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VALUATION OF PROPERTIES

VALUATION OF PROPERTIES

     Introduction
The following the methods of valuation being adopted in General practice by a practicing valuer are:

  • Land and Building Method
  • Rent Capitalization Method
  • Development Method
  • Profit Method
  • Direct Comparison Method

Land Building Method:
By this method, the value of the land and the value of Building are assessed separately and added to get the present value of the property. Depreciation is calculated either by straight line method or applying Linear method.
Rental or Capitilisation Method:
Rental method of valuation consists in capitilising the Net Annual Rental Income (NARI) at an appropriate rate of interest or rate of capitilisation.
Net annual rent income equals to Gross Annual Rental Income (GARI) minus outgoings like Property Tax, repairs, maintenance, Service Charges, Insurance Premium, Rent Collection and Management Charges etc.
Development Method (or Residual Method):
This method is used to evaluate such property where there is a development potential, so that the value of the property after development will be increased more than the expenditure incurred. For example, a large portion of land can be divided into small plots and developed fully so as to provide plots of land for a residential Colony or a large complex of multi-storied buildings, housing ownership flats in a Co-operative Housing Society.
Profit Method:
This method is applicable to Hotels, Cinema Theatres, Marriage Halls and Public Places. This method as the name suggests deals in working the profit from a property and subsequently capitalizing the same at appropriate rate of return depending upon a number of factors.

  • The net profit to be adopted should be an average of last three years of profit.
  • Part of the profits is due to goodwill which should be properly reflected in the rate of return.

GENERAL Procedure to do the Valuation of Building

    • Measure the Plinth Area. Observe the specification and other factors which affect the value.
    • Adopt suitable Replacement Rate of construction (for the Building portion alone) depending upon the existing conditions and specifications.
    • Multiply the plinth area by the unit rate to get the replacement value of the building.
    • Ascertain the age of the Building.
    • Estimate suitable total life of the Building.
    • Assume suitable % age for salvage value. Calculate Depreciation by Straight line method. Depn %  = (Age / Total life) x (100 - % Salvage value). If the age is not known or if the building has crossed its service life, estimate future life and calculate the depreciation by using the formula.

         D =   x (100 - % age salvage value)

    • Depreciation % age multiplied by the Replacement value will be the Depreciation Value.
    • Present Value = Replacement Value – Depn. Value

       This is the value of Building.

    • Add suitable depreciated value for other works like Amenities, extra works, miscellaneous works etc.
    • Add suitable value separately for services depending upon the actual’s specifications.

LAND AND BUILDING METHOD:

       Definition
In this method of valuation building portions being valued separately after allowing depreciation and the land is valued separately and their added to get the present value of the property:
Present Value of the Property = Value of the building + Value of the  land +
                                           Value of the amenities & services.
PROCEDURE OF VALUATION:

  • Ascertain from the applicant the exact purpose of valuation.
  • From the document available, note down the measurement of  the plot and other details.
  • Verify the measurements and the extent at site.
  • Assess suitable unit rate based upon the prevailing market rate or from the recent comparable sale instances of a similar vacant plot with almost similar characteristics.
  • Arrive the value of Building by adopting the procedure.
  • Addition of value of Land and Building will be the present value of the property.
  • If the aim of valuation is to assess the market Value
  • apply the reduction factor to the value of land.
  • Add suitable percentage towards any potential value
  • Deduct any percentage towards negative factors.
    • Analyse any other points depending upon the individual merits of the case.

Give valuation report in the appropriate format

CASE STUDY
Example : 1
An R.C.C Roofed Residential Building of G.F 1600 Sqft & F.F 1000 Sqft is existing in a plot of 1.5 Grounds. Age of G.F is 10 years and that of F.F is 5 years. Find the market value of the property.
Valuation is done to assess the market value by adopting land and building method.
I valuation of Land:

Extent of the plot

:

3600 Sqft

Prevailing Market Value

:

Rs. 50.00 / Sqft

Adopted Unit rate in this valuation 85% of Rs. 50/-

:

Rs. 42.50 / Sqft

Assessed Value of the plot

:

Rs. 1,53,000/-

II. Building :
(A) Ground Floor


Plinth area of Ground floor
  •  

1600 Sqft

Replacement Rate of construction

  •  

Rs. 500.00 / Sqft

Replacement value

  •  

Rs. 8,00,000/-

Age of the Building

  •  

10 years

Total lift assumed

  •  

80 years

Depreciation percentage assuming the salvage value as 10%

  •  

  x 90 = 11%

Depreciation value

  •  

Rs.    88,000.00

Depreciated value of Ground Floor

  •  

Rs. 7,12,000.00

(B) First FLoor


Plinth area of Ground floor
  •  

1000 Sqft

Replacement Rate of construction

  •  

Rs. 400.00 / Sqft

Replacement value

  •  

Rs. 4,00,000/-

Depreciation % age (GF Deprn)

  •  

11%

Depreciation value 11/100 x 4,00,000

  •  

Rs.    44,000.00

Depreciated value of First Floor

  •  

Rs. 3,56,000.00

(C) Total Value of GF & FF (7,12,000 + 3,56,000)  = 10,68,000.00

III Others (Depreciated Value)

Amenities existing in the building

  •  

Rs. 30,000.00

Water Supply arrangements

  •  

Rs. 20,000.00

Septic tank & Dispersion Trench

  •  

Rs.   6,000.00

Compound wall 224 RFT @ Rs. 100/RFT

  •  

Rs. 22,400.00

E.B. Deposit & Miscellaneous

  •  

Rs.   5,000.00

Total

  •  

Rs. 83,400.00

IV Abstract Valuation:


I

Land

  • Rs.   1,53,000.00

II

Building

  • Rs.  10,68,000.00

III

Others

:     Rs.       83,400.00

IV

Total Value

  • Rs. 13,04,400.00

Example : 2
A R.C.C Roofed Residential Building 1800 SFT it is constructed in year 1965 and the First Floor Constructed in year 1975. The total land area 4000 SFT (40 x100). The building built-up with load bearing structure with aesthetic look and having all services like bore, motor, OHT, Septic tank etc.

VALUATION DETAILS

Part – I - Land


Size of the plot
  •  

40 x 100

Total Extent of the plot

  •  

4000 Sqft

Prevailing Market Value

  •  

Rs. 120.00 Sqft

Adopted rate of valuation

  •  

Rs. 100.00 Sqft

Assessed Value of the plot

  •  

Rs. 4,00,000/-

 

Part – II Building


SI. No.

Floor

Reported year of construction

Roof

Plinth area Sq.ft

  •  

Ground Floor

1965

R.C.C

1800 SFT

  •  

First Floor

1975

R.C.C

1000 SFT

B. General information   

  •  

Type of construction

  • Load Bearing Structure
  •  

Quality of construction

  • I class
  •  

Appearance of the building

:    Excellent and aesthetic

  •  

No. of floors

  • GF & FF
  •  

Maintenance of the building

  • Excellent
  •  

Water supply arrangements

  • Deep bore, motor and OHT
  •  

Drainage arrangements

  • Septic Tank

 

C. Valuation of Ground Floor Construction

  • Specifications:

 

Foundation

  • Stepped footing

Superstructure

  • Brick Work in C.M 1:5

Roof

  • R.C.C. 1:2:4

Joinery

  • Teak wood

Floor finish

  • Colour Mosaic
  • Total Plinth area
  • 1800 SFT
  • Year of construction
  • 1965
  • Age of building
  • 39 yrs
  • Total life of the building estimated
  • 70 yrs
  • Depreciation percentage (assumed salvage value 10%)
  • 70 – 31/70 (100 – 10) = 50.14%
  • Replacement rate of construction with the existing conditions & specifications
  • Rs 500.00/SFT
  • Replacement value
  • Rs.  9,00,000.00
  • Depreciation value at the rate of 50.14%
  • Rs.  4,51,260.00
  • Estimated present value of ground floor construction
  • Rs.  4,48,740.00

 


D. Valuation of First Floor Construction

  • Specifications:

 

Superstructure

  • Brick Work in C.M 1:5

Roof

  • R.C.C. 1:2:4

Joinery

  • Teak wood with mica

Floor finish

  • Colour Mosaic
  • Total Plinth area
  • 1000 SFT
  • Year of construction
  • 1975
  • Age of building
  • 39 yrs
  • Total life of the building estimated
  • 70 yrs
  • Depreciation percentage
  • 50.14 %
  • Replacement rate of construction with the existing conditions & specifications
  • Rs.  400.00/SFT
  • Replacement value
  • Rs.  4,00,000.00
  • Depreciation value at the rate of 50.14%
  • Rs.  2,00,560.00
  • Estimated present value of First floor construction
  • Rs.  1,99,440.00

 

 

E. Replacement, Depreciation and Net Value


SL.
No.

Description

Replacement value

Depreciation

Net value

  •  

Ground Floor

9,00,000.00

4,51,260.00

4,48,740.00

  •  

First Floor

4,00,000.00

2,00,560.00

1,99,440.00

 

Total

13,00,000.00

6,51,820.00

6,48,180.00


Part III – EXTRA ITEMS

  • Portico 200 Sqft @ 150 Sqft
  •  

Rs.

30,000.00

  • Ornamental front door
  •  

Rs.

5,000.00

  • Sitout/ Verandah with steel grills
  •  

Rs.

5,000.00

  • Over head water tank
  •  

Rs.

5,000.00

  • Extra Steel /Collapsible gates
  •  

Rs.

3,000.00

  • Side dadoos 200 Sft @ 30/Sqft
  •  

 Rs.

6,000.00

 

  •  

 Rs.

54,000.00

Less depreciation 50.14%

  •  

 Rs.

27,076.00

Net Value

  •  

 Rs.

26,924.00

Part IV – Amenities

  • Wardrobes 250 Sqft x 125 / Sqft
  •  

Rs.

31,250.00

  • Glazed tiles 375 Sqft x 25/Sqft

 

  •  

Rs.

9,375.00

  • Extra sinks and bath tub
  •  

Rs.

6,000.00

  • Marble / ceramic tiles flooring
  •  

Rs.

3,600.00

  • Interior decoration
  •  

Rs.

10,000.00

  • Architectural elevation works
  •  

Rs.

15,000.00

  • Panelling works 225 Sqft x 100
  •  

Rs.

22,500.00

  • Aluminium works 100 Sqft x 100
  •  

Rs.

10,000.00

  • Aluninium hand rails 32 RFT x 80
  • 5

Rs.

2,560.00

Total

  •  

Rs.

1,10,285.00

Less Depreciation 50.14%

  •  

Rs.

55,297.00

Net Value

  •  

Rs.

54,988.00


Part V – Miscellaneous

  • Separate toilet room 50 Sqft
  •  
  •  

5,000.00

  • Separate lumber room
  •  
  •  

-

  • Separate water tank / sump
  •  
  •  

3,000.00

  • Trees/Gardening
  •  
  •  

8,000.00

Total

  •  
  •  

16,000.00

 

Part VI - SERVICES

  • Water supply arrangements
  •  
  •  

20,000.00

  • Drainage arrangements
  •  
  •  

6,000.00

  • Compound wall 150 Rft @ 125 Rft
  •  
  •  

18,750.00

  • E.B. deposits and fittings etc
  •  
  •  

10,175.00

  • Pavement
  •  
  •  

-

  • Steel gates
  •  
  •  

-

Total

  •  
  •  

54,925.00

Part VII  - ABSTRACT

  • Plot
  •  
  •  

4,00,000.00

  • Building
  •  
  •  

6,48,180.00

  • Extra items
  •  
  •  

26,924.00

  • Amenities
  •  
  •  

54,988.00

  • Miscellaneous
  •  
  •  

16,000.00

  • Services
  •  
  •  

54,925.00

Total

  •  
  •  

12,01,017.00

Say

  •  
  •  

12,00,000.00


RENT CAPITALISTION METHOD:

  In this method, the buildings attracted by Rent Control Act. The income  should be calculated as that actually received. If the rent has not been revised due to the owner not asking for that, the rent calculated should be as per the market value, as on the date on which the valuation is made. Since the rent itself is fixed as a percentage on the value of the property.

Rate of Return & Capitalisation
Rate of Return : The income what we receive for our capital is called                                           Rate of Return.
i.e.,


Amount invested
  •  

2,00,000.00

Rate of Return

  •  

10 %

Yearly income

  •  

2,00,000 x  = Rs. 20,.000/-

Monthly income

  •  

 = Rs. 1666.67

Capitalisation


Capitalisation
  •  

Yearly income x

 

  •  

20, 000 x

Capital amount

  •  

Rs. 2,00,000.00

Calculation of capitalized value of property
Capitalized value of the property = Net Maintainable Rent x 12.5
Case study: REnt capitalisation method
A shop fetches a monthly rent of Rs. 2000 advance amount received Occupier Rs. 30,000, Property tax Rs. 1200. What is the value of the shop? It is a free hold property.


i) GARI (Gross Annual Rental Income)


Monthly rent

 

= 2000.00

Annual rent 2000 x 12

 

= 24000.00

Add actual advance paid

= 30,000.00

 

Normal Three month Rent

= 6,000.00

 

Excess

= 24,000

 

Interest @ 12%

= 2,880.00

= 2880.00

GARI

= 24,000 + 2,880

= 26,880.00

ii) Outgoings


Property Tax

-

Rs. 1200.00

15% GARI

(0.15 x 24880)

Rs. 4032.00

 

Total Outgoing

Rs. 5232.00

iii) Net Annual Rental Income: NARI = Gari - outgoings
= 26,880 – 5,232
= 21,648.00
Value of the property: = net maintainable rent x 12.5
= 21648 x 125
= 2,70,600/-
Case Study – II
Mr. Rajan has let out his godown (free hold) in mount Road, Chennai for a monthly rent of 8000/-. He has received a refundable advance Rs. 1,50,000/- and premium amount of 2,00,000 for 20 years. The tenant is maintaining the shop by paying 8000/- as corporation tax per annum. Calculate the value by rent capitalization method.


i) GARI


Monthly rent

=

Rs.      8000.00

Annual rent 8000 x 12

=

Rs.   96,000.00

Add

 

 

a) Tax born by the tenant

 

Rs.      8000.00

b) Repairs 1/9 x 96,000

 

Rs.   10,666.66

c) Advance

Rs. 1,50,000.00

 

Normal advance 3 month rent 8000 x 3

Rs.    24,000.00

 

Excess advance

Rs. 1,26,000.00

 

Add interest 15%

 

Rs.    18,900.00

d) Premium / No of years
20000 / 20

 

Rs.     10,000.00

 

Total

Rs. 1,43,566.00

ii) Outgoings

Tax

NIL

15%  of GARI = 0.15 x 143566

21534.90

Total

21534.90

iii) NARI = GARI – OUTGOINGS

 

 

  143566 – 21534.90

 

   1,22,031.10

iv) Capitalised Value

= NMR x 12.5 = 15,25,388.75

 

 Say  15.25 lakhs

 


3) Development Method:
In this method, the value of the property is latent and will be released  on development. This can be worked out by ascertaining the zoned use and extent of development legally permissible under the rules of local authorities and determining the annual gross income that can be fetched after development. From this the next income can be arrived by deducting the outgoings. The capitalized value can be arrived at. To develop the property certain period will be required right from preparation of plans, getting them approved by the local bodies. The capital expenditure required for development during the phase period should also be estimated. A percentage of amount has to deducted on account of the above. The result so obtained by the above procedure should be compared with the actual sale instances of similar under developed properties.
Under developed property, if occupied by tenant under Rent Control Act, will have constraint in utilizing the potential of the development  of vacant land depending upon the legal rights of shifting the tenant. It has to be examined whether surplus land is serveable from the enjoyment of the tenant.
Development method should invariably be adopted for valuing land which is ripe for development. Some of the agricultural land close to the periphery of the city will be allowed to be converted as urban land. Large pockets of land have to be laid out in small housing plots as per the rules of the development authorities taking into account the expense that may be incurred for provision of roads, sewers, drains, water mains, electric mains and leveling up of area should be worked out and priced. The net plot area available should be worked out and priced. The net plot area available should be priced on the basis of instance sale of developed land in that area. In cities where urban renewal is permitted and where old buildings are allowed to demolish and convert into shopping complex or residential apartments, here also development method should be adopted taking into account the floor area ratio, the plot coverage and other parameters prescribed by the local authorities.
4) VALUATION BY PROFIT METHOD:
Profit method is applicable to Hotels, Cinemas, Marriage Halls and Public Places. This method as the name suggests deals in working the profit from a property and subsequently capitalizing the same at appropriate rate of return depending upon a number of Factors.
Estimating the Fair Market Value by using Profit Method is discussed here.
METHOD OF VALUATION OF A CINEMA THEATRE
The fair market value of a cinema theatre is the best possible price one could give in the case of any sale.
The method of valuation which a valuer can adopt depends upon the circumstances of the individual case. Many valuers including this author feel that the profit Method is the most appropriate method of valuation if the owner of the theatre conducts himself the business.
The procedure of valuation of a cinema theatre by using profit method is analyzed here in brief.
ASSESSMENT OF VALUE
Profitably is determined and the value is arrived by capitalizing the net profit at an appropriate rate of return after apportioning the profit due to

    • Tangible assets and
    • Intangible assets

PROFIT = GROSS INCOME – EXPENSE
GROSS INCOME
Gross Income = Income from exhibiting the pictures excluding entertainment                 Tax + Income from other sources.
Income from Picture
Yearly Gross Income from exhibiting the pictures = [{Full House occupancy – Normal Vacancy} x No. of Shows in a month x 12] – Entertainment Tax paid to the Govt.
More the occupancy percentage, more the income form exhibiting the pictures. The significant factors affecting the better occupancy rates are:

  • Competition
  • Locational Advantage
  • Interior decoration
  • Good films
  • Capacity of the House
  • Environments
  • Aesthetics of Foyer
  • Excellent Sound Systems
  • Video Piracy
  • Cable T.V
  • No. of Theatres existing in that area
  • Development of the adjacent locality
  • Modern Cinema Building with amenities
  • Elevational Treatments, Facades
  • Elegant and comfortable furniture
  • Efficient projection equipment
  • Pleasant light arrangement
  • Perfect cooling systems
  • Easy approach to the public
  • Power supply – Standby source

Vacancies are determined either from actual observations from a number of inspections or on the basis of averages for similar establishments.
Shows include Morning Shows, Noon Shows, Evening Shows, Night Shows, Special Shows, Etc.,
The entertainment Tax varies with individual state Governments. The TamilNadu Govt. has fixed the entertainment Tax as 40 % of the daily collection from exhibiting the pictures.


Income from other sources
They are:

  • Income from Exhibiting the Advertisements
  • Income from Exhibition of Slides.
  • Rental Income from Stalls, Coffee Houses, Cool drink Shops, Ice Cream Parlour, etc.,
  • Rental Income from Car  Parking and Cycle Stand.
  • Rental Income form showcases.
  • Miscellaneous Income from Weighing Machine etc.
  • Advertisement display on walls.
  • Income from Hoardings display.
  • Interest for the deposits paid by the contractors of stalls.

Expenses
The heads of expenses are:

  • Preliminary Expenses
  • Working Expenses
  • Repairs and Depreciation
  • Owner’s Profit

Preliminary Expenses

  • Film hire changes to the distributors
  • Hire charges for the Indian News Reels
  • Local Tax, if any
  • Other Taxes connected to Cinema Business

Working Expenses

  • Establishment charges like Staff Salary, Gratuity, Bonus, Provident Fund, Welfare Fund.
  • Consumables like Carbon Electrodes etc.,
  • Running cost of generators, cooling appliances.
  • Legal Expenses, Auditors fees.
  • Electricity
  • Printing
  • Postage
  • Property tax
  • Ground Rent if any
  • Traveling & Conveyance
  • Packing and Forwarding
  • Stationery
  • Publicity
  • Various License Fees
  • Bank Commissions
  • Office Expenses
  • Railway Freight, Octroi
  • Telephone, Telegrams
  • Insurance for Plant & Machinery, Equipments, Furnitures
  • Insurance premium to the Building
  • Subscription to Associations
  • Entertainment to Guests
  • Miscellaneous

Repairs and Depreciations:

  • Suitable Depreciation
  • Repairs and Maintenance of Building
  • Maintenance of Plant & Machinery
  • Sinking fund for Furnitures

The following percentages are normally adopted as depreciation:


Theatre Buildings
  •  

2.5 %

Furniture

  •  

15 %

Machinery

  •  

20 %

Cooling Plant

  •  

10 %

Electrical Fittings

  •  

10 – 15 %

Allowance for Repairs and Maintenance of the buildings is normally assumed between 1 to 2 % and this does not exceed by 3 %.
Sinking fund deduction is required to be made for replacement of Furnitures, Fixtures, Plant & Machinery etc., which require periodic replacements. The deduction should be calculated not on the prime costs but on prevailing costs of replacement less accumulated sinking fund reserves of earlier year on remaining period of anticipated life.
Owner’s Profit:
If the owner runs the Cinema business on his own under his direct supervision, guidance and control, a percentage of 15 % as Owner’s Profit on the total gross income excluding the entertainment tax is to be taken into account as an expense.
This percentage covers the items like

  • Interest on Capital Blocked up in his assests
  • Interest on Capital required for day to day Working.
  • Trade Profit which is due to his labour, Skill and Managements.
  • Allowance for Risk Element.

PROFIT AND CAPITALIsING
Profit = Gross Income – Expenses
The profits are to be apportioned to two categories, namely

    • Profit from intangible assets and
    • Profit from Tangible assets.

The ratio of intangible profit to Tangible profit is normally 1:3.
While Capitalising, a higher rate of interest is to be adopted for intangible profit than Tangible profit since efficient running the Cinema business depends upon the good Management, Good will and license.
Here 12% capitalization is adopted for Tangible profit and 14% Capitalisation is adopted for Intangible Profit.
CASE STUDY:  Example
Valuation of Cinema Theatre by adopting profit method is explained by means of a Case Study.
Data:


Type of Theatre
  •  

Permanent – Non A/c

Location

  •  

Municipal Limit

 

  •  

I class 250 @ Rs. 10.00

 

  •  

II Class 300 @ Rs. 7.00

 

  •  

III Class 250 @ Rs. 5.00

No. of Shows / day

  •  

4

Average Percentage

  •  

60 %

Occupancy

  •  

 

Entertainment Tax

  •  

40% of Daily Collection

Distributors Share

  •  

Average 50% of the Daily collection after deducting the Entertainment Tax.

Advance received from stalls

  •  

Rs, 4,00,000/-

Conductor of the Theatre

  •  

Owner