Valuation Flashcards

Question

What is the methodology of the profits method of valuation?

Answer 1

- Adjusted net profit (FMOP) which can be expressed as the EBITDA - Capitalised at the appropriate yield (years purchase multiplier) to achieve market value - Cross check with comparable sales evidence if possible

Answer 2

Earnings Before Interest, Taxes, Depreciation, and Amortization

Answer 3

Part 1 - Introduction Part 2 - Glossary Part 3 - Professional Standards (PS) Part 4 - Valuation Technical and Performance Standards (VPS) Part 5 - Valuation Practice Guidance Applications (VPGA) Part 6 - The International Valuation Standards (IVS)

Answer 4

RICS Valuation - Global Standards 2021 ("Red Book Global") effective from 31st January 2022

Answer 5

1. The need for compliance with RBG + adequate ToR to reflect this - ToR must be clear + unambiguous 2. Valuation for financial reporting purchases - reference to IFRS 13 + 16 3. Reference to the use of the Profits Method for certain trade-related property valuations 4. Sustainability and ESG factors 5. Definitions and scope of valuations contained within the International Valuation Standards (IVS)

Answer 6

A. Identification and status of the valuer B. Identification of the Client C. Identification of any other intended users D. The asset to be valued - if a portfolio then lotting of assets should be considered E. Currency F. Purpose of the valuation G. Basis of value H. Valuation date I. Extent of investigation J. Nature and source of the information to be relied upon K. Assumptions and special assumptions to be made L. Format of the report M. Restrictions for use, distribution and publication N. Confirmation of Red Book/IVS compliance O. Fee basis P. CHP to be made available Q. Statement that the valuation may be subject to compliance by the RICS R. Limitation on liability agreed

Answer 7

Compliance with standards where a written valuation is provided

Answer 8

1. Providing agency or brokerage advice for an acquisition or disposal 2. Acting as an expert witness 3. Performing statutory functions 4. Providing a valuation purely for internal purposes, without liability and without communication to a third party 5. Expressly providing advice in preparation for or during course of negotiations or litigation

Answer 9

Professional Standards and they are mandatory WORLDWIDE

Answer 10

Ethics, Competency, Objectivity and Disclosures

Answer 11

1. Professional and Ethical Standards - Members undertaking valuations must act in accordance with the RICS Rules of Conduct 2. Independence, objectivity and the identification and management of conflicts of interest: - The valuer/firm must act objectively and independently and not be influenced by situation which could threaten professional objectivity - Professional Scepticism when reviewing information and data before relying on it - Detailed advice on dealing with COI 3. Terms of Engagement - Members must understand the clients requirements and comply with the minimum terms of engagement. Members must be able to demonstrate professional competence

Answer 12

Terms of Engagement (IVS 101 Scope of Work)

Answer 13

Provides a list of minimum matters which must be confirmed in writing to the client as a minimum PRIOR to commencing a Red Book Global valuation

Answer 14

These are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation

Answer 15

An assumption that is taken to be true and accepted as fact, even though it is not true

Answer 16

Assuming planning consent has been granted for a particular use - CHECK - on the special assumption of completion of the proposed scheme and assuming Plots 1 & 2 are built at the same time

Answer 17

Yes - this must be agreed in writing prior to the commencement of the instruction CHECK IS THIS FOR ASSUMPTIONS TOO

Answer 18

Inspections, Investigations and Records

Answer 19

Valuers must take the steps to verify the necessary information being relied upon for a valuation to ensure the information is professionally adequate for its purpose

Answer 20

Restricted Information (desk top) valuations (no inspection undertaken)

Answer 21

Banks need to know what the value of property would be if their client defaults. This would result in a quick sale hence the restricted marketing period.

Answer 22

1. The nature of the restriction must be agreed in writing in the TOE 2. The possible valuation implications of the restriction confirmed in writing before the value is reported 3. The valuer should consider whether the restriction is reasonable with regards to the purpose of the valuation 4. The restriction must be referred to in the report

Answer 23

When a valuer is instructed to undertake a valuation on the basis of restricted information or without a physical inspection

Answer 24

A revaluation without re-inspection of the property previously valued must not be undertaken unless the valuer is satisfied that there have been no material changes to the property or nature of its location since the last inspection This must be confirmed in the TOE and in the valuation report

Answer 25

Wyndham Mews, London - Property valued in 2022 (inspected) - Revalued in 2023 - Stated in assumptions + confirmed in writing in TOE that valuation to be undertaken on desktop basis + condition of the property considered to be same as 2022 valuation

Answer 26

Proper records must be held of the inspections and investigation and of other key inputs in an appropriate business format Note the importance given to ESG and Sustainability

Answer 27

A. Identification and status of the valuer B. Client and any other intended users C. Purpose of valuation D. Identification of the asset to be valued E. Basis of value F. Valuation date G. Extent of investigation H. Nature and source of the information to be relied upon I. Assumptions and special assumptions to be made J. Restrictions for use, distribution and publication K. Instruction undertaken in accordance with IVS standards L. Valuation approach and reasoning M. Valuation figure(s) N. Date of valuation report O. Comments on market uncertainty P. Statement setting out any limitations on liability that have been agreed

Answer 28

Valuation Reports (IVS 103 Reporting)

Answer 29

In providing a client with preliminary advice or a draft report/valuation in advance of completion The member must state that: - The opinion is provisional + subject to completion of the final report - The advice is provided for client's internal purposes only - Any draft is on no account to be published or disclosed - If any matters of fundamental importance are not reflected, their omission must be declared

Answer 30

Bases of Value The valuer must determine the basis of value that is appropriate for every valuation to be reported

Answer 31

1. Market Value 2. Market Rent 3. Fair Value (IFRS 13) 4. Investment Value 5. Equitable Value (IVS 104) 6. Liquidation Value

Answer 32

The price an asset should expect to fetch if sold on the open market at the valuation date CHECK The estimated amount which an asset or liability should exchange: - On the valuation date - Between a willing buyer and a willing seller - In an arms length transaction - After proper marketing - Where the parties had acted knowledgeably, prudently and without compulsion

Answer 33

The estimated amount which an interest in real property should be leased: - On the valuation date - Between a willing lessor and a willing lessee - In an arms length transaction - After proper marketing - Where the parties had acted knowledgeably, prudently and without compulsion

Answer 34

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 - This basis of valuation is now required if the International Financial Reporting Standards have been adopted by the client - It is adopted by the International Accounting Standards Board - The RICS view is that this definition is generally consistent with the definition of Market Value

Answer 35

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives - This may differ from Market Value - This is sometimes used as a measure of worth to reflect the value against the clients own investment criteria

Answer 36

The estimate price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interest of those parties - Not used in the UK

Answer 37

This basis of value can be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets into a saleable condition - Not used in the UK

Answer 38

Valuation Approaches and Methods

Answer 39

- Valuers are responsible for choosing and justifying their valuation approach and use of model - In some cases, more than one approach may be appropriate

Answer 40

1. VPGA 1 Valuation for inclusion in financial statements 2. VPGA 2 Valuation of interests for secured lending 3. VPGA 3 Valuation of businesses and business interests 4. VPGA 4 Valuation of individual trade related properties 5. VPGA 5 Valuation of plant and equipment 6. VPGA 6 Valuation of intangible assets 7. VPGA 7 Valuation of personal property, including arts and antiques 8. VPGA 8 Valuation of real property interests 9. VPGA 9 Identification of portfolios, collections and groups of properties 10. VPGA 10 Matters that may give rise to material valuation uncertainity

Answer 41

Valuation Practice Guidance Application

Answer 42

Valuation for inclusion in financial statements

Answer 43

Fair value will be adopted for all IFRS adopted accounts Prescribed performance standards must be adhered to

Answer 44

Valuation of interests for secured lending

Answer 45

Dealing with conflicts of interest for secured lending valuations Reporting procedures

Answer 46

1. A longstanding professional relationship with the prospective borrower or owner 2. When the valuer will gain a fee from introducing the transaction to the lender 3. If there is a financial interest in the property holding or prospective borrower 4. When the valuer is retained to act in the disposal or letting of the completed development on the subject property

Answer 47

1. Disclosure to the lender - any previous / current / anticipated involvement 2. Previous involvement is defined as being in the past two years - but can be longer in some circumstances 3. If the valuer or client considers that a COI is unavoidable the instruction should be declined 4. The valuer is responsible to accept / refuse the instruction with regard to the ROC 5. If the conflict can be managed this must be agreed with the client and recorded in writing within the TOE and valuation report

Answer 48

As well as the minimum requirements of a valuation report: The valuer should be able to advise whether to agree to the loan or in the case the borrower defaults - Must report if the property is suitable for mortgage purposes - Any circumstances which the valuer is aware of that could affect price - Comment on any environmental considerations - Disclosure of any COI identified or arrangements agreed - Where a special assumption has been used - any material difference between the reported value with and without that special assumption

Answer 49

1. Valuation Methodology adopted 2. Recent transactions of the subject and the extent to which that information has been relied upon 3. Where the enquiry does not reveal any information, the valuer will make a statement to that effect in the report 4. Any other factor that potentially conflicts with the definition of MV or its underlying assumptions 5. Any other relevant normal valuation enquiries are undertaken 6. Acknowledges that sustainability factors are becoming a more significant influence and valuations for secured lending should have appropriate regard to their relevance to the instruction

Answer 50

Valuation of real property interests

Answer 51

1. Covers inspections and investigations with particular emphasis on ESG and specific environmental constraints and sustainability issues 2. Identifies ESG and Sustainability issues including the need to consider: Direct Valuation Factors (Storm/Flood risk) Indirect Valuation Factors (resilience or carbon emissions) Physical Risks (heat or wildfire) Transition Risks (regulatory change or carbon emissions)

Answer 52

Matters that may give rise to material valuation uncertainty

Answer 53

- A valuation report must not be misleading - The valuer should clearly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation on the specified date relating to the risk surrounding the valuation of the asset - A standard caveat should not be used

Answer 54

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 asst, such as real property and development property

Answer 55

RICS Valuation - Global Standards (UK National Supplement, 2018)

Answer 56

1. Effective from 14th January 2019 2. Sets out clarification that the national supplement augments the Red Book Global requirements for valuations in the UK and is not substitute for it 3. Provides specific requirements for members on the application of the Global Standards to valuations undertaken subject to UK jurisdiction 4. It contains 18 Valuation Practice Guidance Applications (UK VPGAs) - regrouping many to become more user friendly 5. Most of the advice is not mandatory but is for advisory guidance

Answer 57

1. More user-friendly with clear advice on what is and what is not mandatory 2. Clarity that the UK national supplement augments the Red Book Global for valuations in the UK 3. New UK VPGAs have been included for the valuation of central government assets, local authority assets and registered social housing providers assets 4. For financial reporting valuations, there is greater differentiation between UK GAAP and IFRS requirements 5. New section on valuation for commercial lending

Answer 58

Part 1 - Introduction Part 2 - UK Professional and Valuation Standards (Mandatory) Part 3 - UK Valuation Practice Guidance Applications (Advisory) Part 4 - Summary of changes from Red Book UK 2014 (revised 2015)

Answer 59

UK VPGA 1 = Valuation for financial reporting: general matters UK VPGA 2 = Valuations for other regulated purposes UK VPGA 8 = Valuation of charity assets UK VPGA 10 = Valuation for commercial secured lending purposes UK VPGA 11 = Valuation for residential mortgage purposes UK VPGA 15 = Valuation for CGT, Inheritance Tax, SDLT and ATED

Answer 60

Valuation of charity assets

Answer 61

UK VPGA 1.3

Answer 62

Valuations for FIVE purposes: 1. Financial Reporting (Company accounts) 2. Stock Exchange listings/inclusion in prospectuses and circulars 3. Takeovers and mergers 4. Collective investment schemes 5. Unregulated property unit trusts

Answer 63

Secured lending valuations are NOT regulated purpose valuations as they are not relied upon by third party or the public interest

Answer 64

Inspections by RICS’ professional regulation team now take place There is an annual declaration for all members who undertake regulated valuations. The length of time, purposes, extent and duration of the firms relationship with the client has to be outlined.

Answer 65

In the last financial year whether percentage fee income from the client is less or more than 5% of the total fee income - if more than 5% it must be disclosed to the nearest 5% Whether since the end of the last financial year, this has changed or will likely change There should be a policy in place on the rotation of valuers when the asset is regularly valued. RICS recommends a 7 year maximum rotation policy

Answer 66

When a property is purchased or an introductory purchase fee accepted by the firm, it cannot be valued for a regulated purpose valuation for 12 months by the same firm

Answer 67

A non exhaustive list of properties including self-storage, flexible workspace and purpose built student houseing

Answer 68

Independent Review of Real Estate Investment Valuations (December 2021)

Answer 69

1. Governance arrangements 2. Separation of valuation from advisory activities within firms in respect of the use of valuation data and instructions 3. Developing a time-specific, mandatory procurement and rotation process for valuers 4. Developing a Valuation Compliance Office role within firms 5. Processes to raise concerns about ethical conduct including improper pressure placed on valuers 6. Establishing a valuation regulatory quality assurance panel 7. DCF as the principal model applied in preparing property investment valuations 8. Improving the knowledge and application of valuers in respect of advanced analytical techniques 9. Independent review of real estate investment valuations 10. Review of post-qualification requirements for valuers and regular re-validation of valuers 11. Continue to build on its important work to ensure a diverse and inclusive valuation profession 12. These findings may have far reaching consequences for valuers and their firms 13. RICS hopes that changes brought following the recommendations will increase trust in the profession and the confidence that clients will have in the quality of the valuation process

Answer 70

Peter Pereira Gray

Answer 71

Provides a useful glossary of relevant terms and factors which valuers should incorporate into their valuation approaches including: - Terms of Engagement - Valuation purpose - Inspection - Reporting - Relevant sustainability characteristics, considerations and risks which should be considered when analysing comparable and other market information - How these should be considered in the choice of valuation methodology

Answer 72

RICS Global Guidance Note “Sustainability and ESG in commercial property valuation and strategic advice” December 2021 (effective 31 Jan 2022)

Answer 73

An acceptable margin of error of +/- 15% The claim was dismissed as the MV was within the margin of error

Answer 74

The permissible range allowed by courts for example in respect of a valuation

Answer 75

Singer & Friedlander Ltd V J. D. Wood (1977) It held that the usual margin of error can be varied and it will be narrower for a relatively straightforward valuation case and wider for a more complex case

Answer 76

The principle of a 10% margin of error was reinforced in respect of a valuation of 4 hotels in 2005. The judge stated that an appropriate margin may be +/-5% for a standard residential property but for a one-off commercial property +/-10% and if there are exceptional features of the property the margin could be +/-15%

Answer 77

The value arising from any expectation that future circumstances affect the property may change

Answer 78

1. Future prospect of securing planning permission for the development of land where no planning permissions currently exist 2. The realization of marriage value arising from the merger of two interests in land

Answer 79

Created by a merger of interest - can be physical or tenurial

Answer 80

Undertake a before and after valuation and calculate the level of marriage value created Typical negotiated outcome is to split the marriage value created 50:50 or divide it pro-rata to the value of the individual interest

Answer 81

It is the tax payable by the purchaser in respect of the transfer of land and buildings (a progressive / incremental tax)

Answer 82

£0 - £250,000 = Nil £250,001 - £925,000 = 5% £925,001 - £1,500,000 = 10% Over £1,500,00 = 12%

Answer 83

From 1 April 2016 higher rates of SDLT to be charged on purchases of additional residential properties. Buy-to-let, second home owners, and limited companies pay a 3% surcharge on top of residential SDLT rates.

Answer 84

They can claim relief with a nil rate up to £425,000 5% - on the portion from £425,001 to £625,000. There is no relief if the price is over £625,000

Answer 85

Land Transaction Tax (LTT)

Answer 86

New leases and premiums payable Calculated on the Net Present Value (NPV) of the lease, discounted at the RPI at the following rates as a incremental tax: NPV of up to £150K (£125K for resi) - 0% NPV of over £150K (£125K for resi) - 1% NPV over £5M - 2%

Answer 87

When the LL/T wants a surrender of the existing lease and agrees to grant a new lease usually longer on different lease terms simultaneously Calculation of the premium to reflect the change in value of the leasehold interest Need to value the before and after leasehold interest Understand the valuation of premiums

Answer 88

THE REQUIREMENTS OF THE CHARITIES ACT 2011 (amended in 2022) Two sets of changes: - Changes that came into force on 14 June 2023 - Changes that came into force on 31 October 2022 The Charity Commission requires the trustees of a charity to obtain a Section 119 of the Charities Act 2011 valuation when the charity is seeking to buy or sell property The valuer must follow the Act’s requirements: - The surveyor must comment as to whether the purchase or sale is in the charity’s best interest - Reports must state whether terms agreed are the best that can be reasonably obtained for the charity - UK VPGA 8 sets out advice in respect of the provision of valuation advice to charities Basis of valuation to be MV or MR

Answer 89

1. A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership which would not be available to other buyers in a market. 2. Special value is an amount that reflects particular attributes of an assets that are only of value to a special purchaser 3. This could arise from physical, functional or economic association of the property with some other property such as an adjoining property Example - A tenant purchasing their freehold interest

Answer 90

Land and Building Transaction Tax (LBTT)

Answer 91

For building insurance purposes The cost of the reinstatement of the building without a profit

Answer 92

1. Use of RICS Building Cost Information Service (BCIS) adopting GIA for commercial properties and gross external area for residential properties 2. Have to add VAT / Demolition costs / professional fees / planning and building regulation fees and inflation allowance if applicable 3. A replacement cost figure which is provided for insurance purposes, whether separately or within a valuation report is not a 'written opinion of value' so Red Book Global compliance is not required

Answer 93

1. Rent received less ground rent (=net rental income) 2. Capitalized at an appropriate yield for the remaining length of the lease 3. Result in the MV of the leasehold interest

Answer 94

- It is usual valuation practice to deduct the likely costs of purchase from the GMV to provide NMV of a property as a purchaser will have to pay these costs

Answer 95

1. Stamp Duty Land Tax 2. Agent's fee - say 1% of the purchase price + VAT 3. Solicitor's fees - say 0.5% of the purchase price + VAT

Answer 96

The Upper Tribunal (Lands Chamber) evidence suggests that the value 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 In some cases a fixed sum has been awarded The Upper Tribunal (Lands Chamber) assesses each case on its own facts Key case law - Stokes V Cambridge (1961) - when a value of one third of the uplift in the development site value was awarded to the owner of the ransom strip

Answer 97

Stokes V Cambridge (1961) - when a value of one third of the uplift in the development site value was awarded to the owner of the ransom strip

Answer 98

A wall is a 'party wall' if it stands astride the boundary of land belonging to two or more different land owners

Answer 99

Party Wall etc Act 1996 Provides a framework for resolving disputes in relation to party walls, boundary walls and excavations near neighboring buildings The Act provides a building owner who wishes to carry out various sorts of work to an existing party wall, with additional rights going beyond ordinary common law rights. If you are a party wall owner you must inform all adjoining owners of your intention to undertake any works to the party wall

Answer 100

RICS Guidance Note on Rights of Light 2016

Answer 101

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 an easement with a prescriptive right. If a light to right is infringed an injunction may be granted or damages awarded

Answer 102

HKRUK II (CHC) Ltd (a subsidiary of Highcross) V Heaney 2011 The outcome of this case has left Highcross with a remedial works bill and a mandatory injunction to reduce the scale of its extended Toronto Square scheme in Leeds where two new floor levels were added to tan existing office building

Answer 103

RICS Consumer Guide to Right to Light published in April 2022 for homeowners

Answer 104

The RICS monitor the VRS through the submission of the firms annual returns Additional monitoring ranges with Risk Based Reviews from desktop investigations to site based Regulatory Review Visits (RRVs) dependent on the risks identified The Head of Regulation has the power to remove a valuer from the Scheme

Answer 105

Type of valuations Purpose of valuations Number of valuations Firms total fee income from Red Book Global valuations in the last year What data sources are used Quality assurance audit procedures in place History of any negligence claims and notifications

Answer 106

1. Improve the quality of valuation and ensure the highest possible professional standards 2. To 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

Answer 107

Registration is not mandatory for valuation work excluded from the Red Book Global Any valuer registered can use 'RICS Registered Valuer' on their business stationery and marketing material RICS publish a register of the Registered Valuers Members are only eligible if they have completed APC vals to Level 3 or subsequently qualify for registration There is a alternative post qualification route for those who did APC o Level 2 Annual fee payable to the RICS upon registration

Answer 108

A RICS introduced a regulatory monitoring scheme for all valuers carrying out Red Book Global Valuations from October 2011

Answer 109

The price it might reasonably be expected to fetch if sold in the open market at the date of the death of the owner.

Answer 110

- Address/Weather/Inspection Date - Inspection circumstances - Construction of property - Outside space/parking - External/internal condition & specification CHECK WITH GINA

Answer 111

- Assuming that the property is connected to mains supply

Answer 112

Only to be used when direct market evidence is limited or unavailable for specialised properties e.g. lighthouses, schools, oil refineries

Answer 113

- Valued of the land in its existing use - assume planning permission exists - Add current cost of replacing the building plus fees less a discount for depreciation and deterioration (using BCIS) - Must estimate the amount of depreciation appropriate for physical functional and economic obsolescence - Physical - the result of wear and tear over the years - Functional - where the design or specification of the asset no longer fulfils the function for what it was intended for - Economic - changing market conditions for the use of the asset

Answer 114

Building Cost Information Service

Valuation Flashcards

(138 cards)