Case Study Flashcards
(46 cards)
Terms of Engagement
What must be included VPS1 (15)
According to VPS 1, the minimum matters must be included in Terms of Engagement:
* Identification and status of the valuer
* Identification of the client(s)
* Identification of any other intended users
* The asset to be valued
* Currency
* Purpose of the valuation
* Basis of value
* Valuation date
* Nature and extents of valuer’s work (including investigations and any limitations theron)
* Nature and source of information to be relied upon
* Assumptions and special assumptions to be made
* Format of the report
* Restrictions for use, distribution and publication
* Confirmation of Red Book / IVS compliance
* Fee basis
* Complaints handling procedure to be made available
* Statement that the valuation may be subject to compliance by the RICS
* Limitation on liability agreed
What sections of the red book did you adhere to?
PS 1: when does a valuation have to be “Red Book” compliant?
* PS 2: must act in accordance with the RICS Professional and Ethical Standards, must act independently by identifying and managing conflicts of interest, must comply with the minimum terms of engagement
* VPS 1: minimum terms of engagement
* VPS 2: must undertake inspections to verify information being relied upon
* VPS 3: minimum requirements to be stated within a report
* VPGA 2: valuations of interests for secured lending
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What section of the “red book” is relevant for valuations of interests for secured lending purposes?
VPGA 2
what additional information must a report for secured lending purposes include?(6)
- Disclosure of any conflicts of interest identified / agreement put in place to avoid a conflict of interest
- Valuation methodology adopted
- Where a transaction has recently occurred on the Subject Property or been provisionally agreed, the extent to which that has been accepted as Market Value
- Comment on the environmental considerations
- Comment on loan suitability
- Any circumstances the valuer is aware of that could impact the price
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How did you account for the tenant’s fit-out when valuing the property?
- Under the yielding up clause the tenant was required to return the property in the same condition which it was let under
- Tenant improvements were therefore disregarded when establishing the Market Value of the Property
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What is an effective full repairing and insuring (FRI) lease?
- Tenant has responsibility for internal non-structural repairs
- Landlord takes on the responsibility for the repairs to the structure and outside parts of the building but recovers costs of doing so from the tenant through a service charge
- Landlord will also maintain insurance and recover cost of premium from the tenant
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If the lease were inside the 1954 act, what would the landlord have to do to terminate the tenancy?
Would have to issue tenant with a Section 25 notice no more than 12 months and no less than 6 months before the date for the termination of the tenancy
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What matters may you have discovered during your due diligence that would have adversely impacted on the value of the Property?
Environmental – if it was located in an area at high risk of flooding (Environment Agency website)
* Contamination – if it was situated on a former landfill site (commissioned Groundsure report)
* Planning – if there was planning permission granted which would adversely impact the property (Bristol County Council Council website)
* Lease terms – prolonged lease with no rent review provision would have an adverse impact on the property (Land Registry)
* Title Deed - onerous restrictions, encumbrances or outgoings contained within the Title Deed. (Received a Report on Title which indicated that there were none)
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What does VPGA 2 state with regards to conflicts of interest?
- Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender
- ‘Previous involvement’ usually defined as within the last two years but can be longer
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Explain the process of a conflict of interest check?
Check property name and name of the borrower or third party in accordance with VPGA 2
check our internal files and emails and then send an email to the firm as a whole to ensure no one else has a conflict
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If there had been a conflict, what would you have done?
- Conflict avoidance – consider whether conflict is irresolvable with your impartiality uncompromised. Decide whether to decline or accept instruction
- Written advice to both parties – if you accept instruction write to both parties disclosing nature of the conflict, outline how you propose to manage the conflict and request written confirmation of informed consent
- Conflict management – set up information barrier in accordance with the provisions agreed with both parties
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What source of errors are associated with using a laser measuring device?
- Human error – not using the device appropriately i.e. not measuring a horizontal distance
- Systematic error – devices should be regularly checked for accuracy of calibration by checking a known distance and recording the results in a log
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What is included/excluded in GIA
- Gross Internal Area (GIA) is the area of a building measured to the internal face of the perimeter walls at each floor level
Exclude: - Perimeter wall thickness and external projections
- Areas less than 1.5m in heights
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What is Market Rent
‘The estimated amount for which an interest in real property should be leased’
* On the valuation date
* Between a willing lessor and a willing lessee
* On appropriate lease terms
* In an arm’s length transaction
* After proper marketing
* When the parties had each acted knowledgeably, prudently and without compulsion
How did you weight the comparable evidence?
Guidance Note RICS Comparable Evidence in Real Estate Valuation (1st edition), 2019. Valuer should use professional judgement to assess importance of evidence on a case-by-case basis
* Category A: direct comparables
* Category B: general market data
* Category C: other sources
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What impact would lease length have on rental value?
Tenant’s seek a discount if they have a long lease i.e. one which is longer than a lease that might be granted in the open market
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What is a net effective rent?
This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction
Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period
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What is Market Value?
‘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
* When the parties had each acted knowledgeably, prudently and without compulsion
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What is a net initial yield?
- Immediate return of the property based on the present income that the property produces
- Calculated as passing rent divided by Gross Purchase Price (inclusive of purchasers costs)*
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What makes a good covenant in a tenant?
The ability of the tenant to perform th covenant in the lease e.g. rent, service charge and repairing covenants
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What statutory enquiries did you carry out?
- Flooding
- Business Rates
- EPC
- Planning history
- Radon
What Red Book section covers loan secutity?
VPGA2
Describe how you aged the property?
Tell me different constuctions of indsustrial buildings?
