POV Test Bank 2011

Principles of Valuation
Examination Test Bank
Spring Semester 2011
Principles of Valuation 200602 Spring Semester 2011 Examination Test Bank

Important Notes
This is the examination test bank promised in tutorials. You must read very carefully and make sure that you understand all of the following sections between here and the End of Important Notes heading. Apart from key information regarding the examination, the notes address many of the questions that have been raised by students when similar test bank approaches have been used in other units. Raise question in Discussion facility on vUWS but at least make sure that you have read these important nots first. Please!!
Examination Weighting
The examination carries 60% of the marks for the unit. You must achieve a satisfactory standard in the final examination in order to pass the Unit.
Structure Of Examination Paper

A sample examination paper will be issued at the same time or shortly after this test bank. That sample paper follows precisely the structure stated below. The paper will comprise 7 questions: 1. Compulsory question 1 will comprise 10 conversions of interest rates drawn from the examination test bank examples (but with numbers changed. Each conversion question will carry 2% of the marks. No marks will be awarded for incorrect answers. 2. Compulsory question 2 will comprise 10 straightforward calculations involving the use of the financial function keys of the financial calculator. The questions will be drawn from the examination test bank examples (but with the numbers changed). Each calculation will carry 2% of the marks for the exam paper. No marks will be awarded for incorrect answers.
Norman Harker
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3. 5 Optional questions of which you must answer 3. All questions will be drawn from the test bank but with calculation questions the numbers will be changed. a. At least one of these questions will involve more complex calculations but there will be no more than 3 calculation questions in the batch of 5 optional questions. b. The remainder of the 2 optional questions will be related to Principles of Valuation theory and will be drawn from the test bank. In some cases you may give calculations to illustrate your answer.
Answering Too Many Questions Marking Policy

In the past with similar examination papers I have noted that, despite clear instructions in the test bank and on the exam paper, students still answer too many questions! There is absolutely no excuse for this in the context of students having received very clear information on the structure of the examination paper.
Typically, students answer all or too many of the questions on the exam paper and not Questions 1 and 2 plus 3 others. Policy: You will be awarded no marks for the unanswered Questions 1 and/or 2. If more than 3 optional Questions are answered, only the three worst marks will count. Mitigation of Policy If in the application of the above rule the selection of worst answers rather than best answers causes a mark below 50% for the paper, you may be awarded a P 50. However, in no case will more than 3 optional questions be counted.
Time Allowed and Length of Answers

I do not believe that examinations should be a test of writing speed! Similarly, I do not believe that they should necessarily be a test of ability to think quickly. A clearly structured and brief answer is all that is required. With the exception of any contemporary event and / or issue question, you should not exceed 2 sides of examination script to answer any written question. For all written questions, significant marks are awarded for the structure and clarity of your answer. A clearly written and well structured answer could well score 100%. With precisely the same content but poorly expressed and with no structure the mark is not likely to exceed 70%. Even with detailed calculation questions, you should concentrate upon producing a clear and logical layout for your question. Apart from Question 1 and 2, where marks are only given for a correct answer, the detailed calculation questions may be awarded marks for the structure of the answer and an assessment of how important and fundamental are the calculation errors that you have made.
Norman Harker
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How Accurate Should be Calculation Answers?

Use the answers given to the test bank questions as your guide. In general terms: Where the question specifies a required accuracy, then use that.
Otherwise: Set your calculator to give maximum display of significant figures. Round monetary answers to the nearest cent. (well cover rounding of valuations in separate topics during the course). Give percentage answers to at least 6 significant figures.
Note: We use this level of accuracy for the purpose of establishing for certain that you have done the right calculation.
Limitations of Test Banks and Warnings

We do not award marks for memorising and as a result the test bank must be large. We cannot allow students to pass a unit simply because they have the ability to memorise a few pages of answers. In any event, a small test bank will not cover comprehensively a broad based unit such as Principles of Valuation. Do not attempt to guess which questions the lecturer will select from the test bank. The lecturer is quite capable of laying down false trails that serve to penalise students who think that they will be able to pass the examination by only covering a selected group of questions. If you really are lazy and only want to secure a bare pass, then although you are selling yourself short, your best policy will be to ensure that you can give at least a moderate answer to at least 90% of the test bank and hope that no more than 3 questions come from the 10% of the test bank that you did no work on. Remember that the questions will not be drawn at random and, accordingly, the probabilities associated with random selection do not apply.
Where Are The Model Answers?

Do not expect to get model answers or even detailed structures of answers to questions provided in the test bank. Why? 1. With discussion and evaluation questions, there is no such thing as a model answer. 2. Some answers will involve differences of opinion where even fully qualified property professionals will have different views. 3. A lecturer issued model answer is unlikely to be 100% correct. Norman Harker Page 3 of 40
4. The model answer would limit students who might go further into the question. And beware of the answers that you might get from other students. In the past I have noted that a group of students all gave a similar / same answer to a question and all of them had completely misunderstood the requirements or content of the answer that was required.
End of Important Notes

Objectives of an Examination Test Bank
There are multiple objectives behind establishing an examination test bank although it should be accepted by students that it does require a very large up front effort by the lecturer in this, the first running, of the unit in the upgraded format introduced this semester. 1. Test banks remove the fear of examinations. You no longer have to wonder about what questions might be set in the examination or even how questions should be answered. They are there for you to see and will have been available for you to read and work upon for weeks before the exam. 2. They remove the need for you to reflect on what a particular question means or what is required by the answer. You will have had weeks to reflect on the questions. 3. They reward hard working students. A hard working student will, as a result of preparation, go into the exam room knowing the answers or method of answering 80% of the questions. 4. They allow students time to think about the answers before they have to answer them. 5. They allow students to give very clearly structured and argued answers to questions requiring discussion and evaluation. 6. The test bank covers a broad sweep through the entire subject matter of the unit. As a result, a student who covers the entire test bank during preparation for the examination, will have a thorough grounding in the unit. 7. Test banks allow targeted revision for examinations. By working through the test bank in stages, the student is able to have a measure of what proportion of revision has been done and what proportion is left to be done. 8. It encourages students to network. Setting up a study group of three or four students allows students to delegate between themselves the basic research for each question and then to get together to exchange answers and discuss them. 9. Test banks encourages discussion of the concepts and issues involved. By discussion and exchange of views and opinions students gain a greater understanding. 10. We can actually ask much harder questions in examinations drawn from test banks. As a result of this, I have found in the past that the significant group of students who do very little work, do very poorly in the test bank based exams.
Norman Harker
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Use of Discussion Facility on vUWS

This is where the use of the discussion facility on vUWS is very helpful to all students. But dont expect it to be a running tutorial! That is not the intended use. The main objective of Discussion is Networking! Networking! Networking! Just because I kick started it in Introduction to Property with a heavy contribution, doesnt mean that such a contribution can be always assumed. In the main, students should expect to ask or discuss questions and have them answered by others. There will be occasional confirmations given and in some cases detailed replies. One thing you can be sure of! I will rarely answer questions in the two or three days immediately before the examinations. The time to raise questions is well before the examination. Dont expect to use Discussion as a means of avoiding the hard yards that you will have to put in to complete the test bank. But do expect to be able to ask where good sources for particular answers might be.
Rules / Guidelines for Discussion

a.
Keep to the right thread! I will structure the discussion on the examination test
bank to allow questions to be directed at the specific questions in the test bank.
b. c.
One question only per post! Dont ask more than one question in one post. Read previous replies before you ask! Its annoying to everyone concerned
to see a latecomer ask questions that have already been answered; often several times!
d.
Be Polite! Participation by everyone is voluntary. Dont make fun of anyone excepting

Norman, who deserves all that is thrown at him! But remember, even then, that the use of vUWS in this unit is far greater than what most other units currently provide or will provide in the future. The time and resources put into this unit are well in excess of that required by the University.
Division of Labour
Here is a suggestion that has worked very successfully in the past with examination test banks and is a method that comes with the firmest of recommendations from us and from past students. 1. It is recommended that you participate in discussion groups of 3 or 4 students. 2. Divide up the questions randomly and NOT by topic area. 3. Go away and research and draft answers.
Norman Harker
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4. Come back and exchange answers. 5. Go away and read through and consider the answers of the others in your group. 6. Come back and discuss. External students these days are not handicapped by the tyranny of distance. You guys are even better users of technology than we are and should be able to make up for the lack of face to face contact. External students should be regarded as valuable members of your discussion groups as they do tend to be working in the field and also have good professional networks they can access. Beware of the free loaders! Although you are NOT in competition with other students, there is no reason why you should allow others to benefit from your hard work if they, in turn, are not prepared to reciprocate. It is a fundamental principle of networking that the information and assistance is a two way process. Free loaders in a university and in a professional property practice environment are very soon found out and frozen out. Those who give freely of their time and experience benefit immensely from it and also find that they get a lifelong exciting, interesting, and highly rewarding career.
Norman Harker
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Question 1 (Compulsory)
Note that 10 of these sub-questions will be included in Question 1 and that marks are only awarded for correct answers. Since all answers are percentages give your answers to 6 significant figures of accuracy as illustrated in the answers I have given after each question. Note also that questions will be drawn randomly and that the numbers used will be changed. i. A financial calculator calculation of interest has used monthly payments for 120 months and has thus returned the monthly effective rate of .7654% the client quotes annual nominal compounded monthly. What rate should it quote? (Answer: 9.18480% p.a. Nominal Compounded Monthly)
0.7654 x 12 = 9.18480 Nom Comp Monthly
ii. A quarterly effective rate is 4.567% what is the equivalent annual effective rate? (Answer: 19.5580% p.a. Effective)
4 x 4.567 = [STO A] 4 [X,Y] RCL A 2ND F EFF
iii. A financial calculator calculation of interest has used quarterly payments for 20 quarters and has thus returned the quarterly effective rate of 2.75% the client quotes annual nominal compounded monthly. What rate should it quote? (Answer: 10.9007% p.a. Nominal Compounded Monthly)
4 x 2.75 = [STO A] 4 [X,Y] RCL A 2ND F EFF [STO A] 12 [X,Y] RCL A 2ND F APR
iv. An interest rate is 0.1534% per week effective. What is the monthly effective equivalent of that rate? (Answer: 0.666435% per month effective)
52 x 0.1534 = [STO A] 52 [X,Y] RCL A 2ND F EFF [STO A] 12 [X,Y] RCL A 2ND F APR / 12
v. A bank quotes a rate of 6.5% p.a. nominal compounded monthly. What is the monthly effective equivalent of that rate? (Answer: 0.541667% per month effective)
6.5 x 12 = 0.541667
vi. A bank quotes an annual nominal rate compounded monthly of 6.5% What is its annual effective rate? (Answer: 6.69719% p.a. effective)
12 [X,Y] 6.5 2ND F EFF
vii. A bank uses nominal rates compounded monthly of 7.3% on some accounts but quotes a nominal rate compounded daily on others. To get the same equivalent rate, what should the second rate be? (Answer: 7.27861% p.a. nominal compounded daily)
12 [X,Y] 7.3 2ND F EFF [STO A] 365 [X,Y] RCL A 2ND F APR
viii. A bank quotes 6.8% p.a. nominal compounded monthly but charges interest on daily balances using the equivalent daily effective rate. What should that rate be? (Answer: 0.0185793% per day effective)
12 [X,Y] 6.8 2ND F EFF [STO A] 365 [X,Y] RCL A 2ND F APR / 365
ix. A bank wants to secure an annual effective rate of 8.3%. It charges interest on the daily outstanding balance. What rate should it charge on those daily balances to secure the 8.3% annual effective rate? (Answer: 0.0218476% per day effective)
365 [X,Y] 8.3 2ND F APR / 365
Norman Harker
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x. A bank wants to secure an annual effective rate of 7.9% but quotes annual nominal compounded monthly. What should it quote? (Answer: 7.627608% per annum nominal compounded monthly)
12 [X,Y] 7.9 2ND F APR
xi. I have computed a monthly effective rate of 1.08754%. What is the annual effective equivalent of that rate? (Answer: 13.8601% p.a. effective)
xii. Banks quote nominal compounded monthly of 8.3% for mortgages but use the fortnightly (2 weekly) effective equivalent of that rate in calculating terms of mortgages where payments are made fortnightly (two weekly). What is that fortnightly effective equivalent rate? (Answer: 0.318638% per fortnight effective)
xiii. A property yields a weekly rental of 0.1731% of the value. What is the annual effective return? (Answer: 9.41023% p.a. effective)
xiv. Banks quote 8.3% p.a. nominal compounded monthly as their variable mortgage rate. In calculating monthly repayments they use the monthly effective equivalent of the quoted rate. What rate should they use? (Answer 0.691667% per month effective)
8.3 / 12 = 0.691667
xv. Banks quote 8.19% p.a. nominal compounded monthly as their rate for fixed interest over a 1 year period but apply the daily effective equivalent of that rate to the daily outstanding balance. What rate do they apply? (Answer: 0.0223646% per day effective)
xvi. Government bonds produce a return of 6.9% p.a. nominal compounded half-yearly. What is the equivalent rate per annum compounded monthly? (Answer: 6.80285% p.a. nominal compounded monthly)
2 [X,Y] 8.19 2ND F EFF [STO A] 12 [X,Y] RCL A 2ND F APR
xvii. What is the monthly effective equivalent of 12% per annum effective? (Answer: 0.948880% per month effective)
12 [X,Y] 6.9 2ND F APR / 12
xviii. A building society quotes a mortgage rate of 8.5% p.a. effective. Banks quote their rates using annual nominal compounded monthly. What is the annual nominal compounded monthly equivalent of the building society rate? (Answer: 8.18579% p.a. nominal compounded monthly)
12 [X,Y] 8.5 2ND F APR
xix. ABC Bank quotes a mortgage rate of 8.3% p.a. nominal compounded monthly. A mortgage broker quotes various rates using annual effective as the comparison tool. What rate should it insert for ABC Bank? (Answer: 8.62314% p.a. effective)
12 [X,Y] 8.3 2ND F EFF
Norman Harker
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xx. What is the quarterly effective equivalent of 1.3456% per month effective? (Answer: 4.09136% per quarter effective)
12 x 1.3456 = [STO A] 12 [X,Y] RCL A 2ND F EFF [STO A] 4 [X,Y] RCL A 2ND F APR / 4
Question 2 (Compulsory)
Note that 10 of these sub-questions will be included in Question 1 and that marks are only awarded for correct answers. i. What is the Years Purchase in Perpetuity rent assumed annually in arrears at 7%? (Answer: 14.2857). N i PV PMT FV BGN / END 999 7 -1 0 END ii. If the Years Purchase in Perpetuity rent assumed annually in arrears is 15.3846, what is the capitalization rate? (Answer: 6.5%). N i PV PMT FV BGN / END 999 15.3846 -1 0 END iii. What is the Years Purchase rent assumed annually in arrears for 10 years at 7%? (Answer: 7.02358). N i PV PMT FV BGN / END 999 7 -1 0 END iv. If a freehold interest has a value of $1,500,000 and the property was recently let at a net rental of $100,000 per annum assumed paid annually in arrears, what was the capitalization rate? (Answer: 6.66667%). N i PV PMT FV BGN / END 999 -1500000 100000 0 END v. If a freehold interest has a value of $1,456,000 and the property was recently let at a net rent of $120,000 per annum assumed paid annually in arrears, what was the Years Purchase in Perpetuity? (Answer: 12.1333).
120000/1456000 x 100 = 8.24176
N 999
i 8.24176
PV
PMT -1
FV 0
BGN / END END
vi. What is the Years Purchase in Perpetuity rent assumed annually in advance at 7%? (Answer: 15.2857). N i PV PMT FV BGN / END 999 7 -1 0 BGN vii. If net rent of $23,000 per month in advance is capitalized at 0.5% per month, what is the value? (Answer: $4,623,000).
05.x 12 = i 23000 x 12 = 276000
N 999
i 6
PV
PMT -276000
FV 0
BGN / END BGN
Norman Harker
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viii. What is the Present Value of $1 received in 10 years discounting at 6.5%? (Answer: $0.532726). N i PV PMT FV BGN / END 10 6.5 0 -1 END ix. If I estimate the cost of replacing a roof in 5 years time will be $120,000, what amount must I set aside now if I can earn 6% per annum effective? (Answer $89,670.98). N i PV PMT FV BGN / END 5 6 0 -120000 END x. What is the Amount of $1 in 5 years at 4% per annum? (Answer: $1.21665). N i PV PMT FV BGN / END 5 4 -1 0 END xi. If I estimate the current cost of replacing a lift is $230,000, how much will it cost in 9 years if such costs inflate at 4% per annum effective? (Answer: $327,361.72). N i PV PMT FV BGN / END 9 4 230000 0 END xii. A lease rent is subject to annual increase based upon the Cost and Prices Index (CPI). If the CPI at lease commencement was 372.4 last November and it is now 384.7, what percentage increase should be applied to the lease rent? (Answer: 3.3029%). N i PV PMT FV BGN / END 1 372.4 0 384.7 END xiii. What is the amount of $1 per annum after 5 years at 5% per annum? (Answer: $5.52563). N i PV PMT FV BGN / END 5 5 0 1 END xiv. If I invest $1,500 at the end of each year for 10 years at 6.5% per annum effective, how much will I accumulate? (Answer: $20,241.63). N i PV PMT FV BGN / END 999 Rate YP -1 0 END xv. What is the annual sinking fund assumed paid in arrears to replace $1 in 5 years at 7%? (Answer: $0.173891) N i PV PMT FV BGN / END 5 7 0 1 END xvi. A roof needs replacing in 10 years at an estimated cost of $460,000. If I can earn 4.5% per annum effective and make payments at the end of each year, how much should those payments be? (Answer: $37,434.26). N i PV PMT FV BGN / END 10 4.5 0 460000 END xvii. What is the Years Purchase rent assumed paid in arrears for 5 years at 11%? (Answer: 3.69590). N i PV PMT FV BGN / END 5 11 -1 0 END
Norman Harker
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xviii. If a leasehold interest produces a profit rent of $123,000 per annum for the remaining term of 3 years. It was sold for $311,349. What was the capitalization rate? (Answer: 9%). N i PV PMT FV BGN / END 3 -311349 123000 0 END xix. If the mortgage rate is 0.6% per month and I borrow $450,000 for 25 years, what will be the monthly repayments on the assumption that payments are made at the end of each month? (Answer: $3,238.15 per month).
12 x 0.6 = 7.2
N 25
i 7.2
PV -450000
PMT
FV 0
BGN / END END
xx. If I can afford repayments of $4,200 at the end of each month and the mortgage rate is 0.5% per month for a mortgage term of 30 years, how much will I be able to borrow? (Answer: $700,524.78).
N 360 i .5 PV PMT 4200 FV 0 BGN / END END
xxi. What is the Year Purchase for 10 years at 8% with a sinking fund of 4%. (Answer 6.12404). N i PV PMT FV BGN / END 10 4 -1 0 END xxii. A leasehold profit rent is $56,000 and the lease has 7 years unexpired. Using a capitalization rate of 12% and a sinking fund rate of 4% what is the value ignoring tax. (Answer: $227,079.55). N i PV PMT FV BGN / END 7 4 0 .126609612 1 END
.126609612 + .12 = 0.246609612
1 / 0.246609612 = 4.054991984 56000 x 4.054991984 = 227,079.55
xxiii. What is the Years Purchase for 10 years at 8% with a sinking fund rate of 4% and tax at 40%? (Answer: 4.57000). N i PV PMT FV BGN / END 10 4 0 .083290944 -1 END .60 = 0.138818241
0.138818241 + .08 = 0.218818241
1 / 0.218818241 = 4.570002928
xxiv. A leasehold profit rent is $87,000 and the lease has 25 years unexpired. Using a capitalization rate of 8%, sinking fund at 3%, and tax at 40%, what is the value? (Answer: $692,051.88) N i PV PMT FV BGN / END 25 3 0 .027427871 -1 END .60 = 0.045713118
Norman Harker
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0.045713118 + .08 = 0.125713118

1 / 0.125713118 = 7.954619317

87000 x 7.954619317 = 692,051.88
Question 3
a) What are the features of a property market? (5 marks).
1. 2. 3. 4. 5. 6. 7.
Imperfect market Involvement of different professionals Inelastic supply High transaction cost Long transaction period. Heterogeneous nature Presence of sub-markets
b) Comment on the statement Value does not equal Cost. (5 marks). Value as compared to cost and price
c) What are the common purposes of a valuation? (10 marks). Property is valued for a specified purpose. The purpose will determine the basis and procedure of the valuation. Common purposes include: sale, purchase, mortgage, investment, development, leasing, rent review, accounting, property trust revaluation, floating of shares, insurance, rating, taxing, stamp duty, compulsory acquisition, etc.
Question 4
a) What are the characteristics of real property? (8 marks) Relatively expensive
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Cannot be subdivided into smaller units for transaction Immovable Owner possesses an interest in the property Good hedge against inflation (long term) High long term capital appreciation Needs management and maintenance Obsolescence Subject to tight government control Heterogeneous Provides physical enjoyment Localised market b) What is the meaning of Cujus est solum ejus est usque ad coelum et ad inferos? (6 marks)
Property right extends indefinitely upwards (space) and downwards (core of earth), subject to restrictions by law.
c) Comment on the statement Value does not equal Cost. (6 marks)
Value as compared to cost and price
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Market Value (International) the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Source: The International Assets Valuation Standards Committee (now the International Valuation Standards Committee). This definition has been adopted by the API.
Question 5
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a) Who was the 1st economist that paid attention to valuation techniques? What valuation methods were introduced by him? (2 marks).
Neoclassical Economists Alfred Marshall at the turn of the 20th century introduced the modern concept of market value. On the demand side, he considered that market value is influenced by utility and on the supply side by cost of production. He introduced three basic valuation methods which are still in use today: Replacement cost method Market comparison method Capitalisation of income method He was the 1st economist to give attention to valuation techniques. Writing shortly after the turn of the 20th century, Irving Fisher emphasised that the value of durable goods is represented by the present worth of future return and developed the income theory of value. He emphasised the distinction between cost and value and developed the income theory of value, and was regarded as the father of the income approach.
b) What is the principle of the Capitalisation Method? What is Years Purchase (YP)? (2 marks).
Capitalisation Method This method is based on the idea that the market value of a property equals to the present value of all present and future rents from the property. For income producing properties
Valuation Model: Value = Expected future net income x YP The process is known as capitalisation. It converts all future benefits into present day value. Benefits here means net income from the property YP or Years Purchase is a property jargon that means a net income multiplier. o See Demystifying YP.ppt for details
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Years' Purchase By 1450, the relationship between rentals and capital value was well understood. The idea of years' purchase was used to assess property value. In 1662, Sir William Petty introduced the following valuation model: Value = Income x Years' Purchase
c) What do you know about the marketability and productivity principles of valuation? (6 marks).
Principles of Marketability Substitution The value of any replaceable property tends to equal its cost of replacement. A tool for comparing market prices cost and rent. Conformity A reasonable degree of conformity is required for maximising value Progress and regression When a property does not conform in size or quality, its value tends to seek the level of the surrounding properties. Change Property values are constantly affected by changes in socio-economic and political conditions. Supply and demand Property tends to increase when effective demand exceeds supply Competition Market demand creates profits, which generate competition. Competition increases supply and decreases profit. Principles of Productivity Agents of production Real estate production depends on 4 agents (factors) of production: labour, capital, land and coordination. Surplus productivity, balance and contribution Income available to land, after the other economic agents have been paid for, is known as the surplus productivity. Increasing and decreasing demand Income and other benefits from property may be increased by adding capital improvements, but only up to the point of balance in the agents of production. Highest and best use and consistent use It is the most profitable use of the land. If the existing use does not qualify in this aspect, the valuer has to use the appropriate valuation method to reflect this potential. Anticipation Investors will look at the expected or anticipated use of the land, not just the previous use. The valuation has to reflect this point of view.
d) If capitalization rates increase, what happens to YPs? (4 marks).
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YP or Years Purchase is a property jargon that means a net income multiplier.

1/0.1 = 10 YP 1/.11 = 9.1 YP As capitalisation rate increases the YP decreases. e) The years purchase in perpetuity is a special case of the years purchase for a term. Discuss. (6 marks). YP in perpetuity has no specified term of the holding interest as the perpetuity means at an infinite term period. N 999 i Rate PV YP PMT -1 FV 0 BGN / END Advance or Arrears.
N = 999 represents the infinite numbers of term holding period.
Question 6
a) What is the principle of Capitalisation Method? (2 marks).
Capitalisation Method This method is based on the idea that the market value of a property equals to the present value of all present and future rents from the property. For income producing properties
Valuation Model: Value = Expected future net income x YP The process is known as capitalisation. It converts all future benefits into present day value. Benefits here means net income from the property YP or Years Purchase is a property jargon that means a net income multiplier. o See Demystifying YP.ppt for details
b) If capitalization rates increase, what happens to the resulting Years Purchase figures? (2 marks).
YP or Years Purchase is a property jargon that means a net income multiplier.

1/0.1 = 10 YP 1/.11 = 9.1 YP As capitalisation rate increases the YP decreases. c) As the term of leasehold increases, what happens to the Years Purchase? (2 marks). N 10 i 5 PV 7.72173 PMT -1 FV 0 BGN / END END
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N 15 i 5

PV 10.3797 PMT -1 FV 0

BGN / END END
As demonstrated, if the term of leasehold increases, the YP has also increase.

d) Use the Capitalisation Method to value a freehold property let at full market gross rent of $20,000 per annum. Outgoings and vacancy rate are estimated at 20% and 6% respectively of the market rent. The market yield is 5%. (6 marks). N 999 i 5 PV 20 $20,000 p.a -$4,000.00 p.a -$1,200.00 p.a $14,800.00 p.a X 20 = YP $296,000.00 PMT -1 FV 0 BGN / END END
Gross rental Outgoings @ 20% Vacancy @ 6% Net rental Cap Rate @ 5% Capitalisation method value
e) You are interested in buying a freehold property for investment. It has an area of 1000m2. The real estate agent told you that it could be let at full market rent of $30,000 per annum gross. The property across the road is very similar to this property except that it is 100m2 bigger. It is currently let at $31,000 per annum gross and was sold last month for $387,500. Outgoings and vacancy deductions are estimated at 25%. What is market value of this investment property? (8 marks). Cap Rate Analysis Sale price Net annual rent Years purchase Equals: Comparable property Gross rental Outgoings & Vacancy @ 25% Net rental Area size 1100m2 Subject property Gross rental Outgoings & Vacancy @ 25% Net rental Area size 1000m2
$387,500 $23,5000 387,500/23,500 = 16.49 100/16.47 = 6.06% Alternative method 23,500/387,500 x 100= 6.06%
$31,000 p.a -$7,750.00 p.a $23,250.00 p.a 23250/1100 = $21.15 psm
$30,000 p.a -$7,500.00 p.a $22,500.00 p.a 22500/1000 = $22.50 psm
Value = Income / Comparable Cap Rate Value = 371,287.1287 Lets say 370,000.00
Norman Harker
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Question 7
a) What are the features of modern industrial building construction? Discuss from the point of view of building materials, internal clearance & span. (4 marks).
Features to consider Changes from heavy industry to warehousing and more high tech. Wall construction; pre-cast concrete panels, brickwork/ concrete blocks and galvanized iron cladding. Standard of offices space and amenities; office floor space ratio to factory space 25% to 30% is the norm in a modern industrial construction. The Building code of Australias (BCA) fire regulations. This is a specialised area, but there are really no problems with buildings built in the last 10 years Minimum door height required is 4.75m. This may have to be larger under different council codes Internal clearance in the factory area. Usually (now) 9m. Electricity supply; Industrial 3-phase 415 volts.
b) What is the meaning of gross rent and net rent? (4 marks).
Gross rent is the rent passing income without any outgoing and vacancy in consideration, whereas net rent is the overall rental income with deductions of any outgoings included. For example: An investor looks at an industrial property of 100m2 for lease is advertised a gross rent of $65 psm per month which calculates for a gross rental income of $6,500 per month. On the other hand, the net rental income in the view point of the investors will be $6,500 per month less the outgoings of 25%. The net rent will be $4,875 per month.
c) Using the traditional term and reversion approach value a freehold reversion interest which has
a term net income of $45,000 for 4 years. Upon reversion, the owner can revise the rent to a full market net rent of $60,000. The market yield is 7.5%. You have to value the property assuming i) the yield is not an equivalent yield; (6 marks) I 7.25 I 7.5 I 7.25 PV 2.6124 PV 13.3334 PV 0.8106 PMT -1 PMT -1 PMT 0 FV 0 FV 0 FV -1
N 3 N 999 N 3
BGN / END END BGN / END END BGN / END END
Term and Reversion Valuation Term income YP 3 years @ 7.25% Reversion income YP in perp @ 7.5% Def 3 years @ 7.25%
$45,000.00 2.6124 $60,000.00 10.80803
$117,557
$648,482 Capital value $766,039 But say: $765,000
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ii) N 3 N 999 N 3
the given yield is an equivalent yield. (6 marks) I 7.5 I 7.5 I 7.5 PV 2.6005 PV 13.333 PV 0.805 PMT -1 PMT -1 PMT 0 FV 0 FV 0 FV -1 BGN / END END BGN / END END BGN / END END
Term and Reversion Valuation Term income YP 3 years @ 7.5% Reversion income YP in perp @ 7.5% Def 3 years @ 7.5%
$45,000.00 2.6005 $60,000.00 10.733
$117,024
$643,968 Capital value $760,992 But say: $760,000
Question 8
Your client is the freeholder of a shop which is subject to a lease with 7 years unexpired. The rent passing is $35,000 pa without rent review. He told you he had the following expenses last year: Council rates $990 Water rates $1500 Insurance $2000 Personal entertainment $6000 Repair & maintenance $1000 Comparable properties in the vicinity are let at $60,000 pa. If freehold yield of similar property is 9%, estimate the value of his interest. The client manages the property himself. Market evidence shows that management fee is 7% of gross rent. For the purpose of this exercise, assume the outgoings remain unchanged at reversion time. What is the value of the freehold interest? Passing Rent Council rates Water rates Insurance R&M Management Net passing rent N 7 N 999 I 8 I 9 $35,000.00 -$990.00 -$1,500.00 -$2,000.00 -$1,000.00 -$2,450.00 $27,060.00 PV 5.20637 PV 11.111 PMT -1 PMT -1 FV 0 FV 0 BGN / END END BGN / END END
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N 7 I 8

PV 0.58349 PMT 0 FV -1

BGN / END END
Term and Reversion Valuation Term income YP 3 years @ 8% Reversion income YP in perp @ 9% Def 7 years @ 8%
$27,060.00 5.20637 $60,000.00 6.48323
$140,884
$388,994 Capital value $529,878 But say: $530,000 PMT 27060 FV 60000/.09 BGN / END END
N 7
I 8
PV $529,879
Question 9
You are appointed to assess the market value of an up market apartment unit for investment purpose. The property is a three-bedroom unit on the 8th floor of a high rise residential block overlooking a famous beach. It has a gross floor area of 200m2. It is vacant at the moment. You have found a comparable property two blocks away from the subject. It also has three bedrooms but with a smaller area of 180m 2. This property enjoys an inferior view of the beach. It was let two months at a monthly gross rent of $4,000. The property was sold last week at $500,000. Upon investigation, you have found that the outgoings of this comparable property is at 25% of the annual gross income and you think that the expenses are about right for this class of property. The property market has been fairly stable at the moment. Comparable property Gross annual rent Less outgoings @ 25% of gross Net rental income Sale price Additional 10% for size Location (overlooking the beach) 10% Total value: Cap rate determination Area 180 m2 Subject property Area @ 200 m2 YP perp @ 7%
$4,000.00 x 12 months $48,000.00 x .25
$48,000.00 -$12,000.00 $36,000.00
$500,000 $50,000 $55,000 $605,000 36,000/500000 x 100 =7.2% $36,000/180 = $200 psm
$220 x 200 = $44,000 Net rent 14.2857 x $44,000
$628,571.43 Say: $628,000
Question 10
Which bank will lend you $400,000 over 25 years at 7.2% per annum nominal compounded monthly?
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d) What will be the repayments? (2 marks). N 25 x 12 I 7.2/12 PV -400000 PMT 2,878.35 FV 0 BGN / END END
e) If the bank charges a set up fee of 1% of the loan, plus account charges of $50 per month, what will be the annual effective cost of the loan? (4 marks). N 300 0.625629 x 12 [STO A] I 0.625629 PV -396000 PMT 2928.35 FV 0 BGN / END END
12 [X,Y] RCL A [2ND F] EFF 7.77 ANNUAL EFF
f) If you pay off the mortgage after 5 years, how much will you need to pay? (6 marks). N 60 I 7.2/12 PV -400000 PMT 2878.35 FV 365,575.67 BGN / END END
g) Having paid off the mortgage after 5 years, what has been the effective cost of the loan taking into account the set up fees and account charges? )8 marks). N 60 0.633842 x 12 [STO A] I 0.633842 PV -396000 PMT 2928.35 FV 365,575.67 BGN / END END
Question 11
Your brother wants to buy a house for $350,000. He has got approval from the Dragon Bank for a 25 year home loan at a nominal interest rate of 6.25% per annum compounded monthly. The agreed repayment is $1,616.19 a) How much is the loan? (4 marks) N 300 I 6.25/12 PV 245,000 PMT -1,616.19 FV 0 BGN / END END
b) How much will your brother have to put down? (2 marks). 245,000 / 350,000 = .70 PUT DOWN 30% OR $105,000
c) Based on a monthly repayment of $1,616.19, if he chooses to repay the loan on a fortnightly basis, how much sooner will he repay the loan? (4 marks). 12 [X,Y] 6.25 [2ND F]EFF [STO A] N 188.69 I 6.2416/26 26 [X,Y] RCL A [2ND F] APR PV 245,000 6.2416 ANNUAL NOM PMT -1,616.19 FV 0 BGN / END END
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188.69 / 26 = 7.26 YEARS d) Based on a monthly repayment arrangement, if the bank charges a loan application fee of $800 and a monthly account-keeping fee of $25, what is the annual effective interest rate charged? Assume that the loan application fee is paid separately. (6 marks). N 300 I 0.534540511 PV 245,000 PMT -1,641.19 FV 0 BGN / END END
0.534541 x 12 [STO A]
e) How does the impact of length of loan term affect the effective cost of a loan? Consider in your answer both the agreed loan term and the impact of paying off the loan early. (4 marks). N 98 N 98 I 6.25/12 I 0.536463283 PV -245,000 PV -244,200 PMT 1,616.19 PMT 1,641.19 FV 201,649.54 FV 201,649.54 BGN / END END BGN / END END
0. 536463 x 12 [STO A]
Question 12
a) When should a valuer consider using the hypothetical development method? (4 marks)
There are three main situations where the hypothetical development valuation method is appropriate. This valuation method involves the determination of a large quantity of market, financial, economic and development cost data, together with the requirement to project sales data, development periods and costs. Each of these areas involves a risk in relation to the validity of the valuation data over time. Due to these risks the method should only be used when there is no evidence available to support a direct comparison or income valuation method. The main situations where the method is used to value property are:
Residential subdivisions
The supply of residential allotments can only come from the break-up of larger parcels of land. This breakup can comprise either the subdivision of an existing residential block or the subdivision of a larger parcel of land (en-globo) that is currently used for a purpose other than residential. These sites are commonly referred to as greenfield sites as the use prior to subdivision was rural or crown land. Development in these cases can only take place if the land is zoned for residential and there is a demand for residential vacant land. In many regional or country towns the rural land adjoining the town boundary may be zoned residential. However the hypothetical development method is not appropriate as this land will never be developed for residential purposes, as the town population is actually declining and there will not be a need for additional residential lots. The use of the hypothetical development method to value en-globo land should always be subject to the development of the land being the most probable and highest and best use of the land. This can only be determined by a full analysis of the residential property market in the subject property location.
Conversion of multiple-occupancy property

With the introduction of strata and community title, properties that were once held by an individual or company can be converted to multiple ownership through these newer titles.
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Situations where this can occur are:
The conversion of older style residential flat buildings from a single title to strata title. On conversion the units can be sold individually. The conversion of commercial office buildings with a single title to strata title, where each floor of the commercial building can be owned separately to the other floors in the building. A similar situation can occur when a large industrial property is divided into smaller factory or warehouse units. The subdivision of these existing buildings also requires necessary approvals but can result in the individual values on a strata title basis being higher than the value on a single title basis. This also only occurs when there is a market for this type of property, not just the potential to subdivide through council zoning instruments.
Commercial, industrial, retail development sites

Many commercial, industrial and retail centres have a limited economic life. Not all commercial and office buildings are constructed on the basis that the building will be in place for perpetuity. The design, construction, zoning and quality of the building will dictate the economic life of the property. This situation is even more critical in relation to retail and tourism properties that are also subject to changing fashions and consumer expectations. As a property nears the end of its economic life the vacancy rates increase, letting up periods are extended and rental rates decrease. All these factors impact on the risk of the property in that particular property market and in turn raise capitalisation rates. When a property has reached the stage where the valuation based on the income of the property is basically similar to the value of the land then demolition and re-development may be the highest and best use for that property. In such cases the hypothetical method can be used to determine a value for the property as it stands as at the date of valuation. Hypothetical development is not a valuation on completion.
Medium density residential and dual occupancy development

The hypothetical development method can also be used to value the land component of a medium residential or dual occupancy proposal. This residual basis of the method also allows the developer to calculate the highest price that can be paid for the raw land or re-development site and still receive the required profit and risk return for the development.
b) Comment on the statement Hypothetical development method is an unreliable method for determining land value. (4 marks)
The use of the hypothetical development method to value en-globo land should always be subject to the development of the land being the most probable and highest and best use of the land. This can only be determined by a full analysis of the residential property market in the subject property location. However the hypothetical development method is not appropriate as this land will never be developed for residential purposes, as the town population is actually declining and there will not be a need for additional residential lots. If the calculation work out in the reverse, when weve determine the value of the development and start deducing the cost involved, then there may be unreliable method, as development such as building cost may increase during the development period so the residual value will not represent the real value of the land.
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c) What is profits and risk factor in a hypothetical development valuation? (4 marks).

Rost and Collins (1982) state: Various factors would be weighed by the purchaser when assessing the amount of profit expected from the venture, but two significant items in these calculations would be the sum to cover the element of risk and a sum representing profit. The risk factor relates to the security of the capital invested in the enterprise and is a form of insurance against error in the estimates of costs and realisations. The other ingredient is profit, or net return on the money invested. A developer should only commence a development project on the basis that it is profitable. The degree of profitability will vary from one developer to another. Generally the market has a range for the profit and risk return required for various types of property developments. These rates can be determined by analysing sales of completed subdivisions or strata unit conversions or developments. Discussions with developers can also provide an indication of the profit and risk factors taken into account when assessing the feasibility of any development. The various elements of risk that have to be considered when valuing a property using the hypothetical development method are: Risk components A. Town Planning Risk Development consent building consent B. Construction Risk Site problems design problems Industrial relations Cost overruns Time overruns Interest rate rises Environmental factors C. Marketing Risk Timing in property cycle leasing up/sale time demand for total developments or specific stages of the development, market projections Note: As this method involves working back from a final sales figure to the raw land value it is not correct to simply multiply the net realisation figure by the profit and risk factor to determine the amount to be deducted. If the profit and risk factor is 12% then the net realisation figure represents 112% of the figure we are determining before deducting costs. What has to be determined is the 100% figure. This is calculated by dividing the net realisation figure by 100 + profit and risk factor %, then multiplying by 100. Profit and risk calculations Net realisation $2,000,000, profit and risk factor 12% $2,000,000/112 x 100 = $1,785,714.00 Development costs
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These costs are often quoted on a per lot basis but each individual subdivision or development can incur significant cost differences for each of the various cost items. The major cost items for subdivisions are: water and sewerage headworks, earthworksdrainage and road construction, underground phone and power, surveying fees, planning fees, council fees, and Engineering design and supervision.
Other costs These costs are not directly related to construction and development but are costs required to bring the project to fruition. These costs include: staff wages, administration expenses, open space levy, parking levy, and Contingency allowances. All development costs should be verified by the valuer. It can be risky to rely solely on the figures supplied by the developer or owner of the property being developed. All council contributions can be obtained from the respective Local Government and State Authorities. A review of existing subdivision developments can also provide data to verify the figures supplied to the valuer. Always ensure that there has been sufficient allowance for contingencies during the development. Interest and land tax The interest allowance is usually at the rate applicable to the funding of the project type concerned. The assumption is that the development moneys will be outstanding for half the development period. This assumption is based on the fact that most subdivisions are developed on a staged basis. Once the first stage is completed, then these lots are sold. The proceeds from these sales are then available to repay debts or to fund the continued development of the subdivision. This staged development process results in the development costs being recovered half way through the development period. Land tax is calculated on rates applicable at the date of valuation. Acquisition costs and interest on the land The interest on the land cost is assumed to accrue over the entire development period. This interest charge is based on the assumption that a developer would need to borrow funds to purchase this development site and the debt would not be repaid until the development was completed. Acquisition costs of the initial greenfield or brownfield site includes stamp duty, legal and other fees on purchase.
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d) Discuss the validity of the profit and risk factor in hypothetical development valuation as a measure of profit. (4 marks)
Profitability of Development The following measures are commonly used to estimate the profitability once the land is in the hands of the developer: Capital profit this is difference between the capital value and the total costs. A positive figure means a profit can be made. (Note that capital value is also known as gross development value, total development value, capital value on completion, value on completion, gross realisation, etc.) Development yield this is the yield or return to the developer if the completed property is kept as an investment. The calculation is: Expected Annual Income x 100% Total Costs Rent cover the number of years that will take to dry up the profit if a letting of the completed property is delayed. The calculation is: Capital Profit Annual rent A. Capital profit = B. Development yield = net sale value total cost = Annual income = Total cost Capital profit = Annual rent Capital profit x 100% = Net sale value Capital profit x 100% = Total costs
C. Rental cover =
D. Profit as a percentage on value =
E. Profit as a percentage on costs =
e) Your client is interested in buying a run-down house for investment. He intends to renovate the property and then sell it. It is estimated that the cost of renovation is $150,000 including fees and the property could be sold for $550,000. If he expects to have a return of 10% of the gross development value, advise him as to the offer for the property. (4 marks).
Estimated sale Cost of renovation and fees Profit and risk @ 10% Net investment value: $550,000 -$150,000 -$55,000 $245,000
We should advise the client to pay no more than $245,000.00 to purchase the investment property.
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Question 13
a) Your client is interested in a development site and needs your advice on how much to pay for it. You have collected the following data: Expected sale price: $1,500,000 Overall building cost: $750,000 Developers profit @ 20% of building cost Contingency @ 5% of building cost Estimated finance cost $100,000 (12 marks)
Expected sale price: Overall building cost: Developers profit @ 20% Contingency @ 5% Estimated finance cost Total Cost Land value $1,500,000 -$750,000 -$50,000 -$37,500 -$100,000 -$1,037,500 $462,500
b) Discuss the limitations of the profit and risk as a measure of profitability. (4 marks).
Not time value weighted.
c) Discuss the impact on profit of expected sale price being 10% lower than the estimate. (4 marks).
10% will wipe out the profits or the client has paid too much for the land.
Question 14
Prove that the single rate YP formula has an inherent sinking factor at the remunerative rate. (20 marks).
It is because it has an inherent sinking fund that accumulates and repays the original capital at the same rate as the leasehold yield rate. Proof YP single rate formula: Consider: ASF + i ASF + i = [i / (1+i)n- 1] + i = {i x [(1+i)n-1] + i} / (1+i)n 1 =i x (1+i)n / (1+i)n -1 = i / 1 - (1+i)n 1- [1 / (1+i) n] / i
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n
1 / (ASF + i) = 1- [1 / (1+i) ] / i = YP single rate
Question 15
Prove that with the single rate YP formula the investor secures the required return on capital AND the return of capital at the end of the term. (10 marks).
Since a leasehold interest is a wasting asset, it needs to recoup the original capital outlay, i.e. return of capital. The objective is to be achieved by investing a portion of the profit rent in a safe investment with a view that the original capital can be recovered. Money assigned for the investment is called a sinking fund. Proof YP single rate formula: Consider: ASF + i ASF + i = [i / (1+i)n- 1] + i = {i x [(1+i)n-1] + i} / (1+i)n 1 =i x (1+i)n / (1+i)n -1 = i / 1 - (1+i)n 1 / (ASF + i) = 1- [1 / (1+i) n] / i = YP single rate 1- [1 / (1+i) n] / i
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Question 16
Explain the following terms a) Tenant for life (5 marks)
Where a freeholder of the property for the duration of his/her life, he/she pays no rent for the occupation of the property. His/her interest in the property is as good as the original freehold except for the term of the holding.
b) Lessee for life (5 marks)

Is where a life tenant who holds the property under the term of a lease. He/she has to pay rent for occupying the property and is subject to all the advantages and disadvantages of an ordinary leaseholder except that the enjoyment of the property is for the duration of his/her life.
c) Reversioner (5 marks)
Upon the death of the last remainderman, the interest goes to another person called the reversioner. The reversioner may be the freeholder or a separate person.
d) Settlement (5 marks)
The successive interests in the property concerned are called a settlement. Example of Settlement Freeholder Life Tenant 1 Life Tenant 2 (remaindeman) Life Tenant n Reversioner
Interest may revert back to the freeholder
Question 17
Write a short note on the various valuation basis of rating and taxing of real property in Australia. Which basis do you think is the best and why? Should we have a uniform valuation basis across the nation?
Different basis; e.g adapted to the USA. Land value (unimproved land value) Some states use partial value
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Stamp duties Levies on transaction prices Market value substituted into if the transaction is not at arms lengths.
Question 18
a) What do you understand by the term Before and After valuation approach in compulsory acquisition valuation? What are the advantages of using this method? (12 marks). The theory is that the dispossessed owner should not be in a worse position after the loss than before the property was taken. This is in a monetary sense only. When a person has land or an interest in land taken, the Crown becomes the owner, and anyone who has an interest in that land has that interest converted into a claim for compensationthat is, for its monetary equivalent. The compensation claimed is always a question of degree of loss. No matter what type of interest is to be taken by Government, it more than likely has value. But this does not include sentimental value. For the purposes of establishing the value (in dollar terms) of the interest taken, the courts rely on the expert evidence (in the form of a valuation report) of a valuer. Valuers prepare a valuation report expressing their opinion as to the value of the interest in the land taken. Subsequently, when called as an expert witness the valuer will be examined, cross-examined and re-examined so that the Court is satisfied it understands all the points raised in the valuation report and the methodology used by the valuer. In other words the valuer gives evidence on the estimate of value of the interest involved. The Court then decides, after having regard to certain procedures set in previous judgements, on the amount of compensation to be settled.
Although this heading may seem strange it really refers to those items/matters that must be taken into account when assessing and calculating the amount of compensation to be claimed. These Heads of Claim could include: market value of the land, value of improvements, any special value to the owner (not to be confused with sentimental value), severance damage, or Disturbance.
b) In the context of compulsory acquisition, what do you understand by the terms: i) Injurious affection. (2 marks)
Injurious affection is also damage to the residue of lands not through loss of the part taken but by the use to which the part taken will be put by the acquiring authority.
ii) Disturbance. (2 marks)

Re-instatement is essentially a method of valuation, one of the approaches to assessing the value of the land to the owner.
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iii) Severence. (2 marks).
Severance relates to the damage to resumed lands through the loss of parts or parts taken.
iv) Solatium. (2 marks).

Payment or other recompense for mental suffering or financial or other loss.
Question 19
a) Using the following information analyse the annual percent depreciation of a property. Sale price $200,000 Land value $120,000 Replacement cost new $145,000 Age of property 12 years
Land value Replacement cost new As New Sale price Depreciation $120,000 $145,000 $265,000 $200,000 $65,000/12 years Land value Replacement cost new Sale price Depreciation $65000/$145,000 Per year: $120,000 $80,000 $200,000 $65,000/12 years 44.877% 3.75%
b) Using the result from (a) above and the additional information below, value a similar property with the summation method.
Land value $125,000 Replacement cost new $135,000 Age of property 8 years
Land value Replacement cost new Total value 8 x 3.75% $125,000 $135,000 $260,000 30% x $135,000 $94,500 remaining. Land value Building value Total value $125,000 $94,500 $219,500
Question 20
Value an industrial property with the summation method and the following data: Subject land area: 1,200 m2 Subject gross floor area: 600m2 Effective age: 10 years Estimated annual depreciation rate: 2.5% New building cost: 500/ m2 Comparable land value: $450/m2
Land value @ 1,200 m2 $450 x 1200 = $540,000 Land value $540,000
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Replacement cost new Total value 10 x 2.5%

$500 x 600 = $300,000 $840,000 25% x $300,000 $225,000 remaining. Building value Total value

$225,500 $765,000
Question 21
A motel with the following average annual figures in the accounts was recently sold for $2.6 million. Analyse the capitalisation rate. Gross earning $2,250,000 Wages, etc. 400,000 Food, drinks, etc. 600,000 Advertising, etc. 250,000 Electricity, gas, phone, etc. 150,000 Insurance, repairs, etc. 100,000 Tenant's share 350,000
Valuation Model Gross earnings: Less purchases: Food, drinks, etc Gross profit: Less working expenses: Wages, etc. Advertising, etc. Electricity, gas, phone, etc Insurance, repairs, etc. Net profit: Less Tenant's share: Balance for (rent)
$2,250,000 -$600,000 $1,650,000 -$400,000 -$250,000 -$150,000 -$100,000 $750,000 -$350,000 $400,000
400000/2600000 = 15.38461538
N 999
I 15.38461538
PV 6.5
PMT -1
FV 0
BGN / END END
Question 22
You are instructed to assess the rental value of Superlux Hotel for rating purposes. A close examination of the accounts of the hotel revealed the following annual figures: Wages, superannuation 450,000 Advertising 10,000 Laundry 25,000 Gross earning - hotel 1,500,000 restaurant/cafe 350,000 Postage, telephones 4,000 Purchase of food and drink 400,000 Tenant's remuneration 180,000
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Principles of Valuation Ground rent 500 Capital invested 200,000 Depreciation 85,000
The tenant expects a 10% return on the capital invested. Comment on the method of valuation you have adopted.
Accounts Method This method is normally used to assess the rental value of special properties where there exists some elements of monopoly (either legal or factual monopoly) or where direct comparison of rentals is not available. These special properties include hotels, hospitals, pubs, cinemas, theatres, petrol stations etc. The method is also used to assess business goodwill. Valuation Model Gross earnings: Rest. & Cafe Total Less purchases: Food, drinks, etc Gross profit: Less working expenses: Wages, etc. Advertising, etc. Laundry etc. Postage & Tele Return Depreciation Total expenses: Less Tenant's share: Balance for (rent)
$1,500,000 $350,000 $1,850,000 -$400,000 $1,450,000 -$450,000 -$10,000 -$25,000 -$4,000 -$20,000 -$85,000 $594,000 -$180,000 $856,000
(200000 x 20%) return on capital invested
Disregard as it can be easily adjusted to suit them.
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Question 23
a) Using the split yield approach value a freehold reversion which produces an annual income $6,500 for a term of 10 years. Market analysis shows the full market rental of the property is worth $9,500 p.a., the freehold yield for properties let at full market rent is 6% and term yield of similar property is 5%. (8 marks)
Term income: YP 10 years @ 5% Reversion income: YP in perp @ 6 % YP 10 years @ 5 % $6,500 7.721734929 $9,500 10.23188755 $97,202.93 Value $147,394.2118 Say $148,000.00
$50,191.28
N 10 N 999 N 10 N 10
I 5 I 6 I 5 I 5
PV 7.721734929 PV 16.666666667 PV 0.613913254 PV $147,394.2089
PMT -1 PMT -1 PMT 0 PMT 6500
FV 0 FV 0 FV -1 FV 9500/0.06
BGN / END END BGN / END END BGN / END END BGN / END END
b) A freehold reversion produces an annual income of $8,000 for 15 years. Market analysis shows the full market rental of the property is worth $95,000 p.a., the freehold yield for properties let at full market rent is 6%. i) Value the freehold reversion using the equivalent yield approach. (8 marks)
N 15
Term income: YP 15 years @ 5% Reversion income: YP in perp @ 6 % YP 15 years @ 5 %
I 5
PV -$844,647.67
$8,000 10.37965804 $95,000 8.016951635
PMT 8000
FV 95000/0.06
BGN / END END
$83,037.26
$761,610.41 Value $844,647.67 Say $845,000.00
N 10
I 5
PV 7.721734929
PMT -1
FV 0
BGN / END END
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N 15 N 999 I 5 I 6

PV 0.481017098 PV 16.666666667 PMT 0 PMT -1 FV -1 FV 0

BGN / END END BGN / END END
ii)
Set out why your equivalent yield is different from the 6% level for properties let at full market rent. (4 marks)
The income of 8000 p.a represents a secure income cash flow so therefore the cap rate is tigthen. The lease may be granted some time ago. Concessionary rent due to special relationship between Landlord and Tenant. A premium may have been paid or improvement works have been done by the Tenant. Poor conditions of the promises. Restrictive or onerous lease conditions.
Question 24
a) In the analysis for valuing a freehold property, you have gathered the following information. What is its market value? Gross rental $75/m2 Outgoings $15/m2 Capitalisation rate 12% Area of the property 1000m2 (8 marks)
Gross rental @ $75 / m2 $75 x 1000 m2 = $75,000 Outgoings @ $15 -$15,000 Net rental $60,000.00 Cap rate @ 12% $60,000 / 0.12 Value $500,000.00
b) Your client is entitled to take over a freehold property after 5 years. The full market rent of the property is estimated to be $80,000 net and yield of similar property is 8%. Assess the value of your client's interest. (8 marks)
Net rental: $80,000 Cap rate @ 8% $80,000 / 0.08 Value $1,000,000.00
N 999
I 8
PV 12.5
PMT -1
FV 0
BGN / END END
Norman Harker
Page 36 of 40
c) Discuss the approach you would adopt in comparing a property that was recently let and then sold with a similar property that is vacant at the date of valuation. (4 marks).
Income capitalisation method as the approach as there is similarities between the subject and comparable property with the similar cap rates and full market potential rent as the variables.
Question 25
Determine the equivalent yield of the following property investment: Term rent $35,000 pa for 3 years, term yield 6% Reversionary full market rent $50,000 pa, reversionary yield 8% Sale price $620,000
Term income: YP 3 years @ 6 % Reversion income: YP in perp @ 8 % YP 3 years @ 6 % $35,000 2.673011949 $50,000 10.49524104 $524,762.05 Value $618,317.47 Say $620,000.00
$93,555.42
N 3 N 3 N 999 N 3
I 6 I 6 I 8 I 6
PV 2.673011949 PV 0.839619283 PV 12.5 PV -$618,317.47
PMT -1 PMT 0 PMT -1 PMT 35000
FV 0 FV -1 FV 0 FV 50000/0.08
BGN / END END BGN / END END BGN / END END BGN / END END
Question 26
You have just bought a property for $250,000 and paid 30% deposit. You obtain finance for the balance from a bank which charges a variable mortgage rate of 8% per annum for 20 years, the repayments are to be made monthly in arrears. a) calculate your monthly payment. (6 marks)
N 240 I 8/12 PV -$175000 PMT 1,463.77 FV 0 BGN / END END
Norman Harker
Page 37 of 40
b) if after 6 months (i.e. 6 instalments) the mortgage rate falls to 7.45% h) how much is your new monthly payment? (7 marks)
N 6 N 234 I 8/12 I 7.45/12 PV -$175000 PV -$173,187.40 PMT 1463.77 PMT $1,405.46 FV 173,187.40 FV 0 BGN / END END BGN / END END
iii)
how long will it take to repay the loan if you choose to maintain your old monthly payment? (7 marks)
I 7.45/12 PV -$173,187.40 PMT $1463.77 FV 0 BGN / END END
N 214.296
Question 27
With respect to valuation, what are a valuers duties?
Valuers duties To make a physical inspection of the property Check all items relevant to the basis of the valuation, such as title of the land, interest to be valued and zoning Have a knowledge of sales and values in the locality relevant to the particular type of valuation Make an impartial assessment of the market. A valuer is not an advocate and as an expert must be unbiased Act in person Be qualified to do the work Maintain confidentiality
Question 28
What do you understand by the following terms: a) Negligence. (5 marks)
If the previously detailed areas (duties, obligations, rules of conduct) are not carried out, it will lead to areas of possible negligence
Norman Harker
Page 38 of 40
As most valuations are carried out for finance, or involve large sums the valuer can become a soft target for injured (where an actual money loss occurs) parties. Over recent years valuers have been successfully sued for: Failing to inspect the property Ignoring market evidence selectively analysing inappropriate market evidence not inspecting sales evidence adopting an incorrect valuation method inconsistencies in the valuation approach and market evidence
b) Duty of Care. (5 marks)

Complete the valuation within the agreed time or within an acceptable time period The valuer should not delegate part or all of the valuation to another valuer without the approval of the client. (Different for firms). Valuers must acquaint themselves with the interest in the land to be valued
c) Third Party. (5 marks)

It would be sometimes difficult for a valuer to limit their liability There is a standard 3rd party disclaimer clause Even if a 3rd party is unknown, there could be a nexus (tie) to that 3rd party and the valuer owes them a duty of care. Eg. Valuing for a property trust and the 3rd party is a unit holder. Unknown but the care is owed to them
d) Disclaimer. (5 marks)
It is now common practice for a valuer to insert a number of disclaimer clauses into the valuation report. What should you use? See Chapter 2 Code of Ethics and Rules of Conduct of API & NZPI 2008 Valuation And Property Standards Remember the more disclaimers used the more the validity of the report is open to question Disclaimers should now be at the front of the report, not hidden at the back
Question 29
a) What is the International Valuation Standard definition of Market Value? (14 marks)
The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeable, prudently and without compulsion.
Norman Harker
Page 39 of 40
b) In what respect would this definition be varied if you were required to undertake a forced sale valuation? (6 marks).
The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeable, prudently and without compulsion. Under the international definition, it outline both buyer and seller making the transaction under no compulsion, which indicates that under the assumption of the definition of market value, a forced sale valuation will not come under that definition.
Question 30
In the context of a description or definition of Market Value, outline the meaning of the following terms: a) Willing buyer and willing seller. (5 marks)
For the buyer who is willing to buy with knowledge, prudent and without compulsion and same as the seller.
b) Arms length transaction. (5 marks)

This does not apply to family or friends who have close ties with the transaction nor have no close relations.
c) Proper marketing. (5 marks)

The subject property was marketed in a proper manner upon for sale to the open market.
d) Parties had each acted knowledgeably and prudently. (5 marks)

Both buyer and seller have greater or prior knowledge of the subject property and acted prudently in the best interest to themselves.
Norman Harker
Page 40 of 40

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Principles of Valuation

Examination Test Bank

Spring Semester 2011

Principles of Valuation 200602 Spring Semester 2011 Examination Test Bank

Structure Of Examination Paper

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Answering Too Many Questions Marking Policy

Time Allowed and Length of Answers

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How Accurate Should be Calculation Answers?

Limitations of Test Banks and Warnings

Where Are The Model Answers?

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End of Important Notes

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Use of Discussion Facility on vUWS

Rules / Guidelines for Discussion

Be Polite! Participation by everyone is voluntary. Dont make fun of anyone excepting

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BGN / END END

BGN / END BGN

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BGN / END END

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c) Comment on the statement Value does not equal Cost. (6 marks)

Value as compared to cost and price

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YP or Years Purchase is a property jargon that means a net income multiplier.

N = 999 represents the infinite numbers of term holding period.

YP or Years Purchase is a property jargon that means a net income multiplier.

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As demonstrated, if the term of leasehold increases, the YP has also increase.

$31,000 p.a -$7,750.00 p.a $23,250.00 p.a 23250/1100 = $21.15 psm

$30,000 p.a -$7,500.00 p.a $22,500.00 p.a 22500/1000 = $22.50 psm

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BGN / END END BGN / END END BGN / END END

$45,000.00 2.6124 $60,000.00 10.80803