What is a loan security valuation?
When a property is used as security in order for someone to lend money from the bank. A way for a lender to determine a value of a property so they know if they can recoup the amount of the loan if the borrower defaults on their loan repayments.
What are some examples of bridging lenders?
Castle Trust Bank, Bridginvest, Lendinvest
What do D&B scores tell you?
They provide a quick and clear indication of the creditworthiness of a company. The first score assesses financial strength from N to 5A and the second score assesses risk from 1 to 4. 5A1 is best score possible.
How else can you consider a company’s financial strength?
Analysing their balance sheets and income statements – can also do the profits test.
How do lenders stress test suitability for lending?
Special assumption valuations allow lenders to test serviceability/end value in the event of certain market conditions. More broadly, they will have their own internal lending risk criteria which will lead to certain LTVs and rates they can lend at.
Where did you agree the special assumption in Aviv Place, Addlestone?
In the terms of engagement. Special assumptions need to be agreed in writing and requested by the client.
How else can you value SA MVVP?
Using the comparative method looking at sales of vacant units.
Why did the client ask for VP and how can a VP property be suitable for lending?
They wanted to know whether it would still be valued at enough money to recoup their money if it was unlet. It can still be suitable as it is a bricks and mortar building that will still have value. In this case, the residential market was strong and the retail market was reasonable so voids would not be too long as income would be coming in to service this debt.
What are examples of assumptions you make?
-There are no issues with the title
-There is no contamination
-There are no breaches of planning
-The building complies fire/health and safety regulations.
What is a profits test?
A test of a tenant’s covenant strength and how likely they are to default on rental payments. If the net profit for the last three years is 3 x the rent then they pass the test (or if net asset value is 5 x the rent). If they pass the test it may mean they do not have to pay a rental deposit (or a reduced one).
What lease events could impact on suitability for lending?
Break clauses – means the income is not secure for the whole term
What other types of rent review are there?
-Open market rent reviews (usually upward only) where the rent is adjusted to reflect the rent that could be achieved on the open market.
-Index linked rent reviews (with the RPI or CPI) where the rent increases in line with an index that measures inflation. It can have a cap (maximum) and collar (minimum) in which it can increase.
-Assumptions of rent reviews = vacant, term is equal to original lease length
Disregard of rent reviews = tenants good will, tenants improvements
How can an owner occupied property with no income be suitable for lending?
As properties can still demand a high value when vacant as it can be attractive to certain occupiers wanting their own space. In particular, industrial units where there is high demand for units and where an occupier can make changes to the property to make it most suitable for how they are using it and need to be in certain location.
When might a property not be suitable for secured lending?
If it is an older property which is in disrepair and has poor energy efficiency. If it has a low EPC rating then it may not be suitable for the whole loan term as would not be able to be let without improvements.
How are inflation and interest rates linked?
They are intrinsically linked and usually follow each other (although with a lag). If inflation increases then interest rates will go up to try to tackle this as less money will be spent so price rises will slow. When inflation is low, interest rates decrease to stimulate spending.
What is a valuation report’s role in ensuring the security of finance?
-Assess value
-Assess risk
-DD
-Decision making
What does a Red Book valuation provide with regard to security to a lender?
-Determine the value of the property and if it can pay back the loan
-Determine if the rent could pay back the monthly/ annual payback from the loan.
Give me an example of a negligence case
-Yianni v Edwin Evans (1981)- resi valuer instructed by mortgagor leading instruction could owe a duty of care in tort to a mortgage purchaser relying on val.
-Scullion v Bank of Scotland plc 2010- surveyor who provides advice on value to a tender in respect of a buy to let purchase does not owe a duty of care to the borrower
Do you owe a duty of care to the applicant?
Yes. Under the RICS Rules of Conduct 2021- Rule 5- members and firms must act in the public interest, take responsibility for their actions and act to prevent harm and maintain public confidence in their profession
What are the two main methods of development funding?
- Debt finance - lending money from a bank or other funding institution
- Equity finance - selling shares in a company or joint venture partnership or using you’re the developers own money
What is senior debt?
Senior debt is the first level of debt borrowing and it takes a percentage over any secondary/mezzanine funding
What is Mezzanine funding?
Mezzanine Funding is additional funding from another source for the additional monies required over the normal LTV lending
What is the limitation of Dun and Bradstreet report
-Only looks at the financing
-doesn’t take into account the economy
What is included in a business plan?
-Executive summary
-Business description
-Market analysis
-Management structure
-Marketing and sales strategy
-Operational plan
-Financial plan
-
Brucey Top Ten Cases11
-
Yield Definitions9
-
Legislation and RICS Standards29
-
Ethics, Rules of Conduct and Professionalism53
-
Client Care5
-
Communication and Negotiation13
-
Health and Safety31
-
Accounting Principles and Procedures8
-
Business Planning3
-
Conflict Avoidance, Management and Dispute Resolution Procedure9
-
Diversity, Inclusion and Teamworking6
-
Inclusive Environments4
-
Sustainability19
-
Inspection37
-
Measurement33
-
Valuation (Methods)92
-
Valuation (Red Book)42
-
Development Appraisal6
-
Loan Security40
-
Data Management15
-
Purchase and Sale68
