Valuation Flashcards
When is the Profit method used?
For trade related properties where the value is derived from the business and its trading potential by a reasonably efficient operator.
Looking to establish the Fair Maintainable Operating Profit.
What properties use the profits method?
Pubs, hotels, cinemas and theatres.
Where the property has been designed for a specific
use and the value is linked to what the owner can generate from the property.
What are the basic steps to the profit method?
1) Get annual turnover from company accounts
2) Less costs/ purchasers = gross profit
3) Less reasonable working expenses = unadjusted net profit
4) Less operators remuneration = adjusted net profit known as FMOP
5) Capitalised at appropriate ARY to achieve market value
6) Stand back and look, cross check with sales if possible.
When is the Depreciated Replacement Cost method used?
For owner occupied property where market evidence is limited
What is the different between a DRC and a Contractors valuation (Rating)?
DRC = Capital Value
Contractors = Rental Value by applying the statutory decap rate
What are the statutory Decap rates currently?
2.6% Hospitals/ Education and defence
4.4% All other hereditaments e.g. powerplants
What is the main basis of DRC?
A buyer will pay no more or less than what the property would cost to obtain based on the current modern equivalent.
What are the basic steps to the DRC?
1) Use BCIS (RICS owned) to find the modern equivalent £ and apply this to the size (GIA) of the property)
2) Adjust this cost reflecting age and obsolescence
- Functional - design no longer suitable
- Physical - result of wear and tear
- Economical - change of market conditions
3) Add in value of land from market evidence - assumed planning is in place
4) Stand back and look
– to make it contractors at step 3 –
5) Apply the statutory decapitalisation rate
When is the Comparable method used?
Where there is sales data that can be utilised to find the value of similar properties, for example offices, warehouses, shops (bulk).
What should we look for in comparables
That they are of a similar size, age, build type, location, condition, features and specification.
What do you do once you have found your comparable evidence?
Compile this into a schedule which contains the details about the property such as:
building age
quality
location
tenure
size
transaction price
date of sale
price per sq.ft.
What are the basic steps to the comparable method?
1) Search for comparable properties
2) Verify your comps
3) Compile comps into schedule
4) Adjust comps using hierarchy of evidence
5) Analyse comps to form opinion of value
6) Stand back ad look
7) Report value and prepare file note.
When is the Residual method used?
Where you want to find the MV of a development based on market inputs.
It is a form of development appraisal.
The residual method is typically used for property or land with development potential.
What are the basic steps to the Residual method?
1) Determine the development potential of the land, i.e. highest value use
2) Calculate the GDV which is the MV of the completed development based off comparables.
3) Less the Total Development Costs (TDC)
- Planning costs
- Building costs
- Contingency
- Marketing costs
- Finance costs
- Developers profit
4) Deduct the TDC from the GDV to get site value
5) Cross check value against comparables and stand back and look.
Why do you need a contingency?
Helps to minimize the impact of disruptions, maintain operational continuity, and recover more quickly from setbacks. It helps organizations adapt to changing conditions, capitalize on new opportunities, and recover after a disaster or unexpected event.
What are finance costs?
Costs of borrowing money.
What is the difference between a residual land valuation and a development appraisal?
- Residual land valuation (i.e. output of market value of the land) - main purpose to determine MV of the land
Inputs usually fixed (GIA, profit, finance).
- Development appraisal (i.e. output of profitability or viability) - several purposes but most often establish profitability of development options.
Inputs often variables - so appraise exercise involves several iterations.
Always incorporates precise cashflow and calculate finance costs.
Requires specialist software/ spreadsheet.
What are the different purposes of valuation?
- Valuation for Financial Reporting.
- Valuation for Commercial Secured Lending Purposes.
- Valuation for Residential Mortgage Purposes.
- Valuation for Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax.
- Valuation for Compulsory Purchase and Statutory Compensation.
When would you use the Hard Core method?
When the property is over-rented.
What are the basic steps to a Hardcore layer?
1) Find your market rent and yield comparables
2) Establish that the property is over-rented
3) Value the MR element at a market yield
4) Then value the difference between the passing rent at an appropriate yield that you have adjusted to reflect the higher risk for e.g. tenant defaulting
5) Then add top + bottom slice together.
When would you use a Term and Reversion?
When the property is under-rented.
What are the basic steps to a T&R?
1) Find your market rent and yield comparables
2) Establish that the property is under-rented
3) Value the ‘term’ for however long is remaining on the lease whether that be to review/ break/ expire at the passing rent with an appropriate market yield
4) Value the ‘reversion’ at MR from the comparables gathered. Complete your defer until next event, value into perpetuity with appropriate yield to reflect risk of future income.
What is the Red Book?
Document which contains mandatory rules and best practice guidance for members who undertake asset valuations.
Does the Red Book cover development Appraisals?
YES - but if if doing work for statutory function including viability under planning framework - the statutory framework takes precedent over Red Book.
What does the Red Book include?
- International Valuation Standards
- Red Book UK – Issued since 2015.
- Introduction.
- Mandatory Valuation Standards.
- Advisory Valuations Standards.
- Valuation for Financial Reporting.
- Valuation of Charity Assets.
- Valuation for commercial secured lending purposes.
- Valuation for compulsory purchase and statutory compensation.
What are the basic steps when you have been instructed on a case?
- Obtain details of the property.
- Undertake a conflict of interest check.
- Obtain a signed letter of instruction.
- Confirm the purpose of the valuation.
- Undertake information gathering including confirmation of the purchase price.
- Identify ratings, planning & environmental information.
- Carry out the inspection & measurement of the property.
- Research market values.
- Compile the valuation report.
- Check valuation internally including sign off with any relevant signatories.
- Report to the client and address any queries.
- Submit an invoice.
What is the definition of Market Value?
Estimated amount 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.
What is the definition of Market Rent?
Estimated amount a property, or space within a property should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction and after proper marketing wherein the parties had acted knowledgably, prudently and
without compulsion.
What is hope value?
Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it.
What is marriage value?
The extra value that arises from the merger of two physical or legal interests.
