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Valuation Flashcards

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1
Q

When is a red book valuation not required?

A

1) Agency or Brokerage
2) Statutory Functions (GVD)
3) Internal Processes
4) Negotiation or Litigation
5) Expert Witness

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2
Q

What 3 things should you consider before undertaking a valuation instruction?

A

Competence, Independence (conflict of interest) and signed terms of engagement.

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3
Q

What do your valuation files contain?

A

Contact details of client, COI check and signed ToE, scanned copy of inspection notes & photos, copy of the report, due diligence file and invoice.

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4
Q

What are the four bases of value?

A

Market Value
Market Rent
Fair Value
Investment Value (worth)

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5
Q

What is the definition of Market Value?

A

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing where the parties each acted knowledgeably, prudently and without compulsion.

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6
Q

What is the definition of Market Rent?

A

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor & lessee on appropriate lease terms in an arm’s length transaction, after the proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

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7
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.

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8
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.

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9
Q

What is the definition of Market Value for Inheritance Tax Purposes?

A

S160 of IHTA 1984 defines as:
‘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 at one and the same time’.

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10
Q

What is the definition of Market Value for Capital Gains Tax purposes?

A

Section 271(1) & (2) of the Taxation of Chargeable Gains Act 1992 defines as:
‘The price for which the assets might reasonably be expected to fetch on a sale in the open market. However, no reduction is to be made to reflect the whole of the assets being placed on the market at one and the same time’.

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11
Q

What is an arm’s length transaction?

A

There is no relationship between the parties.

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12
Q

What is the difference between Market Value and Investment Value?

A

Investment value refers to the value to a specific investor, based on their requirement, tax rate and financing. In contrast, Market value is independent, objective and assumes a willing buyer in an arm’s length transaction.

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13
Q

What is the usual basis of value for financial statements?

A

Fair value.

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14
Q

What is the valuation date of IHT purposes?

A

The date of death

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15
Q

What is the valuation date for assets sold less than they were worth to help the buyer?

A

The date of sale

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16
Q

What is the valuation date for gifts?

A

The date the gift was given

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17
Q

What is the valuation date for assets owned before April 1982 / What is the rebase date for Capital Gains tax?

A

31st March 1982

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18
Q

What is an assumption?

A

A supposition taken to be true, usually because it is.

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19
Q

When are assumptions made?

A

When it is reasonable to accept that something is true without the need for a specific investigation.

All assumptions must be clearly stated in the report and terms of engagement.

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20
Q

Describe 3 assumptions that are usually made in producing a valuation.

A

1) That those parts of the property not inspected are in good condition.
2) That there are no ongoing insurance claims or neighbour disputes
3) That all services at the property are in good working order

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21
Q

What are the 3 valuation approaches?

A
  1. Market
  2. Income
  3. Cost
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22
Q

What is the Market Approach?

A

Based on comparing the subject asset with identical or similar assets or liabilities, where price information is available, and you can compare similar market transactions within an appropriate time period. ie. the comparable method

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23
Q

Name the methods of valuation

A

1 comparable 2. investment 3. residual 4. profits 5. depreciated replacement cost

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24
Q

What is the Cost Approach?

A

Based on the principle of substitution – what it would cost to replace the property new.

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25
What is the Income Approach?
Focuses on the property's ability to generate future income.
26
What is the comparable method?
Compares prices/rents of similar properties (e.g., residential homes).
27
What is the Investment Method?
It is a method of valuation that capitalises net rental income (using Cap Rate or DCF) for income-producing assets.
28
What is the Profits method?
Values properties based on the potential trading profit of the business operating within them (e.g., hotels, golf courses).
29
What is the residual method?
Calculates land value for development by subtracting development costs and profit from the projected value of the completed project.
30
What is Depreciated Replacement Cost?
Calculates cost new, less depreciation, for specialized buildings (e.g., schools, churches) or as part of the Cost Approach.
31
What is an internal valuer?
Employed by company to value internal assets, no third party reliance
32
What is an external valuer?
Is a third party valuer that has no material links with the asset to be valued
33
What are the three steps to undertake prior to commencing with a valuation instruction?
* Competence * Independence (COIs) * Terms of Engagement
34
Why is due diligence undertaken?
To check there are no material matters which could impact upon the valuation Such as; 1. Business rates 2. EPC 3. Flooding 4. Legal title and tenure
35
When would you use the investment method of valuation?
When there is an income stream to value
36
Explain Special Purchaser
Where a particular asset has special value to a particular purchaser because of advantages arising from its ownership that would not be available to other buyers in a market.
37
What is the Red Book?
* Set of global standards which set out procedural rules and guidance for written valuations.
38
What is the full title of the latest Red Book?
RICS Valuation - Global Standards Dec 2024. Effective 31st Jan 2025
39
Purpose of the Red Book?
Greater consistency, objectivity and transparency
40
Who creates the International Valuation Standards?
Valuation professional organisations such as RICS and the American Society of Appraisers.
41
What are the terms of engagement?
Contract with the client detailing the work assignment, can be used as an important defence against negligence claims
42
Name at least 10 headings you would expect to find in the terms of engagement
* Identification and status of valuer * Identification of client * Identification of any other intended uses * Identification of asset or liability being valued * Valuation currency * Purpose of the valuation * Basis of value adopted * Valuation date * Nature and extent of the valuer’s work, investigations and limitations * Nature and source of information which the valuer will rely * All assumptions and special assumptions to be made * Format of report * Restrictions on use, distribution and publication of report * Confirmation that the valuation will be undertaken in accordance with the IVS. * Basis on which the fee will be calculated. * Statement setting out agreed limitations
43
What do understand about synergistic value?
Synergistic value is the result of a combination of 2 or more assets where the combined value is more than the sum of the separate values.
44
What makes a property transaction comparable to the property being valued?
Similarities such as: * Physical * Location * Time scale * Use * Tenure
45
What do you understand by the expression weighting of comparable evidence?
We attach the greatest weight to those comparisons which have the greatest similarity to the subject property.
46
What do you understand by the expression hierarchy of evidence?
The hierarchy of evidence by transaction type for commercial. * Open market lettings * Lease renewals * Rent reviews * Independent expert’s determination * Arbitrator’s awards
47
How would you value a property for which there are no comparables?
* There has got to be some comparables but they may not be very good comparables. * Any evidence of any transactions that have any similarity whatsoever to the subject property. * Then make appropriate adjustments to it which could be large adjustments. * Any valuation figure would have a high level of uncertainty. * Use the contractors method/Depreciated Replacement Cost
48
What is the purpose of Zoning?
* To carry out valuations of shops based on net internal area. * Is that we can analyse and value retail units adding different frontage to depth ratios. * The standard Zone depth is 6.1m
49
What are the general principles of Zoning?
* The retail area is split into 4 zones (A, B, C and remainder) * Zone A is the most valuable area * Zone B is valued at A/2, with each subsequent zone half the value of the one before
50
Tell me about the investment method of valuation.
* Used when there is an income stream to value. * 4 techniques: term and reversion, hardcore and layer, hardcore and top slice and DCF
51
How would you carry out an investment method of valuation?
* Establish if property is over or under rented * If it is under rented complete a term and reversion * Capitalise passing rent using YP at discounted yield to end of term * Capitalise market rent into perpetuity using yp at market ratee * Add together * Stand back and look
52
What is the term and revision technique and what are the steps to carry it out?
An Investment method of valuation used for reversionary investments where the subject is under-rented. 1. capitalise passing rent using YP at discounted yield for remaining years 2. capitalise reversion using market rent into perp using YR at full market rate discounted using present value. 3. Add together 4. Stand back and look
53
What is the hardcore and top slice technique?
Investment method of valuation used for investments where the subject is over-rented
54
What factors make up the all risks yield?
Takes into account all the risks of the investment. 1. the construction (age, design, specification) 2. Tenant covenant strength 3. amount of rent (over-rented, market rent under-rented) 4. unexpired lease term 5. other lease terms 6. anticipated rental growth
55
How would you value a green-field site with planning permission for residential development?
* By using the rent capital comparison if I could if enough comparative evidence. * If not enough evidence then I would use the Residual Method.
56
Describe how you have carried out (or would carry out) a Residual Valuation?
1. Work out the GDV (gross development value through comps) 2. deduct development costs 3. deduct developers’ profit 4. = Land Value
57
What costs did you deduct (are deducted) in your / a Residual Valuation?
* Demolition * Contamination (if any) * Cost of Construction * Professional Fees * Cost of Finance * Contingency say 5% * Disposal Costs such as Agent/Legal Fees * Acquisition Costs = Agents Fees/Legal Fees Stamp Duty & VAT
58
How did you calculate (would you calculate) developer’s profit in your / a Residual Valuation?
* A percentage of the GDV or a percentage of Total Costs * Depending upon the site could be 15% of GDV. * Possibly 22-25% of total costs.
59
What are the usual acquisition costs of a development site?
1. Stamp Duty 2. Legal Fees 3. Agents Fees 4. Non recoverable VAT on Agents Fees
60
What is a ransom strip?
A ransom strip is a piece/strip of land giving access to development land.
61
What is ransom value?
Ransom is the value attributable to a ransom strip or ransom land.
62
How did you (would you) value a ransom strip?
By taking a percentage% of the uplift in value of development land
63
Name three property types that would be valued by the Profits Method?
1. Golf Course 2. Casinos 3. Cinemas 4. Bingo Halls 5. Amusement/Theme Parks 6. Hotels
64
Why are certain properties valued by the Profits Method?
* Because you can’t separate the use from the property.
65
Explain the basic approach to the Profits Method?
* Turnover (net of VAT) * Less Costs of generating the Turnover * = Net Operating Profit * Which is Capitalised
66
What valuation checks can be carried out on a valuation produced by the Profits Method?
* Price per bedroom (Hotels/Care homes/Rest Homes) * Price per seat (Cinemas) * Price per Court (Squash/Tennis) * Price per table (snooker/pool halls)
67
When is the Depreciated Replacement Cost Method used in practice?
* This is used as a method of last resort when we are unable to use any of the other four methods.
68
Explain the basic approach to the Depreciated Replacement Cost Method?
Gross Replacement Cost = 1. Cost of Modern Building 2. Less Depreciation 3. = Net Replacement Cost 4. Add Site Value (arrive at by capital comparison) 5. = Value as Existing
69
Explain what is included in a Reinstatement/ Replacement Cost for Insurance Purposes?
* Demolition * Shoring up and weather-protection of adjoining buildings * Rebuilding in accordance with current Building Regulations * Professional Fees
70
How would you value a long leasehold interest?
* Deduct ground rent from the gross rent to calculate the net rent received. Then can either: * Capitalise at a yield for the remaining length of the lease * Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments * Discounted cash flow (DCF) * Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset
71
What is the significance of rent received and rent receivable when calculating the value of a leasehold interest?
* Ground rent can be calculated on a geared basis, using the rent from the leasehold interest * Rent “received” will be where ground rent is payable on rent actually received by the leaseholder * Rent “receivable” will be where the ground rent payable is based on the potential return as opposed to the actual return i.e. the tenant takes on the risk of voids
72
Would your valuation change if the interest was held leasehold as opposed to freehold?
* Depends on the situation. * The price difference between a long leasehold vs freehold may not be substantial but the price difference between a short leasehold vs freehold property can be extremely significant. * The same property, in the same location, is likely to be more expensive if it is sold with a freehold title than if it is sold with a leasehold.
73
What is a yield?
A measure of investment return, expressed as a percentage of capital invested
74
How would you calculate a yield?
* Income/ Price x 100 * (Gross yield)
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