Valuation (L2C) Flashcards

Question

What is a special purchaser?

Answer 1

Someone with the benefit of marriage value i.e. worth more to them than others

Answer 2

Market value disregarding other potential uses. Must report more valuable other use if there is one.

Answer 3

Valuation approaches and methods. Valuers are responsible for choosing and justifying their valuation approach, having regard to the asset, the purpose and statutory requirements.

Answer 4

Should use whenever possible 1. Search comparables and create schedule 2. Adjust weighting of comparables 3. Analyse and form opinion of value 4. Report value and prepare file

Answer 5

Development appraisal = calculations to establish the viability of a scheme. Generally using investor specific inputs. Tool to financially assess the viability of a development scheme. Residual valuation = uses market assumptions to establish site value at a specific point in time.

Answer 6

- GDV - Construction costs - Professional fees - s106 / CIL - Sales / marketing - Contingency - Finance - Developer's profit - Timescales

Answer 7

Assesses the potential return on investment through ongoing income from a property.

Answer 8

1. Income - costs = gross profit 2. Minus expenses and operators remuneration = adjusted net profit 3. Capitalise at yield * Used for valuations of trade related properties e.g. pubs, hotels etc * Where the value of the property is dependent upon the profitability of its business and its trading potential

Answer 9

1. Value land in existing use 2. Add current cost of replacing building plus fees 3. Discount for depreciation * NOT Red Book compliant *Must report alternative use values where appropriate. * Used for owner-occupied property, for accounts purposes for specialised properties eg sewage works, lighthouses, docks etc.

Answer 10

- External market conditions - Interest rates - Building structure, condition and layout - Location - Passing rent, leases, tenancy (1954) - Vacant possession

Answer 11

The number of years required for income to pay the purchase price (100 divided by yield)

Answer 12

- Introduction letter - conflict of interest check - Terms of engagement - Inspection notes - Planning, rating and environmental searches - Comparable analysis - Valuation calculations - Report

Answer 13

- Asbestos register - Business rates / council tax - EPC - Flooding - Fire safety compliance - H&S Compliance - Legal title - Planning history

Answer 14

1. Receive instructions 2. Check competence 3. Check independence/conflicts 4. Issue Terms of Engagement 5. Receive signed terms 6. Gather information - leases, title docs etc 7. Undertake DD - matters affecting valuation 8. Inspect and measure 9. Research market and analyse comps 10. Undertake valuation 11. Draft report 12. Get report checked/verified 13. Finalise and sign report 14. Report to client 15. Issue involice 16. Ensure valuation report is in good order

Answer 15

- What and where is the asset? - Is it let or vacant? - Who is the borrower or client? - What is the purpose? - Timescales - Conflicts

Answer 16

The annual rate of return expressed as a percentage - Consider choice of yield adopted - found by comparable evidence - Risk is the major factor when determining yield in relation to: a. Prospects for rental and capital growth b. Quality of location and covenant c. Use of the property d. Lease terms e. Obsolescence f. Voids g. Security and regularity of income h. Liquidity - ease of sale

Answer 17

1. Initial yield 2. Net initial yield 3. Reversionary yield 4. Equivalent yield 5. All risks yield

Answer 18

Passing Rent expressed as a percentage of purchase price. | Work out by diving rent passing by purchase price.

Answer 19

Low return on investment, low risk, room for growth

Answer 20

Rent expressed as a percentage of gross price. | Rent passing divided by purchase price plus purchase costs

Answer 21

Market rent expressed as a percentage of purchase price. | Market rent divided by purchase price

Answer 22

The weighted average between initial and reversionary yields (IRR without growth)

Answer 23

Takes into account that it is paid quarterly and in advance. IRR without growth

Answer 24

A yield that takes into account future growth (IRR with growth)

Answer 25

``` Yield taking into account all risks (market capitalisation rate) Accounts for: - physical characteristics - anticipated rental growth - unexpired lease terms - Certainty and continuity of income - tenants covenant strength ```

Answer 26

- Similar characteristics - Location - Physical characteristics - Time - Use - Tenure

Answer 27

- Office records - Agents/valuers -Land Registry -Rightmove -Estates Gazette i CoStar (commercial)

Answer 28

``` Interpolation = value within data range, less risky Extrapolation = Value outside data range, risky, use when not possible to interpolate ```

Answer 29

The sum of the discounted cash flows of a project

Answer 30

A cash flow with discounted income to calculate the NPV eg. deferred payments on a sale proposal

Answer 31

The internal rate of return - the discount rate that makes the NPV of a project zero - therefore, the expected compound annual rate of return that will be earned on a project or investment

Answer 32

``` Finance costs are the interest on the borrowed elements of the scheme. 3 elements: 1. Site purchase 2. Construction costs (s curve) 3. Holding costs ```

Answer 33

1. Debt | 2. Equity / cash

Answer 34

1. Senior debt - typically 6% | 2. Mezannine finance - typically 8-9%

Answer 35

``` Measures sensitivity of value to key inputs. Typically: - Sales values/GDV -Build costs -Finance rates ``` on Land Value or Developer's profit

Answer 36

1. Simple - yield, GDV, build costs, finance rates 2. Scenario - eg phasing vs single phase 3. Monte Carlo - probability theory using software

Answer 37

1. Value both individually 2. Value merged interest 3. Difference is marriage value

Answer 38

The difference between EUV and what the market may pay for a future transformation. The value by judging likelihood of more valuable option and likelihood of it occurring. Look at market comps and come to a reasoned decision.

Answer 39

Charities must: - Obtain a written report from a qualified surveyor on the proposed sale - Properly market the site/property - Be satisfied that they have gained the best terms reasonably possible

Answer 40

- A piece of land which controls the access to another piece of land. - 15% - 50% of uplift in value - Negotiated - Stokes vs Cambridge 1961 - 1/3 uplift in value

Answer 41

Stamp duty - 5% Agents fee - 1% of purchase price + VAT Solicitors' fees - 0.5% of purchase price + VAT

Answer 42

- A valuation technique used to compare retail prices with different shapes and frontages. The frontage of a shop is considered more valuable. - 6.1m / 20ft zones - Half each zone

Answer 43

- 250-word statement of experience - Supervisor declaration - 1,000 - 1,500 word case study of 3 worked examples - Relevant CPD - Fee

Answer 44

VPGA 10: matters that may give rise to material valuation uncertainty. Material uncertainty clause: - If material uncertainty is declared, it should be explicitly stated. I keep a regular eye on the RICS website for any updates. - Advisory wording relating to material uncertainty from March until September for ToE and valuation reports. Important uncertainty is assessed on case-by-case basis.

Answer 45

RICS introduced this regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from October 2011. Schemes aims: 1. Improve valuation quality and ensure highest possible professional standards 2. Meet the RICS' requirement to self-regulate effectively 3. To protect and raise the status of the valuation profession as the leading expertise in valuation. Any valuer on the scheme can use the title 'RICS Registered Valuer'. Have to do valuation to level 3 at APC or if do level 2, you can become a RV by undertaking more valuation experience (up to 100 days and case study submission). - Registration is not mandatory for valuation work excluded from the Red Book.

Answer 46

- SDLT now charged on an incremental basis at different rates depending on the portion of the purchase price that falls into each band: Freehold non-residential sales (land/commercial): - 0% on the first £150,000: - 2% on the next £150,001 - £250,000 - 5% on the remaining amount (portion above £250,000)

Answer 47

PS 1 sets out when valuations must be Red Book compliant and the 5 exceptions: 1. Internal Purposes 2. Statutory Function (CPO) 3. Agency & brokerage 4. Litigation 5. Expert witness

Answer 48

RICS Valuation - Global Standards

Answer 49

PS2 is focussed on ethics, competency, objectivity and disclosures. It states valuers must: - Act in accordance with ethical standards/Rules of Conduct - Act objectively, avoiding conflicts - Refer to conflicts in Terms of Engagement - Keep appropriate records - Keep information confidential - Identify valuer responsible - Responsible valuer must have appropriate level of supervision.

Answer 50

Part 5 of the Red Book contains 10 VPGAs, including: - VPGA 2: Valuations for secured lending - VPGA 8: Valuation of real property interests - VPGA 10: Matters that may give rise to material valuation uncertainty (valuation in markets susceptible to change): valuers should draw attention to the issue affecting the certainty, should consider using special assumptions and sensitivity analysis, degree of uncertainty caveat must be specific to each valuation.

Answer 51

It's used for valuing commercial premises on the basis of a flow of rental income. The appropriate technique depends on whether the unit is under-rented or over-rented. - Term and revision for under rented. - Layer/hardcore for over-rented. - Conventional method if let at market rent.

Answer 52

Used for properties that are rack-rented (passing rent is roughly the same as the Market Rent). - Passing rent multiplied by the years purchase = market value - Importance of comparables for yield.

Answer 53

Used for over rented investments (passing rent more than market rent) - Income flow divided horizontally - Bottom slice = market rent - Top slice = rent passing less Market Rent until next lease event - Higher yield applied to top slice to reflect additional risk - Different yields used depending on comparable investment evidence and relative risk.

Answer 54

Used to describe the performance of a property. | - Use a DCF calculation to find the IRR

Answer 55

Income/Price x 100

Answer 56

Where the seller and purchaser don’t know each other, there’s no personal interest and no special purchasers.

Answer 57

Comparable Evidence in Real Estate Valuations, 2019 (effective 2019). - Provides guidance on the sources of comparable evidence, how to record and how to analyse. - Provides information on the hierarchy of evidence

Answer 58

1. Open Market Lettings 2. Lease renewals 3. Rent reviews 4. Third party determination 5. Sale and Leasebacks 6. Intercompany transactions

Answer 59

Yes, but there is less certainty and a higher degree of caution should be attached in relation to the report.

Answer 60

Yes, but it must be: - Marked as a draft, subject to completion of the final report - Marked for internal purposes only - Stated that it cannot be relied upon and can't be published.

Answer 61

* VPS = Mandatory * VPGA = Advisory – but the VPGAs do include links and cross references to the material in the International Valuation Standards which are mandatory

Answer 62

* Inheritance Tax – date of death and you value all the assets individually to get best value * Fair Value – used for accounts – report at the date of measurement

Answer 63

* No inspection | * Non-reliance

Answer 64

* Places responsibility for the repair of the external, internal and structural format of the property with the tenant. * In theory tenant pays less rent – the more obligations you have on the lease the less you would pay * Effective FRI lease – landlord recovers insurance premium from the tenant

Answer 65

* Landlord responsible for repainting externally and insurance * tenant just responsible for demised area eg decoration and fixtures and fittings * If mulit-let then more likely to be IR

Answer 66

* FRI Lease – more conditions in lease so typically pay less * Internal Repairing * Short lease * Long lease – more security * Break periods – whether there are break clauses – tenant can leave – 6 months notice *The more onerous the lease on the tenant, then the less rent they will pay

Answer 67

• If you are in the Act – then security of tenure o Landlord has to offer you renewal at market rent o More common to be inside the act • If you opt out of the Act then no security of tenure

Answer 68

- Internal valuer performs the valuation for their employer | - External valuer carries out the valuation for a third party.

Answer 69

- Lease length - Size of property - Age of property - Location

Answer 70

- Check competent - Independent - Set out Terms of Engagement

Answer 71

- Yes, all inputs are taken at the date of valuation, so it is classed as a red book valuation.

Answer 72

In: - Yield - Contingency

Answer 73

- Would depend on what the clause was | - It would affect the property in a particular way and limit the market it would appeal to

Answer 74

- You can't build within 2 meters of the road

Answer 75

31 January 2020

Answer 76

The value of the property as it stands with no other assumptions made.

Answer 77

- Limit tenants' repairing obligations - Agreed by negotiation prior to commencement of lease - Reinstatement limited to schedule - Photographic evidence and plans required - Must be referred to in the lease.

Answer 78

Valuations for inclusion in financial accounts - fair value will be adopted for all IFRS accounts. Prescribed 'performance standards' must be adhered to.

Answer 79

VPGA 2 – Valuation for secured lending • Should know the terms of the loan • comment on suitability for mortgage purposes (collateral) • Conflicts – previous involvement (with prospective borrower or property to be valued must be disclosed to lender – normally 2 yrs (also state in ToE) • Valuer's responsibility to decide whether or not to accept the instruction having regard to the principles of the RICS Rules of Conduct. • Where a valuation for secured lending purposes is arrived at with the use of a special assumption, a comment must be made in the report on any material difference between the reported value with and without the special assumption.

Answer 80

Inspections and investigations, with particular emphasis on environmental constraints and sustainability issues.

Answer 81

International Valuation Standards (Mandatory): - "General Standards" address matters such as terms of engagement, approaches to and bases and methods of valuation as well as reporting. - "Asset Standards" which provide requirements relating to specific types of asset, such as real property and development property.

Answer 82

If it stands astride the boundary of land belonging to two or more land owners. There are party wall surveyors who specialise in it.

Answer 83

RICS Guidance Note on Rights of Light, 2016: - The right to light of a building arises after 20 years uninterrupted enjoyment of light without the consent of a third party by way of easement

Answer 84

IVS 105 relates to Valuation approaches and methods - there are 3 approaches: 1. Income approach: converting current and future cash flows into a capital value (i.e. investment, residual and profits methods) 2. Cost approach: references to the cost of the asset whether by purchase or construction (i.e. DRC method) 3. Market approach: using comparable evidence available (i.e. comparable method)

Answer 85

- Sets out clarification that the UK Red Book Global UK National Supplement augments the Red Book Global for valuations in the UK and is not a substitute for it, - Most advice is mandatory not advisory - Provides specific requirements for members on the application of RICS Valuation - Global Standards and valuations undertaken subject to UK jurisdiction.

Answer 86

The purpose of having a loan valuation completed is to establish whether the amount of the loan can be secured against the value of the property and, should you default on the loan, whether the lender can realistically recoup the amount.

Answer 87

Any previous, current or anticipated involvement with the prospective borrower, or the property to be valued, must be disclosed to the lender

Answer 88

* As being within the last two years | * Under certain circumstances, this may be longer

Answer 89

* When the valuer has a longstanding relationship with the borrower * When the valuer is likely to receive a fee for introducing the transaction to the lender * When the valuer is also retained to act in the acquisition / disposal or letting of the subject property

Answer 90

The valuer

Answer 91

The arrangements for managing the conflict must be recorded in writing and included in the Terms of Engagement and the valuation report

Answer 92

* Disclosure of any involvement; previous, current or future, or any agreed arrangements for managing a conflict of interest * Details of the valuation methodology adopted, supported with calculations where appropriate * The extent to which details of a recent transaction, or a provisionally agreed purchase price has been accepted as Market Value * A comment on the suitability of the property for secured lending purposes * Details of any circumstances which may affect the price

Answer 93

The period over which a loan is paid off

Answer 94

• One in which regular payments are made, to include: o Interest on the unpaid balance o Principal repayments

Answer 95

* One in which, for a set term, the borrower pays only the interest on the principal balance -> the principal balance remains unchanged * At the end of the term, the borrower may pay the principal sum

Answer 96

October 2011

Answer 97

1) To improve the quality of valuation and ensure the highest possible professional standards 2) To meet the RICS’ requirement for self-regulation 3) To protect and raise the status of the valuation profession

Answer 98

* Transparency * RICS protection * Compliance with International Valuation Standards * Expertise and clear reporting

Answer 99

* Valuation Level 3 (for members qualifying after 1st January 2012) * An annual fee paid to the RICS

Answer 100

Details of the: 1) Type of valuations carried out 2) Purpose of valuations carried out 3) Number of valuations carried out 4) Firm’s total fee income from Red Book valuations in the last year 5) Data sources used 6) Quality assurance and audit procedures in place 7) Historic negligence claims

Answer 101

• The RICS has a published register

Answer 102

* Through the submission of their firm’s annual return * Desktop investigations * Site visits

Answer 103

• The Head of the Regulation has the power to remove a valuer from the Scheme

Answer 104

By undertaking more valuation experience (up to 100 days and case study submission)

Answer 105

* I think that the VRS is a good idea * Valuation is a highly skilled and specialist area, which I believe requires regulation to ensure that surveyors in this field have received the proper training * Thus reducing negligence claims

Answer 106

• No, because the fee should be proportionate to the firm’s liability cap • Risk and reward must be fairly apportioned You may have standard Terms of Engagement agreed with a particular client, however, an appropriate fee should be evaluated for each and every instruction

Answer 107

Most leases have upward only rent reviews - if paying £50k at moment and have rent review in 2 years market rent is £40k but I have an upward only rent review - nil increase - rent won't go down, not getting any reversionary income at that point.

Answer 108

When the market rent is adopted (future income)

Answer 109

What property will generate once gets into reversionary income.

Answer 110

Secured lending - considering loan against what you're valuing - stating whether property offers good security. If they're considering a loan over 5 years of £2m and you value the property at £2m, you will say it probably won't offer good security if 100% of their capital is secured against the property. If you had a property worth £2m and only lending £1m, reflecting loan to value of 50% - if default loan, you have an asset you should be able to sell and reclaim your loan back. Telling bank whatever it is you're valuing holds good security for them.

Answer 111

£5m per asset which usually covers 100% of market value in most cases. Where need to extend PI, need internal sign off from head of professional services (Paul Avery). Various certificates up to £25m

Answer 112

Cannot put hope value on market value. Particularly for secured lending - if say it's going to get resi then 6 months later doesn't get resi, your red book would be worth nothing.

Answer 113

Yields, capital value per sq ft, what features looking for

Answer 114

If risks in terms of market, deliverability / planning

Answer 115

If risks in terms of build costs and site specifics such as abnormals

Answer 116

Costs at start of project are never going to be as high as they are at the middle of the project whilst putting infrastructure in / building houses. Once infrastructure is in, costs tail off slightly. Typically adopt an S-curve

Answer 117

Inputted GDV and total costs. Put timescales into Argus to work back what my finance is.

Answer 118

VPGA 10 – Valuation in markets susceptible to change • Valuer should draw attention to the issue affecting the certainty • Should consider using special assumptions and sensitivity analysis • Degree of uncertainty caveat must be specific to each valuation

Answer 119

Revaluation (without re-inspection) – VPS 2 • Must not be undertaken unless the valuer is satisfied that there have been no material changes to property or nature of its location • Must be confirmed in TofE and in valuation report

Answer 120

Automated Valuation Models • Software systems that can provide valuations using mathematical modelling • Mostly used for Resi • Argus – weaknesses, loss of control, full detail cannot be seen.

Answer 121

I under took a red book for internal purposes to assist in end of option negotiations, where I was acting for the landowner. I was provided with a cost schedule from my client. Residual Value: £3,500,000  Price per gross acre: £301,464 per acre  Price per net developable acre: £463,576 per acre  Price per blended plot: £35,000 per plot  Price per open market plot only: £53,846 per plot

Answer 122

Residual value divided by gross site area

Answer 123

Price divided by net developable acre (typically 75% of site area)

Answer 124

Price per open market plot - affordable housing requirements vary Also price per net developable acre - some sites could have large areas of greenspace etc.

Answer 125

The terms of an option tend to relate to planning, with the agreement allowing time for a site to be promoted through the planning process and for relevant planning permission to then be obtained. Once this happens, a Price Notice is normally served to the landowner, which then triggers the price negotiation process and the purchase of the site through an Exercise Notice. The purchase price mechanism typically reflects a percentage discount from the market value at the time of exercise, often also including additional deductions for an option fee and planning promotion costs. The process of agreeing a price can be difficult because there is no transaction that takes place whereby the market value is determined by competing bidders on the open market. A negotiation therefore needs to be entered into to debate the value of the completed development, costs of the development and developer’s profit in order to assess the market value of the site. Local market conditions and comparable land transactions also need to be analysed when negotiating the value of a site. A purchase price can then be agreed between the landownder and option holder following this negotiation process. If the landowner and option holder cannot agree on a purchase price there should be provisions in the agreement for dispute determination. This normally involves the appointment of a suitably experienced Independent expert or arbitrator who is also a chartered surveyor. The expert can either be agreed between the parties or appointed through the RICS. Normally, written representations that detail the market-based evidence and appraisals used to support the assessment of market value and purchase price are submitted, by both the landowner and option holder, to the expert for consideration. There is then usually the opportunity to provide cross representations to the expert based on what the other side has submitted within their written representations. The expert should then determine the purchase price, with the option holder then able to decide whether or not to purchase the site at the determined price.

Answer 126

- First option period - Longstop date - Minimum price - Option fee (non-returnable and creditable against price) - Second option period - Landowner and developer obligations (eg developer to get planning)

Answer 127

- Type of valuations - Purpose of valuations - Number of valuations - Firm's total fee income from Red Book Global valuations in last year - What data sources used - Quality assurance audit procedures in place - History of any negligence claims and notifications * Annual fee to RICS

Answer 128

VPGA 2 - Valuation of interests for secured lending purposes VPGA 2 covers: • taking instructions and disclosures • independence, objectivity and conflicts of interest • basis of value and special assumptions and • reporting and disclosures.

Answer 129

Any previous or current involvement with the borrower or the property or asset to be valued is to be disclosed to the lender prior to the acceptance of the instruction. Disclosure should also extend to any anticipated future involvement. Examples of involvement for valuer: • long-standing professional relationship with the borrower or the owner of the property or asset • is introducing the transaction to the lender or the borrower, for which a fee is payable to the valuer or firm • has a financial interest in the asset or in the borrower • is acting for the owner of the property or asset in a related transaction • is acting (or has acted) for the borrower on the purchase of the property or asset • is retained to act in the disposal or letting of a completed development on the subject property or asset • has recently acted in a market transaction involving the property or asset • has provided fee earning professional advice on the property or asset to current or previous owners or their lenders and/or • is providing development consultancy for the current or previous owners.

Answer 130

The valuer

Answer 131

Valuations for inclusion in financial accounts

Answer 132

Yes, I adopted yield evidence by looking at investment/capital value comps to establish a suitable yield.

Answer 133

Outside the 1954 act?

Answer 134

I assessed rental comparable evidence and established the property was slightly over-rented (RP higher than MR). Therefore, I adopted the hardcore layer method

Answer 135

Two Grade A tenanted office buildings in a secondary location built in 2016 Got a copy of the leases to establish lease details - 5 years left on the lease (5 years unexpired) (10 year leases) Both tenants strong covenants (determined from Dun & Bradstreet Credit Report - 3A1 (low risk of business failure)

Answer 136

- Rental comps to establish whether over rented, rack rented or under rented - slightly over rented so used layer hardcore) - Investment/capital value comps to establish suitable yield - Capitalised hardcore income (MR) into perpetuity using yield established from comps - Capitalised froth (over-rented element of RP) until end of lease at higher yield to reflect higher risk (after lease expires, risk this may not be achieved as higher than MR) - This then generated a value and I sense-checked this with comparable evidence on a capital value basis (per sq ft) and initial yield basis.

Answer 137

I found investment/capital value comps and set them out in a schedule. I found these on CoStar but verified the information (sale price, covenant, building, lease terms, area) by talking to agents. This enabled me to determine a suitable yield (net initial yield = rent passing divided by purchase price) for my property

Answer 138

I would look up VP comps to establish £/sq ft for vacant office buildings I would then look at on investment method also, but factoring in initial void period which will have holding costs (empty rates, letting fees and maintenance) and allow for a rent free period Then I would apply market rent (established from rental comparables) and yield by investment/capital value comps. Taking into account risk that may not get a tenant immediately, I would push the yield out a bit to reflect risk.

Answer 139

Initial yield - rate expressed as a percentage of purchase price - Reversionary yield - market rent expressed as % of purchase price - Equivalent yield - weighted average between initial and reversionary yields (IRR without growth) - Equated yield - yield that takes into account future growth (IRR with growth) - All risks yield - yield taking all risks into account

Answer 140

Circa £190 - £200 per sq ft

Answer 141

the annual income on an investment divided by its current market value

Answer 142

When there is an income stream to value, rental income is capitalised for capital value This method involves reflecting risk, return and expectations of growth through the use of a yield. This yield is fed into the years purchase (YP) formula and the present value of £1 (PV £1) formula to produce the figures that the rent is multiplied by.

Answer 143

Either hourly rate or fixed fee.

Answer 144

Valuation date is whatever you want it to be, whatever is stated in your terms of engagement.

Answer 145

Equivalent yield as it's time weighted. I also considered what the initial yield was against the comparables when Argus produces this.