Loan Security Valuation Flashcards
Under RB VPGA 2, what should you do if you are instructed by a borrower who does not disclose the lender?
If the borrower approaches you for a report, but does not disclose the lender, you should make a statement to the effect of the valuation may not be acceptable to a lender (some lenders see borrower procured reports as insufficiently independent, or have additional requirements)
What 2 main pieces of info does VPGA 2 advise the valuer to request from the lender?
o The valuer should enquire if there has been a recent transaction or provisionally agreed price, and further enquiries e.g. marketing, effect of any incentives, whether best price obtainable.
o The valuer should request details of the terms of the lending facility being contemplated by the lender.
Under VPGA 2, what must you state if you have made a special assumption?
Any valuation for secured lending purposes arrived at by making a special assumption must be accompanied by a comment on any material difference between the reported value with and without that special assumption.
What does VPGA 2 advise you to include in your report re. the market conditions in relation to the property and the loan?
- 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
What question will a Court ask when considering a valuer’s negligence, and what additional consideration will they take into account?
o The usual question the courts ask is what are the maximum and minimum valuations that could be given by a reasonable valuer in the actual valuer’s position (assessed by a valuer’s peers).
o To be found negligent, the actual valuation must generally have fallen outside that ‘bracket’ of hypothetical reasonable valuations.
o The courts may sometimes also consider whether there were any specific errors made by the valuer in the course of the valuation. If there were, that could increase the chances of the valuation being held to be outside the bracket. This means that a valuer cannot focus purely on the end figure; the process followed by the valuer and the text of a valuation report are also important.
What is the SAAMCO Cap, and why should a valuer consider the advice they are giving to a client?
o The SAAMCO Cap: usually restricts the damages to the difference between the valuer’s valuation figure and the figure the court decides was the actual value of the property at the date of the valuation. Therefore, valuers are not generally liable for additional losses suffered by their clients by market depreciation in the property between the date of the valuation and the date of the claim.
o It is important to note that the SAAMCO Cap is based on the principle that providing a valuation is only, in legal terms, providing ‘information’. The cap does not apply if a valuer goes beyond the provision of information and advises a client whether to proceed with a transaction.
Can you give me some examples of lenders requirements which go above and beyond the ‘Red Book’?
The SLA’s for some lenders include requirements above and beyond the Red Book. Such as specific formats, and the inclusion of data such as demographics.
What loan to value are your clients dealing with?
The loan to value ratio depends on the purpose of the loan and, more importantly, the type/quality of the asset. A general ratio is 60-70%, this may go as high as 100% for doctors surgery.
What advice did you give for that valuation for secured lending?
E.G: As the GP is a low risk, and long term investment in an area with high underlying land values, I advised that the property provided suitable security for the proposed loan.
Westholme School - in the event that the school defaulted on their loan, the low saleability, restriction on development and limited alternative use would pose a risk of prolonged marketing period and discounted sale price.
What is the current Bank of England interest rate?
Increased to 1.25% in June 2022, following increases throughout the year. It was reduced to 0.1% in March 2020 due to COVID-19.
What is an SLA?
Service Level Agreement, requirements go beyond the Red Book.
Can you give me some examples of lenders requirements which go above and beyond the ‘Red Book’?
Specific requirements for what’s included within the executive summary and the order of the report. Required level of detail for particular sections of the report. Pre-agreed basis of value and assumptions made.
What do you think about crowdfunding?
Providing valuations for crowd funding comes with a higher risk, as the valuer does not know or have individual contracts for each of the investors who may rely on the report. Members should take special legal advice in this scenario.
When agreeing a commercial lending valuation instruction, what sort of questions should members and firms address?
Risk, Liability and Insurance, April 2021 suggests the following:
• Who can rely on the valuation, and for what purpose? For example, senior debt provider or mezzanine lender, etc.
• Should the engagement contract with the client include a clause preventing the client from assigning the benefit of the contract to third parties?
• Is the purpose of the report clear and specific? For example, in connection with new lending, loan monitoring, default, CMBS, etc.?
• In defining the purpose, members should try to be as specific as possible about the lending transaction for which they are permitting the valuation to be used. Members should consider making it clear – preferably in both the engagement letter and the valuation report – that the valuation may not be relied on for different, or subsequent, lending decisions.
• Are both the engagement letter and the valuation report clear about who the report is to be addressed to, and whether third-party reliance is permitted?
• Is it necessary/appropriate to deal expressly with reliance by specific third parties such as receivers, rating agencies, and other advisers?
• What liability cap is agreed?
• Consider the basis of the liability cap. For example, a cap for each party or claim, or a total cap for the entire instruction (see section 3).
• Particular care should be taken where accepting instructions from a mortgage broker, i.e. where the valuer may be at ‘arm’s length’ from the lender client, in order to ensure that the issues raised in this guidance note are properly considered.
Can you tell me about the example in your submission? (Henlow Vets)
I inspected and measured the property. At the time it was under construction to combine the adjoining unit, so I considered the cost of undoing the works. I obtained market evidence of sales and lettings to assess the value of the property using the comparable and investment methods.
The property was relatively rural which may create some risk, but it was located on a prominent corner plot at a main crossroad. Additionally, the occupying vets were trading well and were considered to have a high covenant strength.
