruction

A

-Receive instruction from client
-Check competence and conflicts
-Issue terms of engagement
-Receive signed terms of engagement
-Gather information - leases, planning info, OS plans, etc
- Undertake statutory due diligence
-Inspect and measure
-Research market and assesmble comparables
-Undertake valuation
-Draft report
-Have valuation report checked
-Finalise and sign report
- Report to client
-Issue invoice
- Ensure valuation file in good order for archiving

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6
Q

What are the 5 methods of valuation?

A

Comparable
Investment
Profits
Residual
Contractors/DRC

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7
Q

What are the 3 valuation approaches and were are these set out?

A
  1. Income approach (converting current and future cashflows in capital)
  2. Cost approach (reference to cost of asset whether by purchase or construction)
  3. Market approach (using comparable evidence where available)

Found in IVS 105

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8
Q

Where is the hierarchy of evidence found?

A

RICS Guidance Note - Comparable Evidence in Real Estate Valuation (1st Edn, Effective Oct 2019)

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9
Q

What are the 3 categories found in the hierarchy of evidence?

A

Cat A - Direct comparable
E.g completed transactions, completed transactions where info not fully available and asking prices.

Cat B - General market date
E.g. Info from published sources or commercial databases, indices and historic evidence.

Cat C - Other Sources

E.g. Transactional evidence for other property types and locations.

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10
Q

When would you use the investment method of valuation?

A

Where there is an income stream

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11
Q

What is a yield?

A

A measure of investment return expressed as percentage of capital invested.

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12
Q

What is an All Risks Yield?

A

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

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13
Q

What risk is factored into determining what yield to use?

A

Location
Prospect for rental/capital growth
Lease terms
Use of property
Obsolescence
Voids
Security and regularity of income
Liquidity

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14
Q

What is a Net Initial Yield?

A

The current rent expressed as a percentage of capital value adjusted for purchasers costs.

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15
Q

What is a reversionary yield?

A

The Market Rent expressed as percentage of capital value.

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16
Q

Run through a term and reversion method valuation.

A

Term capitalised at initial yield until next review/ lease expiry
Reversion to Market Rent, valued in perpetuity at a reversionary yield

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17
Q

Run through a layer/hardcore method

A

Income is divided horizontally with bottom slice being the Market Rent and top slice being the rent passing less the Market Rent until the next lease event.

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18
Q

When to use a layer/hardcore method vs when to use term and reversion?

A

Use term and reversion for reversionary property and layer/hardcore for over-rented properties.

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19
Q

What are some typical instances where valuations may be required?

A

Secured Lending
Sale/ Purchase
Financial Statements
Statutory purposes
Internal purposes

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20
Q

What is the purpose of the Red Book?

A

Establishes a framework for uniformity and best practice.

Imposes mandatory obligations for competence, objectivity and transparency

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21
Q

What is investment value?

A

The value of an asset to the owner or prospective owner for individual investment or operational objectives. Also known as worth.

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22
Q

What is Market Rent?

A

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

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23
Q

What is Market Value?

A

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 and where the parties had each acted knowledgeably, prudently and without compulsion.

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24
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. Definition is from the IFRS.

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25
Q

What valuations do not need to comply with the Red Book?

A

Agency/brokerage work in anticipation of disposal or acquisition instructions.

Acting or preparing to act as expert witness

Purely for internal purposes

Performing statutory functions

Preparation for or during negotiations or litigation.

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26
Q

What areas of the Red Book are compulsory and what aren’t?

A

PS 1-2 - Compulsory
VPS 1-5 - Compulsory (unless agreed departure with client stated in tofe)
VPGA1-10 - Voluntary/best practice

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27
Q

What does the term ‘special purchaser’ mean?

A

A particular buyer for whom a particular asset has special value because of the advantages arising from its ownership that would not be available to other buyers in the market.

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28
Q

What does ‘special value’ mean?

A

An amount that reflects particular attributes of an asset that are only of value to a special purchaser

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29
Q

What is an assumption?

A

A supposition taken to be true. It involves facts, conditions or situations affecting the subject of, or the approach to a valuation that, by agreement, doesn’t need to be verified by the valuer as part of the valuation process. Typically, an assumption is made where specific investigation by the valuer isn’t required in order to prove that something is true.

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29
Q

What is a Special Assumption?

A

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.

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30
Q

What are the minimum terms that should be listed in TofE as per VPS 1?

A

Valuer (identity and status)
Client (identity)
Other users (identity)
Asset being valued
Currency
Purpose of valuation
Basis of value
Val date
Extent of investigation
Nature/source of info to be relied upon
Assumptions/Special Assumptions to be made
Format of report
Restrictions for use, distribution and publication
Confirmation of RB Global/ IVS compliance
Fee basis
Complaints handling procedure
Statement that valuation may be subject to RICS compliance
Limitations on liability agreed.

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31
Q

What terms should be included within a valuation report as per VPS 3?

A

Valuer identify and status
Client identity
Purpose of val
Asset being valued
Basis of value
Val date
Extent of investigation
Nature/Source of info relied upon
Assumptions/Special assumptions
Restrictions on use, distribution and publication
Instruction undertaken in accordance with IVS stands
Val approach and reasoning
Val figures
Date of val report
Comment on market uncertainty
Statement setting out any limitations on liability that have been agreed.

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32
Q

When undertaking a desktop valuation as per VPS 2 what should the valuer consider?

A

The nature of the restriction must be agreed in writing in tofe
The possible valuation implications of the restriction confirmed in writing before the value is reported
The valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
The restriction must be referred to in the report.

33
Q

What do VPS Standards cover?

A

VPS 1 - Terms of Engagement (IVS 101 Scope of Work)
VPS 2 - Inspections, investigations and records
VPS 3 - Valuation reports (IVS 103 Reporting)
VPS 4 - Bases of Value, Assumptions and Special Assumptions
VPS 5 - Valuation Approaches and Methods

34
Q

What does Hope Value mean?

A

The value arising from any expectation that future circumstances affecting the property may change. e.g. the future prospect of securing planning permission for the development of land, where no planning permission exists at the present time.

35
Q

What are the 3 aims for the Valuer Registration Scheme?

A
  1. Improve quality of valuation and ensure highest possible professional stands.
  2. Meet the RICS requirement to self-regulate effectively.
  3. Protect and raise the status of the valuation profession as the leading expertise in valuation.
36
Q

To register for VRS, what info is required?

A

Type of valuations
Purpose of valuations
Number of valuations
Firm’s total fee income from RB vals in last year
What data sources used
QA audit procedures in place
History of any negligence claims and notifications

37
Q

What does K/S Lincoln and Others V CB Richard Ellis (2010) relate to?

A

A valuation of a hotel in 2005 and it relates to margin of error in valutions. The judge ruled that:

5% for standard residential
10% for one off commercial
15% for exceptional features

38
Q

What does the UK National Supplement do?

A

Sets out specific valuation requirements and supporting guidance for members in the UK.

39
Q

What is the latest edition of the UK National Supplement?

A

RICS Valuation - Global Standards: UK National Supplement (2023 Edn, Effective May 2024)

40
Q

What is UK PS 1?

A

Compliance with valuation standards within the UK Jurisdiction. This is mandatory.

41
Q

What is UK VPS 1?

A

Terms of Engagement and reporting: Red Book compliance.

42
Q

What is UK VPS 2?

A

Terms of Engagement supplementary provisions in Scotland.

43
Q

What is UK VPS 3?

A

Regulated purpose valuations: supplementary requirements.

44
Q

What is the SAAMCo cap?

A

Long established principle relating to professional negligence. Provides distinction between advice and information.

45
Q

Explain your understanding of the SAAMCo Cap?

A

If the advice provided by valuer is negligent then they are responsible for the consequences of the advice being wrong. However, if the professional only gives information, they are only liable for the consequences of the information being wrong.

Therefore, in the case of valuations, lenders could not recover more by which the property was overvalued.

46
Q

Under SAAMCO cap, is the valuer liable to losses due to a downturn in the market?

A

No, this would not be classed as the valuer’s responsibility.

47
Q

What are information cases and advice cases?

A

Information cases: Where professional provides information and is only liable for the consequences of that info being wrong e.g. SAAMCO cap.

Advice cases: Where professional advises on course of action and can be responsible for wider consequences of transaction.

48
Q

What are CIL payments?

A

Community Infrastructure Levy, a tax due on most new dev which creates additional floorspace above 100sqm. Used as a tool by Local Authorities to help deliver infrastructure needed to support development in the area.

49
Q

What is a Section 106 Agreement?

A

An agreement between a developer and a local planning authority about measures the developer must take to reduce their impact on the community.

50
Q

What requirements must a Section 106 meet?

A

-Must be necessary, relevant and reasonable.

51
Q

What are some typical development costs for a residual valuation?

A

Demolition
Building costs
Finance
Contingency
Agents/letting fees
Professional/legal fees
Acquisition costs
Developer’s Profit

52
Q

Explain briefly the profits method of valuation?

A

Turnover (net of VAT) less cost of generating turneover

= Net Operating Profit

This is then capitalised.

53
Q

Briefly explain how you would value using the contractor’s method?

A

Cost of Modern Building less depreciation
=Net Replacement Cost
PLUS Site Value

= Value as existing

54
Q

What insurance is available for breaches of planning?

A

Legal indemnity insurance

55
Q

What is an equivalent yield?

A

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

56
Q

On Kingsfold, why did you split each yard up?

A

The client required this as they required a value for each site. The sites were also separated from one another.

57
Q

On Lewes Road, why did you use the investment method?

A

The property was subject to an occupational lease and therefore I used this method.

58
Q

For Lewes Road, what valuation technique did you adopt, talk me through this method?

A

The term and reversion approach. I capitalised the passing rent until the next review at an ARY. I then capitalised the MR in perp at a higher ARY and discounted this to the current date. I then added both elements together.

59
Q

Did you consider alternative use value for the first floor

A

No, the client required a value for the property as is. If the client required this I would have to reconfirm why terms of engagement.

60
Q

Talk me through the issue with the fire escape at St Catherines?

A

The fire escape was deemed to be in a state of disrepair and unsafe and needed to be removed. The service charge payments related to installing a new fire safety system to meet current fire safety regulations.

61
Q

What do you mean by ZA?

A

Zone A relates to the practice of zoning retail property. This states that the most important area of the shop is at the front, therefore, after every 6.1m on depth you half back the value.

62
Q

In Kingsfold, what where the rates of comparables on £/psf basis and how did this compare with what you applied for the subject property?

A

For warehouses between £9.5-£16.60 psf and yards between £1.40-£4.30 psf. I adopted £12.50 psf and £10 psf for the warehouses and £1.50 psf for both yards. For warehouses anything above £14 psf was new build with quick motorway access. The warehouse was in good condition with 8m eaves but was not in great location. The warehouse in yard 2 was open storage in shell condition. For the yards the comps were all much smaller and therefore a discount for quantum would apply.

63
Q

How might lease terms effect the valuation?

A

For example, if break period coming up you would have to adopt a void period to account for this. Additionally, rent reviews allow the LL to benefit from valuer earlier.

64
Q

In Lewes Road how did you value with the rent review coming up?

A

I used a term and reversion approach as I believed the property was reversionary until the next review. I then capitalised the rent in perpetuity.

65
Q

In lewes road, what rate did you apply to the storage ancillary areas?

A

I applied rates of £1.50 psf for the basement and £3 psf for the first floor. This was in line with comparable evidence in the area.

66
Q

What does reversionary mean?

A

It means the passing rent no longer reflects the market, in this case that the rent should be higher.

67
Q

Why did you increase the ARY at reversion at Lewes Road?

A

Because the review was still a few months away, the market may change and until a formal rent review memorandum was agreed there is still a greater risk for this rent.

68
Q

In St Catherines, how would you have valued the property if you adopted the second option assuming a service charge instalment was left outstanding?

A

I would have valued the property as it was but deducted the remaining service charge instalment from my end figure.

69
Q

In St Catherines, when might the terms of a long leasehold interest effect the valuation?

A

-Any restrictive covenants the leasehold title contains.
-Any ground rent review
-The unexpired term of the long leasehold, e.g. residential after 80 years unexpired significantly decrease in value due to the introduction of marriage value (note, with the Leasehold Reform Bill, this will cease to be an issue).

70
Q

In London Road, how did you reflect the lack of planning permission in your residual?

A

For this exercise I assumed a Special Assumption that planning permission was granted, after I did this I found the development to be unviable and as my valuation did not include hope value I valued the ground floor shop as an investment with the first floor value as a lump sum in the condition it currently was in.

71
Q

For London Road, what other costs would be in a residual?

A

Letting/agents fees, surveyor/professional fees, demolition costs, marketing costs and contingency costs.

72
Q

What does EUV mean?

A

Existing Use Value

73
Q

What costs much a purchaser incur when buying a commercial property?

A

Stamp Duty Land Tax SDLP
Acquisition Agent’s Fees
Legal Fees
Non-recoverable VAT

74
Q

What are the current Stamp Duty Land Tax Rates for Commercial Property?

A

0% for first £150,000
2% for the next £100,000
5% for everything above £250,000

75
Q

What RICS legislation guides sustainability in valuation?

A

RICS Guidance Note - Sustainability and ESG in commercial property valuation and strategic advice (3rd edn, effective Jan 2022)

76
Q

What does the RICS Guidance Note - Sustainabilty and ESG in commercial property valuation and strategic advice do?

A

Guides advice on characteristics of ESG/sustainability within valuation approaches (market and income).

States that valuers should be mindful of providing advice on ESG as this directly impacts investment decisions.

77
Q

What does the Red Book do?

A

A set of global standards which set out procedural rules and guidance for written valuations.

78
Q

When may you use the hardcore and layer method for a reversionary property?

A

Where the reversion is close in time.

79
Q

What are the 3 examples listed in VPGA 10 for material uncertainty?

A
  1. Property may have particular characteristics that make it difficult to value.
  2. Where info is limited or restricted by client or circumstances that cannot be sufficiently addressed by adopting one or more reasonable assumptions.
  3. Disruption to market that can result in reduced level of certainty.
80
Q

What does VPGA 10 state about reporting in relation to material uncertainty?

A

-Valuer required not to mislead or create false impression.
-Normally inappropriate to reflect market uncertainty within valuation figure.
-If different values can be foreseen, get in touch with client to see if you can use special assumptions.
-Expression of values within given range not good practice.

81
Q
A

APC Commercial (17 decks)

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