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Valuation Quizzes > Valuation - Profits Method Quiz > Flashcards

Valuation - Profits Method Quiz Flashcards

1
Q

Is the profits method used for specialist of specialised properties?

A
  • Specialist
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2
Q

What type of properties might you use the profits method for?

A
  • Fuel Stations
  • Hotels
  • Pubs
  • Healthcare
  • Care Homes
  • Lighthouse
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3
Q

Does the RICS provide any guidance on profits valuations?

A
  • Yes
  • Guidance Not on Captial rental valuations of public houses, bars, restaurants and nighclubs, Red Book Global and UK
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4
Q

Why would you use the profits method?

A
  • Because the property is trading entity

or

  • Occupies a monooly position
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5
Q

What does a profits valuation include?

A
  • Land and Buildikngs
  • Fixtures, fitting, furnitur and equipment
  • Markets perceptiojn of the ttradiung potential with an assumed ability to obtain or renew licences, consents and certificates
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6
Q

What is another name for the goodwill related to the business profitability?

A
  • Intangible goodwill
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7
Q

What is turnover?

A
  • Total income/revenue/sales
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8
Q

What is the first step in a profits valuation?

A
  • Assess Fair Maintainable Turnover (FMT) generated by a Reasonably Efficient Operator (REO)
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9
Q

What is Fair Maintainable Turnover (FMT)?

A
  • The level of trade that an REO would expect to achieve on the assumption that the property is properly equipped, repaired, maintained and decorated.
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10
Q

What is a reasonably Efficient Operator (REO)?

A
  • A concept where the valuer assumes that the market participants are competent operators. It involves estimating the trading potential rather than adopting the actual level of trade.
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11
Q

Does the assessment of the REO include both personal goodwill and trading potential?

A
  • No only trading potential
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12
Q

What is personal goodwill?

A
  • The value of profit generated over and above market expectations that would be extinguished upon sale.
  • Also financial factors related to the current operator including taxation, borrowing annd capital invested.
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13
Q

What is trading potential?

A
  • The future profit in the context of a valuation of the property that an REO would expect to be able to achieve.
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14
Q

If you are valuing a Michelin Star restaurant, would the current operator form the basis of your assessment of the REO?

A
  • No - you would like at who would be the most likely operator
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15
Q

What is the second step in a profits valuation?

A
  • Asssess potential gross profit, resulting from the Fair Maintainable Turnover (FMT) and then assess Fair Maintainable Operating Profit (FMOP)
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16
Q

What should FMOP reflect?

A
  • All the costs and outgoings of the REO and an annual allowance for peridic expenditure such as decoration etc
17
Q

What does EBITDA stand for?

A
  • Earning before interest, taxes, depreciation and amortisation
18
Q

What is EBITDA?

A
  • A term that relates to the actual operating entity and may be different from teh valuer’s estimated FMOP
19
Q

What is Fair Maintainable Operating Profit (FMOP)?

A
  • The level of profit, prior to depreciation and finance costs relating to the asset itself (and rent, if leasehold), that a reasonably efficient operator (REO) would expect to derive from thhe FMT based on an assessment of the markets perception of the potential earnings of the property.
20
Q

How would you assess the market rent?

A
  • Make allowance from FMOP to reflect return on the tenants capital invested in the operation entity (e.g. cost of trade inventory, stock and working capital), the remaining sum if the divisible balance whiich is split between the landlord (i.e. rent) and tenant.
21
Q

What is the third step in a profits valuation?

A
  • Capitalise FMOP at an oppropriate rate of return (multiplier/YP) to find Market Value.
22
Q

What might affect the level of rent?

A
  • Attractiveness and style of property
  • Availability of finance
  • Economic and regulatory matters
  • Leangth of lease and terms
  • Location
  • Quantum of profit
  • Supply of similar properties
  • Surplus or obsolescent accommodation
  • Terms of and restrictions on trading
  • Trading potential and risk
  • Type of operation
  • Provision of diomestic accommodation
23
Q

How do you know what multiplier to capitalise FMOP with?

A
  • Comparable evidence and market knowledge
24
Q

How could you vlaue a non-trading pub?

A
  • Residual Land Value if it has development potential
  • Sales comparison (based on land values)
25
Q

What type of accounts would you need to request?

A
  • At least 3 years audited accounts

Valuation Quizzes (8 decks)

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