Loan Security Flashcards

1
Q

When undertaking a loan security valuation, what parts of the Red Book would you have view on?

A

VPGA 2 and VPGA 10 of UK National Supplement.

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2
Q

What areas does VPGA 2 cover?

A

Conflict of interest checks
Taking instructions
Basis of value
Assumptions and special assumptions
Reporting and disclosures

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3
Q

Under VPGA 2, what must you include in your ToE for LSV?

A

Disclose any previous involvement within the last 24 months in ToE.

Disclose any anticipated future involvement too.

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4
Q

What are examples of previous/future involvement under VPGA 2?

A

Long-standing professional relationship
Introducing transaction for which a fee is payable to the valuer or firm
Has a financial interest in the asset or in the borrower
Is acting for the owner of the property or asset in a related transaction.
Is acting (or has acted) for the borrower on the purchase of the property or asset

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5
Q

Can you value a property that your agency team has sold?

A

Under RICS Professional Statement: Conflicts of Interest - UK Commercial Property Market Investment Agency (2017).

You can be both the agent for the seller and the valuer for the lender/purchaser - however, must be disclosed and agreed in writing.

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6
Q

What do you do if the borrower won’t disclose the lender?

A

If the party
does not know, or is unwilling to disclose, the identity of the intended lender, it will need
to be stated in the ToE that the valuation may not be acceptable to a
lender.

This may be because some lenders do not accept that a valuation procured by
a borrower or an agent is sufficiently independent, or because the particular lender has
specific reporting requirements

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7
Q

What basis of value is commonly used in LSV?

A

MV

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8
Q

How do you agree special assumptions?

A

In writing in the ToE

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9
Q

Examples of common special assumptions in LSV?

A

planning consent has been granted
2. planning has been satisfactorily developed

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10
Q

Under VPGA 2, what must you state if you have made a special assumption?

A

Special assumption value must be accompanied with a comment on any material difference between the reported value with and without the special assumption.

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11
Q

What additional things do you need to report on for LSV?

A

Disclosure of involvements
Valuation methodology
If recently transacted, the extent to which that has been accepted as Market Value.
Comment on environmental consideration
Comment on suitability for loan security purposes.
Factors which could affect price.

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12
Q

What would you look at for environmental factors?

A

Flood risk
EPC
Current and Historic use
Contamination
Invasive species

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13
Q

What are sustainability factors and why are they becoming more important to lenders?

A

VPGA 8 - Valuation of Real Property Interests

in a valuation context sustainability encompasses a wide range of physical, social, environmental and economic factors that can affect value and of which valuers should be aware.

As commercial markets in particular become more sensitised to sustainability matters, so they may begin to complement traditional value drivers, both in terms of occupier preferences and in terms of purchaser behaviour

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14
Q

If the property is to be held as an investment, what additional report contents should be included?

A

Summary of occupational leases
Commentary on current rental income
Covenant strength
Maintainability of income over the loan.

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15
Q

If the property is to be developed, what additional report contents should be included?

A

The costs
Viability of project
Sensitivity of residual valuations from assumptions
Implications of project taking longer than expected

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16
Q

What should you attach to the report as good practice?

A

Instruction letter

ToE

17
Q

What 2 main pieces of info does VPGA 2 advice the valuer to request off the lender?

A

previous recent sales price if applicable
2. loan terms

18
Q

What does VPGA 2 advise you to include in your report re. a property’s security for a loan?

A

Comment on the suitability of the property as security for mortgage purposes, bearing in mind the length and terms of the loan being contemplated.

Where the terms are not known, the comment should be restricted to the general marketability of the property.

19
Q

What does VPGA 2 advise you to include in your report re. the property use in relation to market conditions?

A

Potential and demand for alternative uses, or any foreseeable changes in the current mode or category of occupation.

20
Q

What does VPGA 2 advise you to include in your report re. the market conditions in relation to the property and the loan?

A

The potential occupational demand for the property
Past, current and future trends, and any volatility in the local market and/or demand for the category of property
The current marketability of the interest and whether it is likely to be sustainable over the life of the loan

21
Q

What does UK VPGA 10 apply?

A

Valuations for commercial secured lending

against investment, development and owner occupied real property

22
Q

How does UK VPGA 10 define commercial property?

A

‘standard’ asset
classes, operating assets, and residential assets that are considered to fall
within the professional investment sector.

23
Q

Under UK VPGA 10, how should a valuer obtain information which is not publicly available?

A

Take instructions from Lender.

If lender elects to open a dialogue between borrower and valuer, the valuer should request these instructions in writing

24
Q

What term does UK VPGA 10 advise is the minimum ‘conflict position’ you must be in to undertake a secured lending valuation?

A

Be at minimum an external valuer.

25
Q

What is an external valuer?

A

A valuer who, together with any associates, has no material links with the client, an agent acting on behalf of the client or the subject of the assignment.

26
Q

What is an independent valuer?

A

No clear definition.

Valuer needs to ensure the instructing client has defined the term.

27
Q

What must valuers mitigate in valuation work?

A

Risk.

Pursuant to RICS guidance note: Risk, Liability and Insurance in Valuation

28
Q

What does UK VPGA 10 state re. limitation of liability?

A

It’s a negotiation.

However, should be reasonable and proportionate to the nature of the instruction and their respective exposures to risk.

29
Q

What are panel agreements?

A

Many lenders deploy framework agreements or ‘panel agreements’, which may be made directly with the valuation firms or managed via a third-party panel management firm.

Where these are agreed and adopted by the parties concerned, they may have the benefit of standardising ToE and the associated reporting requirements.

However, great care must be exercised to ensure that where such agreements are in place, they are and remain appropriate in relation to individual valuation assignments

30
Q

What does UK VPGA 10 state re. limitation of reliance?

A

ToE should limit reliance only to addressee, who should be the named lender.

As default, 3rd party reliance is excluded.

If they are requested to be included, then they should be specifically named.

31
Q

What does UK VPGA 10 recommend re. who the LSV report is addressed to?

A

Strongly recommended to be addressed to lender.

Not a broker or potential borrower.

32
Q

What does UK VPGA 10 say re. suitability for loan security?

A

Lender is responsible for assessing and taking the final decision on the suitability of the asset.

Valuer only expected to provide an opinion based on information that is readily available in the market.

33
Q

What does UK VPGA 10 say re. extensions?

A

If completion of a loan is delayed, then a lender may ask if it’s still valid.

Valuer must be cautious, but can confirm the valuation where appropriate.