Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

APC - Spring 2024 > Valuation & Loan Security > Flashcards

Valuation & Loan Security Flashcards

1
Q

What does the RICS Valuation - Global Standards Red Book Global (2021) outline?

What is the purpose of the Red Book?

A

Set of global valuation standards created to achieve high standards of integrity, clarity and objectivity in adopting valuation best practice

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Red Book PS1 - When would a valuation not have to be RBG complaint?

A

Valuation does not have to be RBG complaint with the following

E – Expert witness
S – Statutory purposes
I – Internal accounts
A – Agency & brokerage apart from Purchase Report
N –Negotiation or litigation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Red Book PS2 - What does the valuer have to follow?

A

Members undertaking valuations must act in accordance with the Rules of Conduct.

Terms of Engagement must be complied with

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

VPS 1 - What are the minimum terms of engagement?

A

VPS1 – Minimum matters to be included in Terms of Engagement
1. Name and status of valuer
2. Client
3. Identification of other intended users
4. Identification of asset(s) (2017)
5. Valuation currency (2017)
6. Purpose of valuation
7. Basis of value
8. Valuation date
9. Extent of investigations and limitations
10. Nature and source of information
11. Assumptions and special assumptions
12. Description of report
13. Restrictions for use
14. Red book compliance
15. Fee basis
16. Complaints handling
17. Statement that the report can be audited by RICS
18. Limit on PII liability (2017)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

VPS 3 - What are the minimum requirements for a valuation report?

A

Minimum requirements in reports

  1. Identification of the status of the valuer
  2. Client
  3. Purpose of valuation
  4. Asset
  5. Basis of value
  6. Valuation date
  7. Extent of investigation
  8. Nature and source of information
  9. Assumptions and special assumptions
  10. Consent and publication restrictions
  11. Red book compliance
  12. Valuation approach and reasoning
  13. Valuation Figure
  14. Date of valuation
  15. Commentary on any material uncertainty – VPGA 10
  16. Limitations to liability
  17. Valuation methodology (secured lending)
  18. State if recent transaction (secured lending)
  19. Suitability for mortgage purposes (secured lending)
  20. Other relevant enquiries (secured lending)
  21. Circumstances that could affect price (secured lending)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Under VPS 2 - When a valuer cannot physically inspect the property what should they do?

A
  • Must be agreed in writing in ToE
  • Possible implications of this must be agreed
  • Must be referred to in the report
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the definition of 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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the definition of Market Value?

A

The estimated amount that an asset or liability should exchange

  1. On the valuation date
  2. Between a willing buyer and seller
  3. Arm’s length transaction
  4. After proper marketing
  5. Knowledgably, prudently & without compulsion
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the definition of Market Rent?

A

The estimated amount that interest in a property should be leased.

  1. On the valuation date
  2. Between a willing lessor and lessee
  3. Arm’s length transaction
  4. Appropriate lease terms
  5. After proper marketing
  6. Knowledgably, prudently & without compulsion
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the definition of Investment Value?

A

The value of an asset to the owner or a prospective owner for individual investment or operational objectives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the 5 methods of valuation?

A

Investment method
Comparable method
Profits method
Residual method
Depreciated replacement cost (DRC)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the Investment method, when is it used?

A
  • Used when there is an income stream
  • The rent is capitalised to produce a capital value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the comparable method?

A
  • Find comparable evidence in the market.
  • Confirm and verify accuracy.
  • Analyse headline and net effective rent
  • Adjust comparables using hierarchy of evidence
  • Form opinion on value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Definition of a Yield? how is it calculated?

A

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

Income / price x 100 = yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the Residual method?

A

Residual method is used to assess the underlying site value.

Uses market inputs in valuation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the Profits method?

A
  • Trade related – monopoly position (3 years of audited accounts).
  • Value the property on its profitiablity rather than physcial and location characteristics
  • Income – costs = gross profit – less expenses & operator’s remuneration = adjusted Net Profit. (Fair Maintainable Operating Profit FMOP)

This can be expressed as EBITDA

Capitalise the EBITDA at appropriate yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the Depreciated Replacement Cost method (DRC)?

A
  • Not a basis of valuation but a method –

value land in existing use, add current cost of replacing building plus fees less discount for depreciation.

  • NOT for loan security, MV only for financial statements, must report alternative use values where appropriate

Example is a lighthouse / submarine base

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Difference between an internal and external valuer?

A

Internal valuer
* Employed by company to value the assets of the company.
* Internal use only – No third party reliance

External valuer
* Has no material links with the asset to be valued

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What valuation approaches does IVS 105 outline?

What are the 3 valuation approaches?

A

Income approach – converting current and future cash flows into a capital value (Investment / Residual / Profits method)

Cost approach – reference to the cost of the asset by purchase or construction (DRC method)

Market approach – using comparable evidence (Comparable method)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What statutory due diligence do you undertake for a valuation (VALOS)?

A
  1. Asbestos register
  2. BR/Council tax
  3. Contamination
  4. Equality Act compliance
  5. Environmental matters
  6. EPC
  7. Flooding
  8. Fire safety
  9. Health & Safety
  10. Highways
  11. Legal title
  12. Planning history
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is the hierarchy of evidence (Cat A, B & C)

A

Category A – Direct comparables. Completed transactions of near-identical / similar properties. Real estate being marketed that are UO.

Category B – General market data which can provide guidance. Historical evidence. Demand for investment / occupation

Category C – Other background data such as interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

SDLT Thresholds?

A
  • £0 - £150,000 = 0%
  • £150,001 - £250,000 = 2%
  • £250,000+ = 5%
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Can you revalue a property without re-inspection?

A
  • 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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is the difference between ERV and Market Rent

A

Market Rent is the actual rent a property could fetch in the market, while Estimated Rental Value (ERV) is an estimate of the potential rent a property could generate based on market conditions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Hope Capital Ltd v Alexander Reece Thomson (2023)

A

The decision stated that the relevant duty of a surveyor with their valuation will be limited to providing information of the value of the security and not extend to all other unforeseeable risks.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Under the New National Supplement for RICS Valuation, what are the new rules put in place for valuations?

A

A firm must only value a fund / property for a maximum of 10 years

An individual must only value a fund / property for a maximum of 5 years

A minimum of 3 years after rotating off the valuations before valuing again

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Which section of the Red Book may you find guidance on valuations for secured lending purposes?

A

VPGA 2 - Valuations for secured lending

Which states the conflicts of interest for secured lending.

There should be no involvement in the last 2 years.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What are the additional requirements in a valuation report for secured lending under VPS 3 according to VPGA 2?

A
  • Enhanced conflict of interest checks
  • The valuation method adopted
  • State if recent transaction. How much reliance is on that value?
  • Comment on the suitability for loan purposes
  • Market commentary
  • SWOT Analysis
  • Lender risks
  • Items of disrepair or deleterious materials
  • Environmental issues
  • Volatility in the market and/or demand for the category of property
  • Special assumption
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What does VPGA 10 of the Red Book Global cover?

A

That the valuer should clearly state any issues which could potentially lead to valuation material uncertainty.

For example with COVID or the Mini Budget

30
Q

VPGA 10 of the New RICS Valuation UK National Supplement 2023

A

This incorporates new ESG principles for the valuations of commercial secured lending. The impact of EPC and flood risk on valuations.

31
Q

What does VPS3 of the UK National Supplement 2023 Cover? Can you give some examples of these types of Valuation?

A

VPS3 of the UK National Supplement covers Regulated Purpose Valuations.

Valuations that are relied upon by third parties who didn’t request the valuation themselves, and they are closely monitored for compliance

These may include valuation for:

  • Financial Reporting
  • Stock Exchange Listings
  • M&A
  • Collective Investment Schemes (pooled money)
  • Unregulated Property Unit Trusts (property investment vehicles).

This is important as they impact stakeholders beyond those that are involved in the valuation process.

32
Q

Are Valuations for Secured Lending Purposes Regulated Purpose Valuations?

A

No they are not regulated purpose valuations as they should not be relied upon by third parties.

33
Q

What does the UK National Supplement state about valuer rotation?

A

A valuer must not value the same asset for more than 5 years.

A firm must not value the same asset for more than 10 years.

A minimum 3 year break after rotating off an engagement

34
Q

Why is there an increased focus on conflict of interest checks when undertaking valuations for secured lending purposes?

A

As you are required to undertake conflict of interest checks on the borrower, as well as the client and the property.

Any previous involvement in the last 2 years with the borrower must be disclosed to the lender.

35
Q

What is the importance of credit checks on secured lending?

A

Credit checks are important in secured lending because they:

Evaluate the borrower’s ability to repay the loan.

Determine loan terms such as interest rates.

Reduce the risk of default.

Protect the lender’s collateral.

Ensure compliance with regulations.

36
Q

What do you know about Loan-to-Value ratios?

A

The ratio looks at the ratio which is a percentage of the total value of the asset that is loaned.

37
Q

What is the importance of a reversionary yield to a lender?

A

It helps assess the future income potential of a property.

This impacts the lender’s confidence in the borrower’s ability to repay the loan

38
Q

What is a special assumption and can you give me an example of a special assumption that a lender may ask you to report on?

A

A special assumption is something that is not true but we believe to be true for the purpose of the valuation.

For example vacant possession or restricted marketing period.

39
Q

Why may an under rented property be a lower risk to a lender than an overrented property?

A

Higher risk of the tenant defaulting due to paying above the market level.

As well as a higher risk that the tenant will vacate at the end of the term.

40
Q

What are the key lease terms which may impact value?

A

Rent review structure.
Break clauses
Term
Restrictive covenants
1954 Act

41
Q

When may you apply an expiry void in a valuation?

A

At the end of a lease

42
Q

What does a running yield tell a lender?

A

A running yield tells a lender the yield in a certain point in time (return expressed as a percentage of the purchase price).

43
Q

What may you include as a threat within a SWOT analysis?

A

Upcoming expiry
Market conditions
Business rates increasing

44
Q

What is the current Bank of England base rate?

A

5.25%

45
Q

Can you talk me through your understanding of an amortising loan?

A

Paying a sum overtime with interest

46
Q

What are the reasonable tolerance when considering potential valuer negligence?

A

Lincoln vs CBRE (2010)

The tolerance for a one off commercial property was -/+10%.

If there are exceptional features this could be -/+15%.

47
Q

Can you talk me through your understanding of liability caps?

A

Liability caps are put into the ToE which set a limit to the liability that could be owed. This is usually £1m or 10x the fee (higher one) for Knight Frank

48
Q

When may a property not be suitable for secured lending purposes?

A

Properties in poor condition with a need for repairs or with structural issues.

Title problems, unclear title plans.

Environmental risks such as flooding. Deleterious materials. Contaminations which could create liabilities to the lender

49
Q

What three things would you consider as first steps before undertaking a valuation?

A

I would consider undertaking CoI and AML checks, and the ToE.

50
Q

When is the effective date of Red Book Global

A

Jan 2022

51
Q

What are some of the headings of the Red Book?

A
  • VPS 1 – Minimum terms of engagement
  • VPS 2 – Inspections and investigations
  • VPS 3 – Valuation reports – minimum requirements
  • VPS 4 – Bases of value – MR, MV, Fair Value, Investment Value
  • VPS 5 – Valuation approaches and methods
  • VPGA 1 – Valuation for Financial Accounts
  • VPGA 2 – Valuation for Secured Lending
52
Q

Where may you find information on a valuation for internal accounts?

A

VPGA 1 - Valuation for financial accounts

53
Q

How do you calculate the WAULT?

A
  1. Multiply the remaining term of each lease by the rental income generated by that lease.
  2. Sum up the results of all these calculations.
  3. Divide the total by the total rental income of all leases.
54
Q

What is the Hierarchy of Evidence when considering lettings?

A
  1. Open Market Letting
  2. Regear
  3. Rent Review
  4. Independent Expert
  5. Arbitration
  6. Sale and Leaseback
  7. Intercompany transactions
55
Q

What is Investment Value?

A

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives

e.g. Milton Keynes Red Bull example

56
Q

Name a restriction introduced with VPS 3 under the National Supplement 2023

A

If a property is purchased by a firm, the valuers of that firm is unable to value for property for 12 months.

57
Q

What is the process of a DCF?

A

1 - Input current market value as a negative figure
2 - Input projected rents over holding period as positive figure
3 - Input assumptions on rental growth, leasing fees, voids and rent free
4 - Input exit value at the end of the term as a positive figure
5 - Discount rate is the rate chosen which provides NPV of 0
6 - Value is the sum of the completed discounted cash flow to provide NPV

58
Q

What is the discount rate for DCF?

A

The discount rate is the rate chosen which provides NPV of 0

If NPV is positive (0+) then the investment achieved the investors TRR

If NPV is negative (-0) then the investment did not achieve the investors TRR

59
Q

What is NPV?

A

The sum of the discounted cash flows

NPV determines if an investment provides a positive return against the target rate of return.

60
Q

What is a DCF?

A

DCF determines the value of a property by examining projected cash flows to arrive at an estimated current value of a property.

61
Q

What is the difference between a residual and development appraisal?

A

Residual method is based on market inputs
Development appraisal is based on client’s inputs

62
Q

What is the purpose of a residual?

A

It is used to assess the viability of a development scheme
It is used to assess the probability of a development scheme
It is used to establish a residual site value

63
Q

What is the process of a residual valuation?

A

The Gross Development Value (GDV)

minus the construction costs
minus other costs e.g. letting, agents, legal and contingency

= residual value

Considering that the market value of the completed development at todays date
comparable method is used to establish rents and yields
All risks yield is used
Rent free and voids are assumed
Purchaser’s cost is deducted

64
Q

Implicit model vs Explicit model

A

Implicit Model

This is the Investment method whereby a rent is capitalised to produce the Market Value.

This is good when there is plenty of comparable evidence. However when there isn’t valuers must use market sentiment.

Explicit Model

This is the Discount Cash Flow method.

More suited with assets with multiple cash flows.

It reflects growth expectations in the market

Implicit and Explicit models will create similar values in a stable market.

65
Q

What is the difference between measurement date and valuation date.

A

The valuation date specifically refers to the point in time at which the value is determined, while the measurement date is the date at which these values are formally recorded for accounting purposes.

66
Q

What is an IRR?

A

The IRR is used to measure the probability of an investment.

IRR calculates the rate at which the NPV of all cash flows equal zero

The IRR is compared to the discount rate to determine if an investment generates returns higher than the required rate of return (discount rate). If the IRR is greater than the discount rate, the investment is considered financially attractive.

67
Q

What was the purpose of the Valuation reports for Milton Keynes and Crawley?

A

Milton Keynes and Crawley was valuations for the purpose of internal use. The client requested that they were red book complaint

Bishop Stortford and Nottingham was valuations for the purpose of a purchase report

68
Q

Residual and Development Appraisal.

Explain the method, what it is used for and the assumptions

A

This method is used to establish the underlying site value of the land.

The difference between residual and development appraisal:
Residual uses market inputs (targets land value)
Development appraisal uses client inputs (targets profitability of a project)

The process is as follows.

Gross Development Value (GDV)
- minus construction costs
- minus all other costs (professional fee 10-15%, contingency 5%, marketing fee 1-2%)
- minus profit (c.10-20%)
- minus finance (if there is any)
= land value

69
Q

Outline requirements for the Valuation for Charities

A

1 - Under the Charities Act 2011, prior to the disposal of a charity asset, they must get a valuation
2 - Under the Charities Act 2022. During the disposal. the charity must obtain the best possible terms for the transaction
3 - Under the Charities Act 2022. The act widens the categories of potential advisors charities may use. It also simplifies the content of their reports.

70
Q

Explain a special purchaser

A

A particular buyer for who a particular asset has special value because of the advantages arising from its ownership.

Example of the is with the St Albans example in my summary of experience. With this property a special purchaser achieved the highest bid. This was Home Bargains, who wanted a presence in St Albans but due to a lack of available space, they decided to purchase this site with the intention of occupying it.

71
Q

Explain the valuation of ransom strips

A

A ransom strip is a piece of land which controls the access to another piece of land.

The value of ransom strips could be in the order of 15%-50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme

This is assessed by The Upper Tribunal (Lands Chamber).

The key case for ransom strip valuations is Stokes vs Cambridge 1961 - 1/3 of the uplift in development value was awarded to the owner of the ransom strip.

72
Q

What are the pros and cons of DCF?

A

Positive

It considers the time value of money

Estimates the present value of future cash flows

Considers that money today is worth money than money in the future.

Helps to estimate the current value of an investment by discounting expected cash flows

Negative

Uncertain future cash flows

Sensitivity to inputs

Dependence on initial information

APC - Spring 2024 (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions