Valuation - L3 Flashcards
Define Market Value
The amount for which an asset or a liability should exchange for on the valuation date, within an arm’s length transaction, following proper marketing between a willing buyer and a willing seller and where the parties act knowledgeably, prudently and without compulsion.
Define MV in terms of taxation, and explain the practicalities of that difference.
The price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market as one and the same time.
Practically, the following may apply-
Prudent lotting (if it would be practical to lot, to maximise income)
Market flooding is to be ignored (lots of one asset marketed at the same time)
Take into account any special purchasers.
In what circumstances do you not have to comply with the RICS Redbook?
Brokerage and Agency
Internal Purposes only
Expert witness
Court proceedings
When performing statutory functions
What are the five methods of valuation?
Comparable, Investment, Profits, Residual and Depreciated Replacement Cost.
Explain what the Residual method is and when you would use it?
This method is usually used to value development land.
1.) Establish Gross Development Value (value of completed development)
2.) Deduct costs (construction, planning, professional fees etc)
3.) Deduct developer profit (usually 20%)
4.) Take into account interest over construction period (PV of time to complete project @ yield)
5.) = what someone will pay for that land as is
Explain what the Depreciated Replacement Cost is and when you would use it?
DRC is used where there is a specialist building and no market (hospital or church for example).
1.) Establish the cost of constructing a contemporary version, then plus 10% for professional fees and the base value of the land.
2.) Deduct the obsolescence (physical, functional and economic obsolescence)
3.) Quantify that obsolescence (takes an experienced valuer, very subjective)
Explain how you would carry out the profits method and when you would use it?
The profits method is used where the rent or market value of a property is derived from the income it can generate.
1.) Establish fair maintainable operating profit, capable of being generated by a reasonable operator.
2.) Establish the fair maintainable turnover
3.) Deduct turnover from profit. 50% of this figure should be what the MR is.
4.) MR x VP for the term @ % yield.
Explain how you completed the valuation of the hotel lease.
I used the investment method (term and reversion).
1.) Established reversion using comparable evidence, then applied PV in 88 years time at a 8% yield to reflect not obtaining VP for that time.
2.) Split the term into the know rent reviews.
First 13 years @ £250 = PV @ 8% for 13 years (x£250)
Second 25 years @£500 = PV @8% for 25 years (x£500), but then PV @ 8% in 13 years to reflect not receiving that income for another 13 years.
Repeat then add term and reversion together.
Explain how you carry out the comparable method?
Collate similar property transactions (location, character, size) that have completed recently. Sort and analyse them based on the above. Apply the values to establish an opinion of value.
Hierarchy of evidence -
Category A = Direct transactions
Category B = General Market Data
Category C = Other sources
RICS Professional Standard - Comparable evidence in real Estate Valuation (October 2019)
What are the physical and non-physical factors that affect value?
Physical =
Location
Character
Condition
Size
Construction
Access
Non-physical =
Planning (policy and permissions)
Designations (NP etc)
Lease terms
Ownership shares
Restrictive covenants
Overage
What is VPS1?
Is a mandatory Valuation technical and performance standard that relates to what should be included within terms of engagement.
1 - Identification and status of valuer
2 - Identification of the client
3 - Identification of other users
4 - Identification of the asset or liability being valued
5 - Valuation currency
6 - Purpose of valuation
7 - Basis of value adopted
8 - Valuation date
9 - Nature and extent of the works
10 - Nature and sources of information upon which the valuer is to rely on
11 - All assumptions and special assumptions to be made
12 - Format of the report
13 - Restrictions to use, distribution and publication
14 - Confirmation of accordance with IVS
15 - Basis on which the fee will be calculated
16 - Complaints handling procedure
17 - Potential for RICS monitoring
18 - Limitations to liability
Why is PII important?
Protect clients from any financial loss that the firm cannot meet.
Protect the firm from losses they cannot meet.
Should be acquired through the RICS as the broker, be on an each and every basis and cover is dependant on turnover.
£100k or less = £250,000 of cover
£100k - £200k = £500,000 of cover
over £200k = £1,000,000 of cover
My firm has £10,000,000 due to extent of work and valuations we do.
How did the AOC affect value?
An agricultural occupancy condition is a planning condition restricting a property to only be occupied by someone working in agriculture.
This limits the amount of people who are eligible significantly, and limits mortgage providers.
Comparable evidence suggests a discount of between 20-30%, in this case we applied 25% as the house was adjacent to the farm, therefore someone purchasing the whole was likely to be able to comply with the AOC.
Talk me through how you valued the easement consideration.
Established existing value of the property (comparable method), then tried to establish uplift relating to improved access but this was very difficult to quantify so used 5% based on comparable easement valuations. £45,000
Deducted cost of establishing access and associated fees (planning) £15,000
Applied Stoves vs Cambridge (one third). £10,000
Explain the Stokes v Cambridge case.
Stokes vs Cambridge 1961
A case whereby releasing the access rights on the ransom strip unlocked development value on other land. But, it also unlocked development opportunity of land owned by Cambridge who also owned the ransom land, therefore this encouraged them to take a lower consideration of one third of the uplift.
Courts noted that if the ransom owner has no interest in the access being granted, up to 50% of the uplift can be demanded.
What is a Charities Act valuation?
The Charities Act 2011 (as amended in 2022), states that a charity must seek the guidance of a Chartered Surveyor (Registered Valuer) prior to disposing property or interest in property (lease over 7 years). The Valuation Report is for the Charitable Trust, not the beneficiaries to the charity.
What should be included within a Charities Act valuation?
Comply with Redbook and then go onto advise on sale methods, any repairs that need doing, lease terms etc
What is adverse possession?
Adverse possession requires factual possession of the land, with the necessary intention to possess and without the owner’s consent. 10 years for registered land and 12 years for unregistered land.
How does someone claim adverse possession?
Applicants submit a form ADV1 with a plan and statutory declaration (including evidence) to the Land Registry. If they deem that the applicant has met the requirements, the registered proprietor is notified. They can then serve counter-notice, which immediately rejects the application unless certain circumstances are met.
How did you account for the risk of adverse possession within your valuation?
I didn’t account specifically for this as I noted that it was beyond my competence to advise specifically on this, but as it was a charities act report, I had to raise it and made the client aware that this may limit saleability. Recommended that Auction may be best as this would avoid solicitors searches etc.
The woodland was also SSSI and Open access land, how did this affect value?
Open access = right to roam, cannot enclose and development is very restricted
SSSI = management restrictions / requirements, development restricted
Comps show 50% deduction on MV due to the above.
What are tenants in common?
A situation in which 2 or more people hold interest in a property and each owner has the right to leave their share of the property to a beneficiary upon their death. Shares can be different percentages.
How does Tenants in common affect value?
Restricts use and in this case, the clients share was the minority share.
Section 18 of the IHT manual addresses minority shares and states that deductions should rarely exceed 20%. I applied 15% for split ownership, then an additional 5% for the minority share and that the majority shareholder was the occupier.
What case law did you refer to when valuing the minority share?
1997 Lands Tribunal decision in the case of Charkham v CIR
How did you reach the 10% deduction for the FBT land?
Comparable evidence suggested that deduction due to the restriction on immediate freedom of use.
Were there any other methods you could have used to value the land subject to the FBT?
I could have used the investment (term and reversion) method.
Could have done the term of existing rent, then market rent if there was a review date.
Didn’t use this method as it was an outdated, periodic tenancy therefore it would be expected that any purchaser would serve notice on the existing tenant.
Did you state anything within your Market Appraisal of the land at Sedgewick Lane limiting it’s use?
Yes i stated that the MA did not intend on compliance with the RICS redbook and was for internal purposes only. I also ensured this was all stated within the terms of engagement.
