INTRODUCTION TO VALUATION OF IMMOVABLE PROPERTIES

INTRODUCTION TO

VALUATION OF IMMOVABLE PROPERTIES (STUDENTS’ EDITION)

Dr. K. DIVAKAR, M.E., Ph.D., Formerly Professor of Civil Engineering, Coimbatore Institute of Technology, Coimbatore – 641014

Š Copyright with the Author Published by AUTHOR

Cover Design by Vahini Divakar

For Copies kindly contact the Author at: Email:kdcitce@mail.com

Dedicated to My Beloved Wife

D. MOHANA and My Sweet Daughter

D. VAHINI

PREFACE I am extremely happy to present My First Book on Engineering in a field which provides ample opportunities to the Civil Engineers for professional practice. The present Engineering Curriculum imparts little knowledge on Valuation of Properties. A book teaching the basics of Valuation Principles and Procedure from the academic purview invoked me to bring out this book.

The purpose of this book is to impart academic knowledge to the Under-graduate and Post-graduate Students of Civil Engineering to the field of Valuation of Immovable Properties. It covers the Basic Principles of Valuation and Various Methods of Valuation at the Students’ Level. It provides them a preliminary knowledge of Valuation of Immovable Properties.

I express my sincere gratitude to my Guru in Valuation Er. B. Kanagasabapathy, a Veteran Valuer and Former National VicePresident, Institution of Valuers whose guidance and training imparted sufficient academic knowledge to write this Text Book on Valuation.

I am greatly indebted to my former Colleagues at Coimbatore Institute of Technology, Coimbatore, Dr. M. Kaarthik and Mr. C. Shankar who were instrumental in bringing out this book.

I express my sincere gratitude to Dr. S.R.K.Prasad, Correspondent CIT Institutions, and Mr. Rajiv Rangasami, Director, CIT Institutions, for the encouragement to bring out this book.

I also express my sincere gratitude to Dr. R. Prabhakar, Secretary, CIT Institutions and Dr. V. Selladurai, Principal, CIT Instituions for their support and encouragement.

K. DIVAKAR

VALUATION OF IMMOVABLE PROPERTIES (Extent covered in this Book)

PRINCIPLES OF VALUATION & VALUATION OF LAND & BUILDING Approaches and Methods of Valuation – Concepts of Valuation of Land and Building – Valuation by Land and Building Method, Composite Rate Method, and Rent Capitalization Method

VALUATION OF APARTMENTS Composite Rate Method of Valuation of Flats – Stage Value of a flat –Joint Venture – Project Report and Project Finance Report VALUATION FOR BANKS Valuation of Building/Flats under Construction, Ready Built House/Flats – Valuation of under SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act 2002

FIXATION OF FAIR RENT Fixation of Building Rent as per Tamil Nadu Rent Control Act Buildings Lease and Rent Control Act 1960, subsequently amended in 1973 and in 1980

CONTENTS Chapter

Title

Page

Foreword Preface 1

Introduction Valuation of Properties

1

2

Methods of Valuation

13

3

33

4

Valuation of a Property – Examples Valuation of Apartments

42

5

Valuation for Banks

52

6

Fixation of Fair Rent

66

7

Annexure I – Format for Valuation of Immovable Property (Prescribed by CBDT)

72

Chapter 1

INTRODUCTION TO VALUATION OF PROPERTIES 1.1 PROPERTY A property is any item that a person or a business has a legal title over affording the owner(s) certain enforceable rights over the said item. The enforceable rights are nothing but a bundle of legal rights exercised by the owner over a landed property to control (i.e., right to hold it, use it, make alterations in it, rent it, mortgage it or even sell it), which is continuous and everlasting until it is transferred.

A property can be a Tangible Property (that can be physically touched or felt) or Intangible Property (that cannot be physically touched or felt). Tangible Property, which is permanently attached to the ground and can be utilized for any legal purpose by its owner, is called as an Immovable Property. The Immovable Properties are classified as Marketable and Non-Marketable Properties.

Marketable Properties are those owned by a single person or family or a group of people and can be sold fully or partly and fetches a monetary benefit. Example: an individual house, a commercial building, an apartment, an industrial building etc.

Non-Marketable Properties are those which belong to the general public and cannot be sold at all. Example: places of worship, government buildings, trust properties, etc.

Real estate means a property consisting of land and the buildings on it, along with its natural resources above or below the ground level. Hence Immovable Properties are also known as Real Properties.

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1.2 REAL ESTATE MARKET Real Estate Market may be defined as an arrangement to buy and sell a landed property for any purpose – residential, commercial or industrial. It has two sides – the demand and the supply. It may be Local Market (mostly for residential purposes), National Market (for commercial establishment) or International Market (for multinational companies).

1.3 OVERVIEW OF VALUATION OF REAL ESTATE Valuation of Real Estate is essential for occupancy as well as investment needs. An individual seeks to know the worth of investment that he makes on the real property, both for occupancy as well as investment. Further the effect of valuation of real properties is significant in the economic growth of the nation as all financial transactions in respect of the property are highly dependent on its value.

1.4 VALUATION OF IMMOVABLE PROPERTY Valuation of real properties is the determination of monetary worth of the property rights encompassed in an ownership, at a specified date applying logical principles, technical, legal and accountancy knowledge. The term monetary worth refers to the amount of money for which the property is exchanged at arm’s length transactions between willing buyers and sellers.

1.5 COST, PRICE AND VALUE Cost is a measure of the actual expenditure incurred to produce a commodity having a value and utility.

Price is the Cost of a commodity plus additional reward to the producer for his labour and capital.

2

Value is the monetary worth of the product available for purchase in a market where a willing buyer and a seller determines it, from their own perspective.

COST is a FACT, PRICE is a POLICY and VALUE is an OPINION

1.6 ESTIMATE, COST OF CONSTRUCTION AND VALUE In the building sector the estimate, cost of construction and value can be distinguishably defined as follows: Estimate is the determination of the closest magnitude of amount (to a minimum degree of approximation and sound judgment) required to construct a building following the engineering standards and specifications.

Cost of Construction is the amount of money which is actually spent for the construction of the building during the specified period of construction.

Value is the estimate of the monetary worth of the building, which it fetches in the open market, between a willing buyer and a willing seller, the transactions taking place with proper advertising.

1.7 VALUE – A FUNCTION OF PURPOSE, PLACE AND TIME Value varies with the purpose, place and time. No two properties which are identical may have the same value. A property will not have the same value on different dates of valuation. It also differs based on the purpose.

1.8 VALUATION OF IMMOVABLE PROPERTIES Valuation of immovable properties consists of the determination of the value of the land and the value of the building with all the

3

amenities and the services available in the building as on the date of valuation for a specific purpose.

1.9 FEW PURPOSES OF VALUATION OF IMMOVABLE PROPERTIES Valuation may be done for various purposes. Some of the purposes of Valuation are discussed henceforth.

Purchasing or Selling Purposes When a property is sold or bought it is required to know the monetary worth for which it can be exchanged. Hence valuation is required.

Taxation Purposes Valuation is done for income tax purposes, where cost of construction is determined for the financial year of investment. For capital gains tax purposes the property is valued as on the date of acquisition is determined.

Property Tax Assessment Property Tax levied by the municipal corporation, municipality or panchayat every half yearly, based on the value of the property.

Stamp Duty Stamp duty and registration charges paid to the government for registration of transfer of property rights, are based on the value of the property as per the guideline rates fixed by the registration department.

Mortgaging Present Value and the forecast of the future trends of the property is required for properties that are pledged as security for obtaining financial assistance from banks.

Visa Wealth statement of an individual including the property value is to be submitted while applying for visa to countries like United States of America.

4

Rent fixation The rent for a building premise is fixed based on the value of the property and hence valuation is required.

Partition of properties The property share for each of the legal heir, at the time of family settlement requires determining the present value of the property.

Acquisition Compensating the public when government acquires a property for public project, is based on the value of the property.

Liquidation The fair value at which a sick company can be liquidated by an official liquidator appointed by court of law through auction is to be determined by the valuer.

Accounting purposes (asset value) In order to bring up-to-date the historical value in their book of accounts large companies revalue their assets. Hence valuation is done.

Property auctioning When a property which is offered as collateral security to bank becomes a non performing asset, is auctioned by a bank the minimum bid price is fixed based on the value of the property.

Insurance Insurance premium to be paid for insuring the property for any damages arising out of natural hazards is based on the value of the property.

Partitions, mergers, take-overs by companies The share of the individuals involved for merger or partition of a company is based on the value of the assets. Hence the valuation is done.

5

Probate matters The stamp duty to be paid for grant of probate by the court, in which a legal successor gets the property transferred to his/her name on is based on the value of the property.

1.10 FEW TYPES OF VALUES OF IMMOVABLE PROPERTIES Immovable properties are to be valued for various purposes. The following are the values usually determined.

Present Value It is the actual worth of the property which includes the present market value of the land and the present value of the building along with the services and amenities, all based on current rates and applying depreciation for the age served and future life expected.

Guideline Value The value of the land or plot in the locality, fixed by the registration department of the state government, for the applicable stamp duty and the registration charges to be remitted for the transfer of property rights, is called as guideline value.

Fair Market Value The estimated amount, for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing is called as fair market value. It is about 5% - 10% plus or minus the present value Replacement Value It is the investment required to reproduce the building with specification, condition and all other characteristics being similar irrespective of its marketability on the date of valuation.

Forced or Distress Sale Value A property sold in a situation without proper marketing, fetches a very lesser value than in the normal circumstances which is known

6

as forced or distress sale value. It is about 85% to 90% of the present value Auction Value It is the value which the property fetches when auctioned to recover the debts from the borrower in case of loan default. It is less by 15% to 25% of the forced sale value Realisable Value The net value realized from NPAs excluding the expenses incurred in recovering debts through auction is realizable value. It is less by 5% of the forced sale value Salvage Value The value of the property at the end of its useful life and no longer useful to the owner of the property is called salvage value.

Scrap Value The value which the dismantled material of a property can be sold at, once the useful period of the building is over and can no longer be used for any purpose is called scrap value.

1.11 VALUER FOR IMMOVABLE PROPERTIES A valuer for immovable property is a technically qualified civil engineer who has the ability, based on his qualification and experience, to prepare an estimate of cost of construction, design and construct a building. He is also expected to be familiar with the latest rules, laws and acts related to building construction, registration of properties and taxation.

Panel Valuers enrolled with financial institutions A valuer with sufficient experience is enrolled as a panel valuer by banks for valuing the property offered as security for obtaining financial assistance.

7

Registered Valuers registered with central board of direct taxes (CBDT) A valuer with necessary qualification and experience as laid down in rule 8-a (2) of the wealth tax rules practicing independently is can get registration under Wealth Tax Act 1957 with income tax department for valuation of cost of construction and capital gains.

Registered valuer under companies act 2013 A valuer with necessary qualification and experience can register as a registered valuer with the Insolvency and Bankruptcy Board of India (IBBI) after passing the examination. Valuations under companies act will be accepted from this category of Valuers only.

1.12 ESSENTIAL REQUIREMENTS OF A VALUER A valuer is highly responsible for the value he certifies and his report is highly relied upon, for all financial transactions involving the property. He is expected to possess the following qualities: 

Possess a sound technical knowledge in construction, contracts, and acts pertaining to property rights, building regulations, taxation and insurance, perusal of property related documents.



Inspects the property personally to ensure correct identification of the property, verifies the actual boundaries, dimensions of the property and makes observations of all relevant features in the property.



Does a fair valuation without prejudices, issues an elaborate unambiguous report along with all vital relevant information.



Preserves copies of the reports, like, worksheets, rough sketch sheets etc. for future references, defends his report as and when required in a court of law or appropriate authority.

8

1.13 VALUATION OF A BUILDING PROPERTY Primarily the valuation of a building property consists of determining the fair market value of the property. The purpose may be for sale of the property, mortgaging for loan, fixing the fair rent, determining the cost of construction or the capital gains realized on sale of a property.

1.14 MARKET VALUE OF A PROPERTY In normal practice, client requires from the valuer a prediction of the most probable selling price viz. the market value of the property.

Market Value of a Property is the most probable sale price of the property in an open market, where the transaction is at arm’s length between a willing buyer and a willing seller without any compulsion, and the parties concerned being aware of the process.

1.15 FACTORS AFFECTING MARKET VALUE OF THE PROPERTY The factors influencing market value of a property are: Economic factors – such as demand and supply, development in the locality, tax and government policies, market fluctuations, inflation Physical or technical factors - such as land and building characteristics, infrastructure facilities, proximity to civic amenities Social factors - such as class of neighbourhood, population density, communication, racial habitation, religious, personal and political factors Legal factors - such as rent control act, land reforms legislations, land acquisition, transfer of property legislations, zoning regulations

9

1.16 VALUATION PROCESS The process of valuation of an immovable property involves following: Problem Definition Valuer discusses the scope and the purpose of valuation of the property.

Data Collection The Valuer collects the following data Technical data (drawings, site measurements, building specifications, services and amenities), Legal data (ownership details, possibility of acquisition, etc.), Economic data (marketability, economic policies etc.) and Social data (class of locality, proximity to civic amenities, etc.)

Approach and Method Application The valuer adopts an appropriate approach and method of valuation. Sometimes all the approaches are applied by certain Valuers and the most appropriate value is certified.

Reconciliation After determining the value, the valuer states and justifies the reasons in support of adopting the same to arrive at the value.

Value Finalization The valuer discusses about a range of values if required and certifies the final value justifying it based on the observations, merits and demerits.

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1.17 APPROACHES TO VALUATION OF IMMOVABLE PROPERTIES There are three approaches to valuation of properties.

Market Approach The principle behind this method is that a property sold should fetch a near approximate price, which a similar property in the same locality was sold, with variations only due to specifications.

Cost Approach The principle behind this method is that a buyer will not spend more than the likely cost required to create the property at the current rate.

Income Approach The basic principle in the approach is that an investor expects a return (rent) on his capital investment on a building property at a certain rate which when capitalized gives the present market value.

1.18 METHODS OF VALUATION The following methods are adopted for valuation of a building property Land and Building Method In this method the value of the land and present value of the building along with the amenities and the services provided are determined separately and are added to give the value of the property.

Composite Rate Method For a flat in an apartment or a shop in a commercial building, the valuation is done based on the composite rate which comprises of the land component (for undivided share of land) and the building component (for construction cost).

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Rent Capitalization Method The annual rent received from a building is said to be the return on the investment made on the building property. It is capitalized at a certain rate of return to find the value of the building.

1.20 LAND MEASUREMENT UNITS AND CONVERSIONS The table below gives some of the units adopted in Tamil Nadu (that appear in the documents of properties owned for generations) and their equivalence to current measurements.

Measures & Equivalent

Remarks

1 Link

8 inches

1 Chain = 100 links = 66 ft

1 acre

43560 sq.ft

10 Chains × 1 Chain

1 acre

100 cents

1 cent = 435.6 sq.ft

1 ground

2400 sq.ft

5.5 cents

1 sq.m

10.76 sq.ft

1 m = 3.28 ft.

1 hectare

2.47 acres

10,000 sq.m (100 are)

1 kaladi

10”

Size of the foot of an adult

0.33 cents(144 sq.ft)

Size of the footwear of an adult

1 kuzhi

12”

1 maa

12’ × 12’

100 kuzhi

33.06 cents (14,400 sq.ft)

1 kaani

4 maa

1 veli

5 kaani

1 anganam

72 sq.ft

1 jathiyadi

132.23 cents (1.32 acres or 57,600 sq.ft) 661.16 cents (6.6 acres or 2,88,000 sq.ft) 0.17 cents

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Chapter 2

METHODS OF VALUATION 2.1 VALUATION OF A BUILDINGING PROPERTY The valuation of a building property in general involves the determination of the value of the land on which the building is constructed and the depreciated value of the building in its present condition and location as on the date of valuation.

The following are few purposes for which the valuation is done for building. 

To determine the value fetched on sale of the Property



To fix the fair rent of the property



To determine the composite rate of an apartment



To determine the cost of construction



To determine the capital gains realized on sale of a property

2.2 VALUES CERTIFIED FOR A BUILDINGING PROPERTY The following values are normally certified while valuing of a building property especially when it is offered as Collateral Security to Banks for obtaining Finance: 

Present Value of the Property



Fair Market Value of the Property



Forced or Distress Sale Value of the Property



Auction Value of the Property



Realizable Value of the Property

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Present Value It is the actual worth of the building as on the date of valuation. It is obtained by deducting the depreciation for the building based on its age and future life expected from the replacement value.

Replacement Value It can be defined as the investment required to reproduce the property with similar specifications with all other characteristics of the building being the same irrespective of its marketability.

Fair Market Value It is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. It depends on the marketability potential, demand for the property, etc. Normally this value will be about 10% - 15% plus or minus the Present Value Forced or Distress Sale Value When a property may have to be sold under distress due to factors like riots, or personal distress a situation of peculiar selling conditions arise, where proper marketability is not done. The value fetched by the property is known as Forced or Distress Sale Value.

This value is normally 85% - 90% of the Present Value Auction Value It is the value which the property offered as collateral security by a borrower will fetch when it is auctioned to recover the debts from the in case the loan is not repaid. This value is usually 75% - 85% of the Present Value Realisable Value It is the net money realized by Financial Institutions after incurring the expenses in the process of recovering debts from NPAs through auction. This Value will be 5% - 10% less than the Auction Value

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2.3 VALUATION OF LAND Valuation of Land is done based on its location, its occupancy, prevailing market demand for the land, the development in the locality, its proximity to civic amenities, class of the locality and zonal classification by the town planning department 2.4 DIFFERENT CLASSIFICATION OF LAND Land may be classified based on the following aspects: 1. Classification Based on Occupancy 

Open Lands (Or) Virgin Lands (Land without any constructions)



Land with Structures

A land with a structure is normally valued at 10% less the value of an open land, the reason being there is a flexibility of construction in a vacant land.

2. Classification Based on Its Location in a Layout Land Locked Land Land which does not have any access to road is called a land locked land. This land is surrounded by properties owned by either a single owner or few owners. It can be brought by only the adjoining property owners and not an outsider. Hence its valued normally at 25% of the prevailing market value in the locality (Figure 2.1) Recess Land This land is normally called as a land with zero frontages (Figure 2.1). It can be sold to or bought by the adjacent plot owner only. Its value is normally assumed to be 75% of the prevailing land value in the locality.

Tandem Plot The tandem plot is one which has a buildable portion lying behind another buildable portion with its entry through a passage from

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the road. The value of this land is 66% of the value of the land abutting the road. (Figure 2.1)

Figure 2.1 Land with Return Frontage A plot in a layout at the junction of two roads is a land with return frontage or called as a corner plot. Such plots may be valued higher considering the local building rules. (Figure 2.1) Lands with Larger Depth These are the lands where the depth of the land perpendicular to the road is more than twice the width of the land. The valuation of the land is done by belting method.

Here the depth of the plot is divided into belts with the depth of first belt as D that is normally prevailing in the locality, the depth of

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the second belt equal to 1.5 D, and of the third belt will be the remaining (Figure 2.2). The value of first belt will be 100%, the second belt 66% and the third belt 50% of the market value.

Figure 2.2

2.5 VALUE OF PLOT The Value of the Plot or Land is obtained by multiplying the Extent of the land (in sft or sq.m) by the Unit Rate of Land.

Market Value of Land = Extent of the land Ă— Unit Rate of Land The extent is calculated based upon the dimensions mentioned in the document or actuals. A valuer should be prudent in ascertaining the dimensions of the plot and satisfy himself about the same before proceeding with the valuation.

2.6 UNIT RATE FOR LAND There are two types of unit rates adopted to determine the value of Plot.

1. Guide Line Rate (GLR) (PMR)

2.

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Prevailing

Market

Rate

Guide Line Rate It is the unit rate of land fixed by the Registration Department. The main purpose of this rate is to calculate the stamp duty and registration charges to be paid for the registration of transfer of the rights from seller to buyer. This rate is also adopted for purposes like fixing the fair rent for the building and assessing the fair market value for capital gains.

Prevailing Market Rate It is the rate to be adopted while assessing the present market value. This rate can be obtained by referring to the recent sale instances taken place at an arm’s length between a willing seller and a willing buyer (best near accurate guiding value) or upon oral enquiry and thorough investigations with the real estate agents/registrar office.

Market Rate Market Rate of the land is fixed based on the following criteria: Physical, Legal, Economic, Social, Utility, Marketability, Transferability, Scarcity & Demand and Locality.

Land Rates Land Rates can be ascertained from one of the following sources and judiciously applied depending upon the purpose of the valuation: 

Upset prices (minimum bidding price) fixed by any department for auctioning



Prices fixed by the development authorities such as Housing Board for their plots



Enquiry from local residents, real estate agents and land brokers



Enquiry from document writers attached to registrar offices



Enquiry with Revenue department

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2.7 VALUATION OF BUILDING Valuation of a building is done for various purposes. It is done as a constituent of a property, as a unit in an apartment or a commercial complex, or to ascertain the cost of construction for income tax assessment. The aspects such as Floor Space Index and Plot Coverage do play a role in the valuation especially in the valuation of an apartment building. While certifying the value of the building the following values are determined: 

Present Value of the Building



Value of Cost of Construction of the Building

2.8 PRESENT VALUE OF A BUILDING Present Value is the actual worth of a building as on the date of the inspection irrespective of its marketability. A certain amount of depreciation is allowed based the age and the future life of the building.

2.9 REPLACEMENT RATE OF CONSTRUCTION It is defined as the current rate of construction usually plinth area rate of construction prevailing in the locality required to create a structure similar to what is exists, with the exactly the same specifications and conditions.

The following factors are to be considered scrupulously to determine the unit rate of construction of a building under valuation.  

Type of structure – Load Bearing or Framed Structure



Basement height



Thickness of walls and mortar used



Type of roof and its height

Type of foundation & depth

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

Quality of wood & Construction materials



Quality of workmanship



Lead distance of construction materials



Engineering design and architecture



Provision of Shelves, Wardrobes, Showcase etc.



Type, Grade and Quality of Fittings – both electrical and sanitary fittings



Type of Flooring and Floor finish etc.

2.10 DEPRECIATION Derived from the Latin word “DEPRETIATUM” which means fall in value or becoming less in worth. The result of depreciation is that sooner or later the asset will become useless. For buildings it is necessary to apply the depreciation for the period it has served.

There are two methods of calculating the depreciation: 1.

Straight line Method or Constant Value Method

2.

Linear Method or Constant Percentage Method

1. Straight Line Method of Calculating Depreciation In this method it is assumed that the property loses its value by a same amount every year.

The Depreciation % can be calculated as follows (

)

Salvage Value% is adopted depending on the present condition of the structure and its components. Life assumed for certain type of construction is given in the Table 1.1. The Valuer based on his

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experience and knowledge has to assess the future life of the building based on the structure, the quality of construction, the maintenance and the appearance of the building etc.

TABLE 1.1 Assumed Life(Yrs)

Type of Structure/Building

60 – 65

Load Bearing Structure

75 – 90

R.C.C. Framed Structure Apartment Buildings

60

50 – 60

Structure with Brick Walls and GI Roofing Structure with Brick Walls and AC Sheet Roofing Structure with Brick Walls and Tiled Roofing Temporary Sheds

40 – 50 20 – 30 10

2. Linear Method of Calculating Depreciation In this method it is assumed that the property loses its value by a same percentage of amounts every year. (

)

Here ‘r’ is the rate of depreciation and ‘n’ is the age of the building in years. The rate of depreciation ‘r’ depends on the type of the structure and its maintenance. The rate is normally 1.5% for Load Bearing Structure and 1% for Framed Structure. For very ordinary constructions with cheap materials the rate may be assumed as 2% or 4%. However the rate depends on the age of the building, life of the building, and maintenance of the building

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2.11

EXAMPLE: DEPRECIATION OF A BUILDING: GROUND FLOOR 10 YEARS OLD, FIRST FLOOR 5 YEARS OLD

Assume Life

:

60 Years

Ground Floor Age

:

10 Years

Depreciation @ 10%Salvage Value

: %

First Floor Age

:

Depreciation @ 10% Salvage Value

:

× (100 – 10) % = 15

5 Years

%

× (100 – 10) % = 7.5

This is incorrect, since Depreciation of first floor is linked with the stability of ground floor as its life ends with the life of the ground floor.

Hence depreciation% of First Floor is same as that of Ground floor

2.12 VALUATION OF A BUILDING – PROCEDURE The following procedure is generally adopted to determine the Present Value of the Building.

1.

Determine the Plinth area of the building.

2.

Adopt a suitable Replacement unit rate of construction based on the specifications observed and find the Replacement value.

3.

Find the Depreciation value assuming a 10% salvage value by straight line method.

4.

Determine the Present Value of the Building by deducting the Depreciation Value

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2.13 EXAMPLE – PRESENT VALUE OF RCC ROOFED BUILDING Plinth Area of the building

=

100 m2

Replacement Unit Rate of Construction

=

Rs. 15,000/ m2

Replacement Value (100) ×(15,000)

=

Rs. 15,00,000/-

Age of the Building

=

15 years

Life of the Building (Assumed)

=

60 years

Salvage Value (Assumed)

=

10%

Depreciation % (15/60) × (100 – 10)

=

22.5%

Depreciation Value (15,00,000 × 0.225)

=

Rs. 3,37,500/-

Present Value (15,00,000 – 3,37,500)

=

Rs. 11,62,500/-

Present value of Building is Rs. 11,62,500/-

2.14 PRESENT VALUE OF A BUILDING PROPERTY Present Value of a property is the Total of Market Value of Land, Present Value of Building, and the Depreciated Value of Amenities and Services.

Present Value of Property = Market Value of Land + Present Value of Building + Value of Services + Value of Amenities Amenities in a Building include Showcases, wardrobes, wall paneling works, false ceiling, interior decoration, air conditioners, lumber room, separate toilet, etc.

Services in a Building Property generally consist of Electrical, Water Supply & Drainage arrangements, Compound Wall & Gate, Garden, Pavements etc.

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2.15 VALUATION OF A PROPERTY – LAND & BUILDING METHOD Valuation by Land & Building Method is done by determining the market value of the land separately and the value of the building with amenities and services separately and summing them.

The present value of the property determined, is the prevailing market value for the land and the depreciated value of the building along with the depreciated value amenities and the services. The depreciated value is obtained by deducting the depreciation amount (based on its age and future life expectancy) from the replacement value of the building.

Depending on the factors like present condition of the building its maintenance, architecture and marketability aspects a certain percentage is either added or deducted to determine the fair market value. Based upon the purpose, force or distress sale value, auction value etc. are then determined appropriately.

2.16 CASE STUDY: VALUATION BY LAND & BUILDING METHOD DATA Size of the plot

:

Plinth area of building

:

70’ × 40’

Type of structure

:

Framed structure

Age of building

:

30 years

Expected future life of building :

50 years

Prevailing unit rate of plot

:

Rs. 1000/sft.

Unit rate of construction

:

Rs. 1600/sft

Date of valuation

:

10.06.2017

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1400 sft

VALUE OF PLOT Extent of plot

=

2800 sft

Prevailing market rate of land per sft

=

Rs. 1000/-

=

Rs. 28,00,000/-

Plinth area of the building

=

1400 sft

Replacement rate per sft

=

Rs. 1600/-

Replacement value

=

Rs. 22,40,000/-

Age of building

=

30 Years

Depreciation % @ 10% salvage value (Straight Line Method)

= 33.75 %

Depreciation Value

=

Rs. 7,56,000/-

=

Rs. 14,84,000/-

Market Value of land VALUE OF BUILDING

Present value of Building

VALUE OF AMENITIES (Depreciated Value) Wardrobes, Showcases,

=

Rs. 35,000/-

Kitchen Cupboards

=

Rs. 15,000/-

Architectural elevation works

=

Rs. 25,000/-

=

Rs. 75,000/-

Water supply and drainage arrangements

=

Rs. 50,000/-

Compound wall with steel gate

=

Rs. 60,000/-

Electrical arrangements

=

Rs. 1,00,000/-

=

Rs. 2,10,000/-

Total Value of Amenities VALUE OF SERVICES (Depreciated Value)

Total Value of Services

25

ABSTRACT Land Value

=

Rs. 28,00,000/-

Building Value

=

Rs. 14,84,000/-

Amenities Value

=

Rs. 75,000/-

Services Value

=

Rs. 2,10,000/-

=

RS. 45,69,000/-

TOTAL VALUE

Present Value of Property by Land & Building Method: Rs. 45,70,000/-

2.17

VALUATION OF A HOUSE CAPITALIZATION METHOD

PROPERTY

–

RENT

Valuation of a property by Rent Capitalization Method is done by capitalizing the Annual Net Maintainable Rent (NMR) that a property fetches, at a certain rate of return (normally the prevailing interest rate or rate of return expected by the landlord).

The period of return (or rent) is taken as perpetual (i.e. for the full life of the building).

A. ANNUAL NET MAINTAINABLE RENT (NMR) It is obtained by deducting all the Outgoings that are necessary to maintain that property in a state to command rent, from the Gross Maintainable Rent (GMR).

B. GROSS MAINTAINABLE RENT (GMR) It is calculated by adding the following to the Annual Rent received: 

Service charges collected from tenants

26



1/9th of actual rent towards repairing charges if spent by tenants



Interest for advance received in excess of 3 months’ rent @ 15%



Premium taken from tenants divided by number of years of tenancy

C.

OUTGOINGS

The expenses incurred to maintain a property so as to command the rent are termed as Outgoings. The following are included as outgoings:  Property Tax levied by Municipal Corporation, on the property.  Repairs and Maintenance Charges incurred on the maintenance of the property viz. usually 1/9th of the Gross Rent.  Establishment Charges incurred towards salary to rent collector, watchman etc. at the rate of 15% on the gross rent.  Insurance Premium amount paid every year for insuring the building against fire or such accidents.

2.18 RATE OF CAPITALIZATION Finding the capital for which we have an annual income from an investment is called as Capitalization. The percentage rate by which the capitalization is done is called as Rate of Capitalization.

If a property yields an annual return of say ‘Y’ and the expected rate of return at is ‘r’ %, the Capital Value ‘V’ can be found as

Here

(

(

)

) is Year’s Purchase 27

2.19

VALUATION BY RENT CAPITALIZATION METHOD:

EXAMPLE Data Monthly rent

: Rs. 20,000/:

Purpose of the building

Residential

Advance received

: Rs. 1,00,000/-

Property tax paid by owner/half yearly

: Rs. 2000/-

Service charges collected from tenant

: Rs. 2,000/:

Repair and maintenance

By Tenant

Premium received from tenant

: Rs. 1,00,000/-

No. of years of tenancy

: 5 years

I. Gross Maintainable Rent (GMR): Monthly rent

= Rs. 20,000/-

Annual rent (20,000 Ă— 12)

= Rs. 2,40,000/-

Add: Service charges collected from tenants

= Rs. 2,000/-

Repair charge spent by tenants {1/9 th Annual Rent)

= Rs. 26,600/-

Interest on excess advance @ 15% p.a.

= Rs. 6,000/-

Premium divided by years of tenancy

= Rs. 20,000/-

Total Additions

= Rs. 54,600/-

Gross Maintainable Rent

= Rs. 2,94,600/-

28

II. Deductions (Outgoings): Municipal taxes

= Rs. 4,000/-

Establishment charges (15% of GMR)

= Rs. 44,190/-

Total Deductions

= Rs. 48,190/-

III. Net Maintainable Rent (NMR) Gross maintainable rent

= Rs. 2,94,600/-

Outgoings

= Rs. 48,190/-

Net Maintainable Rent (NMR)

= Rs. 2,46,410/-

IV. Capitalized Value @ 8% rate of return

= 2,46,410 Ă— {

Rs. 30,80,125/Rs. = 31,00,000/=

Value of Property (say)

Value of property by Rent Capitalization Method is Rs. 31, 00,000/-

2.20 VALUATION BY COMPOSITE RATE METHOD In an apartment building or a commercial complex the individual owner of the apartment or a shop owns an undivided share of land UDS and an individual area of occupation which is his flat or shop, along with a proportionate share of the common area in the building together called as Super Built-up Area SBA.

29

}

Valuation of such property is done by composite rate method. The Composite Rate considers both the cost of undivided share of land and the cost of construction of the flat or shop.

The value is determined by multiplying the super built-up area (SBA) of the flat or the shop by the composite rate (CR)

The main criteria to be considered in the valuation is the Floor Space Index which is the ratio between the total built up area of the building TBA and the total extent of the site LA.

2.21 COMPOSITE RATE The rate per unit area on the super built-up area of the flat at which the flat is sold or bought is called as COMPOSITE RATE which includes the land component for cost of the undivided share of land per unit area and the building component for cost of construction of the apartment per unit area including the services and amenities provided. Let CR be the Composite Rate; MR the Prevailing Market Rate of Land, PAR be the Plinth Area Rate of Construction, including Common Services and Amenities, FSI the Floor Space Index.

Here (

)

[

] ;

30

2.24 CALCULATION OF DEPRECIATED COMPOSITE RATE  Determine the FSI of the apartment and obtain the land component of the composite rate by dividing the prevailing market rate (PMR) by FSI.  determine the present replacement rate of construction including internal services, and proportionate share of external services and common amenities, apply the depreciation appropriately, and calculate the building component of the composite rate  Add Land Component and Building Component and add about 15% to 20% on this sum as Promoter’s Profit. The total obtained gives the Depreciated Composite Rate for the flat.

2.27 EXAMPLE ON VALUATION OF A FLAT BY COMPOSITE RATE Consider an apartment building with three floors with two flats in each floor of equal Super Built-up area 1200sft. The FSI achieved is 2. It is of superior construction. A Flat in the First Floor has to be Valued.

Prevailing land rate

=

Rs. 7,000/sft.

FSI

=

2

Land component

=

Rs. 3,500/-

Building rate + services

=

Rs. 2,100/-

Depreciation on building rate @ 15%

=

Rs. 315

Depreciated building rate (2,100 – 375)

=

Rs. 1,785/-

Add share of common amenities @10%

=

Rs. 180/-

Total building rate

=

Rs. 1,965/-

31

Add land component

=

Rs. 3,500/-

Total of Land + Building

=

Rs. 5,465/-

Add Promoter’s Profit @ 20%

=

Rs. 1,090

=

Rs. 6,555/-

Super built up area

=

1,200 sft.

Depreciated composite rate

=

Rs. 6,555/-

Value

=

Rs. 78,66,000/-

Depreciated composite rate

Value

Value of the Flat by Composite Rate Method is Rs. 78,66,000/-

32

Chapter 3

VALUATION OF A PROPERTY – EXAMPLES 3.1

VALUATION OF A MULTISTOREYED BUILDING PROPERTY OWNED BY A SINGLE OWNER

Valuation of a Multistoreyed building owned by a single owner may be valued by any one or all of the following methods: 

Land & Building Method



Composite Rate Method



Rent Capitalization Method

Normally the building is valued by Land and Building Method.If there are separate tenements in each floor then Composite Rate Method may be adopted considering it as an apartment. A fully or partially rented building may be valued by Rent Capitalization Method.

3.2 EXAMPLE FOR VALUATION MULTISTOREYED BUILDING Details of the Property - 50’ × 60’

Dimensions of the plot Building Structure

- Load Bearing (G + 2)

Plinth Area & Year of Construction Ground Floor

- 1700 sft (2001)

First Floor

- 1600 sft (2005)

Second Floor

- 1500 sft (2007)

Roof height

- 10’

Flooring

- Ceramic Tiles

33

Water Supply

- Municipal Water Supply

Drainage

- Underground Drainage

Other Amenities

-

Prevailing Market Rate of Land

- Rs. 4000/- per sft

Compound Wall, Pavement

The Locality is well developed. Rent for a Similar property when let out is Rs. 15,000/- for ground floor, Rs. 13,000/- for first floor and Rs. 10,000/- for second floor.

Present Value is to be certified as on say 10.06.2017.

I. LAND & BUILDING METHOD A. Land Extent of plot

50’ × 60’

=

3000 sft

Prevailing Market Rate/sft

=

Rs. 4,000/-

Value of Plot based on PMR

=

Rs. 1,20,00,000/-

B. Building Description

Ground Floor

First Floor

Second Floor

1700 sft

1600 sft

1500 sft

Replacement Rate

Rs.1,500/sft

Rs. 1,200/sft

Rs. 1,350/sft

Replacement Value (RV)

Rs. 25,50,000

Rs. 19,20,000

Rs. 20,25,000

16 yrs

12 yrs

10 yrs

24%

24%

24%

Rs. 19,38,000

Rs. 14,59,200

Rs. 15,39,000

Plinth Area

Age of the Floor Depreciation % @ 10% salvage Present Value (76% RV)

Total Present Value of Building

34

Rs. 49,36,200/-

C. Amenities (Depreciated Value) Wardrobes 456 sft @ Rs.1000/- per sft

=

Rs. 4,56,000/-

Show cases 126 sft @ Rs. 750/- per sft

=

Rs. 94,500/-

False Ceiling 768 sft @ Rs. 50/ per sft

=

Rs. 38,400/-

Modular Kitchen LS

=

Rs. 2,00,000/-

=

Rs. 7,88,900/-

Water Supply and Drainage Arrangements

=

Rs. 4,25,000/-

Compound Wall with gate 220 rft @ Rs.800/ per rft

=

Rs. 1,76,000/-

Deposits for Electricity, Drainage etc.

=

Rs. 25,000/-

=

Rs. 6,26,000/-

Total Value of Amenities D. Services (Depreciated Value)

Total Value of Services

Summary Plot - 3000 sft

=

Rs. 1,20,00,000/-

Building - 4800 sft

=

Rs. 49,36,200/-

Amenities

=

Rs.

7,88,900/-

Services

=

Rs.

6,26,000/-

Total

=

Rs. 1,83,51,100/-

Hence the Value of the Property is say Rs. 1,83,51,100/-

35

II. COMPOSITE RATE METHOD A. Data Total Plinth Area

= 4800 sft

Extent of Land

= 3000 sft

FSI

= 1.6

B. Composite Rate Estimation Land Component [

]

= Rs. 2,500/-

Building Component (Including Services and Amenities

= Rs.1,890/- (Average)

Land + Building

= Rs. 4,390/-

Add Promoter’s Profit @ 15%

= Rs. 660/-

Building Rate

= Rs. 1,890/-

Depreciation Rate for 16 year old building @ 10% Salvage Value

=

Depreciated Building Rate (0.76 × 1,890)

= Rs. 1,435/-

Add Land + Promoter’s profit

= Rs. 3,160/-

Depreciated Composite Rate

24%

= Rs. 4,595/-

D. Value Estimated Super Plinth Area

= 4800 sft

Depreciated Composite Rate

= Rs. 4,595/-

Value of the Property

= Rs.2,20,56,000/-

Allowing a deduction of 15%, as flats of more than 15 years is not preferred for purchase, Present Worth of Property is Rs. 1,87,47,600/-

36

III. RENT CAPITALIZATION METHOD The method is applied assuming notional rent as it is owneroccupied Notional Rent for GF/month

=

Rs. 15,000/-

Notional Rent for FF/month

=

Rs. 13,000/-

Notional Rent for SF/month

=

Rs. 10,000/-

Total Monthly Rental Income

=

Rs. 38,000/-

Annual Rental Income

=

Rs. 4,56,000/-

Capitalized Value @ 2.5 % RR

=

Rs. 1,82,40,000/-

The Value of the Property is Rs. 1,82,40,000/-.

Since only notional rent is considered the likely expenses are not deducted from the Annual Rental Income.

IV. VALUE CERTIFIED Since the Building is occupied as an Undivided Family Property the Present Value of the Property may be certified as Rs. 1,83,51,200/- as obtained by Land & Building Method. However considering the practical difficulties in selling the property by the owner, a rebate of 5% may be adopted to determine the market value of the property; i.e. an amount of Rs. 9,17,560/- may be deducted to arrive at the market Value.

Hence Market Value of the Property is Rs. 1,74,33,640/- Say Rs. 1,74,00,000/-

37

3.3 VALUATION OF READY BUILT FLAT Valuation of a ready built flat may be valued by any one or all of the following methods: 

Land & Building Method



Composite Rate Method



Rent Capitalization Method

3.4 VALUATION OF A READY-BUILT FLAT– EXAMPLE Consider an apartment building with Stilt + Four Floors in a plot of size 60’× 80’. Consider TWO Flats in each floor with a Super Builtup area of 1200 sft each. It is required to Value a Ground Floor Flat as on 10.04.2018.

Super built up area

=

1,200 sft. (GF)

UDS of land

=

600 sft.

FSI

=

2

Prevailing market rate of land

=

Rs. 7,000/sft.

Age of the building

=

10 years

Monthly rent

=

Rs. 27,000/-

Unit rate of building with services & amenities

=

Rs. 2,150/-

Annual Property Tax and Maintenance Charges

=

Rs. 15,000/-

Specifications: RCC framed structure – superior construction – Lift and stairway – Compound wall – Pavement – Protected water supply - Underground drainage – Watchman’s shed, Common Solar Water heater in terrace, gym in the terrace – Closed Circuit Camera Surveillance etc.

38

1. Valuation by Land & Building Method: UDS of land

=

600 sq.ft.

Unit rate of land

=

Rs. 7,000/ sq.ft.

Value of UDS of land

=

Rs. 42, 00,000/-

Super plinth area

=

1,200 sq.ft.

Replacement rate

=

Rs. 2,150/-

Replacement value

=

Rs. 25,80,000/-

Age of building

=

10 Years

Depreciation % (salvage 10%)

=

15%

Depreciation value

=

Rs. 3,87,000/-

Depreciated value of Flat

=

Rs. 21,93,000/-

Value of Flat

=

Rs. 21,93,000/-

Land-600 sq.ft.

=

Rs. 42, 00,000/-

Building -1,200 sft

=

Rs. 21,93,000/-

Total

=

Rs. 63,93,000/-

Add Promoter’s Profit @ 15%

=

Rs. 9,58,950/-

=

Rs. 73,51,950/-

Abstract

TOTAL VALUE OF FLAT

The Value of Flat by Land & Building Method is Rs. 73,50,000/-

39

2. Valuation by Composite Rate Method: Prevailing land rate

=

Rs. 7,000/sq.ft.

FSI

=

2

Land component (7,000/2)

=

Rs. 3,500/-

Building rate + services

=

Rs. 2,150/-

Age of Building

=

10 years

Life assumed

=

60 years

Depreciation % @ 10% Salvage

=

15%

Depreciation on Building Rate

=

Rs. 325/-

Depreciated Building Rate

=

Rs. 1,825/-

Add Land Component

=

Rs. 3,500/-

Land + Building

=

Rs. 5,325/-

Add Promoter’s profit @ 15%

=

Rs. 800/-

=

Rs. 6,125/-

Super Built up Area

=

1,200 sq.ft

Depreciated Composite Rate adopted

=

Rs. 6,125/-

Value of Flat

=

Rs. 73,50,000/-

Composite Rate Calculations

Depreciated Composite Rate Valuation

The Value of Flat by Composite Rate Method is Rs. 73,50,000/-

40

3. Valuation by Rent Capitalization Method: Yearly rent (17,500 x 12)

=

Rs. 2,10,000/-

Deduct Maintenance Charges and Property Tax

=

Rs. 27,000/-

Net Annual Rent

=

Rs. 1,83,000/-

Rate of return assumed

=

2.5%

Capitalized value

=

1,83,000 x (100/2.5)

Value of Flat

=

Rs. 73, 20,000/-

4. Value Certified Since Composite Rate Method of Valuation of a Flat is more appropriate the Value Certified is say Rs, 73,50,000/- as determined by Composite Rate Method

41

Chapter 4

VALUATION OF APARTMENTS 4.1 PRINCIPLES OF VALUATION OF APARTMENT A FLAT is a residential unit in an apartment building. In fact both FLAT and APARTMENT mean the same.

In case of an individual residential unit on a plot, the owner enjoys an absolute right over the entire extent of the plot. But in case of an apartment the owner enjoys only an undivided share of the total land in which the apartment building is constructed. He has absolute rights over the area of his apartment only along with an undivided share of the common area in the apartment building such as lifts, stairs, lounges, and the space around the building. In such circumstances the Valuation of an Apartment is different from that of an Individual Building even though the Valuation is done by Cost Approach.

4.2 VALUATION OF APARTMENTS (FLATS) The value of a flat is determined by multiplying the super built-up area (SBA) of the flat by the composite rate (CR).

This composite rate consists of two components –land component considers the cost for undivided share of land and the building component considers the cost of construction of the building along with the services.

The main criteria to be considered in the valuation an apartment is the Floor Space Index which plays an important role in deciding about the undivided share of land, the super built-up area of the apartment and the composite rate.

42

4.3 COMPOSITE RATE The rate per unit area on the super built-up area of the flat at which it is sold or bought is called as COMPOSITE RATE. This rate includes the cost of the undivided share of land and the cost of construction of the flat including the services and amenities provided.

Let CR be the Composite Rate; MR the Prevailing Market Rate of Land, PAR be the Plinth Area Rate of Construction, including Common Services and Amenities, FSI the Floor Space Index Hence Composite Rate, Here (

)

=

*

+

;

Land Component is obtained by dividing the Prevailing Market Rate of Land in the locality by the Floor Space Index. Plinth Area Rate is the Prevailing Rate of Construction for the specifications provided.

4.4 FLOOR SPACE INDEX (FSI) The ratio between the total built up area of the building (total plinth area of all floors) and the total extent of the site is defined to be the Floor Space Index. If TPA is the Total Plinth Area of all Floors in an apartment and SA is the Total Extent of the Site, then the FSI will be

4.5 UNDIVIDED SHARE OF LAND (UDS) The area of the land normally conveyed by the promoter to the purchaser of a Flat by a registered deed is Undivided Share of Land. It is said that the total area of the site is jointly owned by all the owners of individual flat in the apartment and a single owner cannot claim individual rights over any

43

piece of land. The undivided share of land is the ratio of Super Built-up Area (SBA) of the Individual Flat to the Floor Space Index.

4.6 SUPER PLINTH AREA (or) SUPER BUILT-UP AREA (SBA) It is the Saleable Area of a Flat which is the SUM of the Plinth Area (PA) of the Individual Flat and the Proportionate Common Area in the Apartment like Corridor, Staircase, Lift Area in the particular Floor and Common Lift Machine Room, Head Room for Staircase, Foyer in the Ground Floor and any other such Common Facilities provided in the Complex. If TCA is Total Common Area in all the floors, TPA is the Total Plinth Area of all the apartments in the building, then [

(

)

]

4.7 EXAMPLE ON CALCULATION OF FSI, UDS, AND SBA DATA Extent of plot 78’ x 55’

=

4,290 sft

Ground floor – 58’ x 35’

=

2,030 sft

First floor – 58’ x 35’

=

2,030 sft

Second floor – 58’ x 35’

=

2,030 sft

Plinth Area of Flat Type A1/A2/A3 24’ x 35’

=

840 sft

Plinth Area of Flat Type B1/B2/B3 26’ x 35’

=

910 sft

Common Area in each floor – 8’ × 35’

=

280 sft

44

FSI Calculations Total Plinth area of one floor

=

2,030 sft

Total Plinth area of all floors

=

6,090 sft

=

1.4196

Floor Space Index

FSI : ,

-

Common Area Percentage Calculations Plinth area of flat A1/ A2/ A3 = 24’ x 35’

=

840 sft

Plinth area of flat B1/ B2/ B3 = 26’ x 35’

=

910 sft

Total Plinth area of 2 flats A1 & B1 in one floor

=

1,750 sft.

Total plinth area of 6 flats: 1,750 x 3 floors

=

5,250 sft

Common area 35’ x 8’ for one floor

=

280 sft

Common area - for 3 floors: 280 x 3

=

840 sft

Common area %age = (840/5,250) x 100

=

16%

45

SBA Calculations Super plinth area A1/ A2/ A3 = 840 x 1.16

=

974 sft

Super plinth area B1/ B2/ B3 = 910 x 1.16

=

1,056 sft

Total Area of Each Floor (974 +1056)

=

2030 sft

Total Plinth Area of ALL Floors (2030 × 3)

=

6090 sft

UDS for A1/ A2/ A3 = 974 /1.4196

=

686 sft

UDS for B1/ B2/ B3 = 1,056 / 1.4196

=

744 sft

Extent of land: (686 + 744) x 3

=

4,290 sft

UDS Calculations

4.8 COMPOSITE RATE CALCULATION  Determine the FSI of the Apartment and the SBA of the flat.  Ascertain the Land Component of the Composite Rate by dividing the Prevailing Market Rate (PMR) for the Land by the FSI.  Determine the Present Replacement Rate of Construction including internal services and amenities and proportionate share of external services and common amenities.  Based on the age and expected life of the Building determine the Depreciated Replacement Rate which is the Building Component of the Composite Rate.  To this Building Component add the Land Component  Add about 15% to 20% of it as Promoter’s Profit.

 The total obtained gives the Depreciated Composite Rate for the flat.

46

4.9 CALCULATION OF DEPRECIATED COMPOSITE RATE For an apartment building of age 10 years the FSI is 2. The market rate of land is Rs. 5,800/- per sft and the replacement rate of construction is Rs.2,100/- including amenities and services. The depreciated composite rate is calculated as follows as on 10.06.2017 Market rate for land

=

Rs. 5,800/-

The land component (5,800/2)

=

Rs. 2,900/-

Rate for building & services (say)

=

Rs. 2,100/-

Age of the Building

=

10 years

Life of the building assumed

=

60 years

Depreciation % @ 10 % Salvage

=

15%

Depreciation

=

Rs. 315/-

=

Rs. 1,785/-

Land Component

=

Rs. 2,900/-

Depreciated Building Rate

=

Rs. 1,785/-

Total

=

Rs. 4,685/-

Add 20% for promoter’s profit

=

Rs. 940/-

=

Rs. 5,625/-

Depreciation Calculations

(0.15 × 2100)

Depreciated Rate for Building (2,100 – 315)

Depreciated Composite Rate

Composite Rate

47

4.10 VALUATION OF A FLAT BY COMPOSITE RATE  The depreciated composite is obtained as discussed in Section 4.8.  Multiply the Composite Rate obtained with the SBA of the flat to get the Present Value of the Flat.

4.11 EXAMPLE Consider an apartment building in a plot of size 45’× 80’, with Three Floors.

There are TWO Flats in each floor of equal Super Built-up area of 1200 each.

The FSI achieved is 2. It is a RCC Framed Structure of superior construction.

A Flat in the First Floor has to be Valued.

Prevailing land rate

=

Rs. 7,000/sft.

FSI

=

2

Land component

=

Rs. 3,500/-

Building rate + services

=

Rs. 2,100/-

Depreciation on building rate @ 15%

=

Rs. 315

Depreciated building rate (2,100 – 375)

=

Rs. 1,785/-

=

Rs. 180/-

Total building rate

=

Rs. 1,965/-

Add land component

=

Rs. 3,500/-

Total of Land + Building

=

Rs. 5,465/-

Add Promoter’s Profit @ 20%

=

Rs. 1,090

=

Rs. 6,555/-

Add share of common amenities @10%

Depreciated composite rate

48

Value Super built up area

=

1,200 sft.

Depreciated composite rate

=

Rs. 6,555/-

Value

=

Rs. 78,66,000/-

Value of the Flat by Composite Rate Method is Rs. 78,66,000/-

4.12 VALUATION OF FLAT FOR JOINT VENTURE Generally the flat promoters purchase a piece of land to promote the apartments. In cases the land owner will not want to part with the land but however would like to develop the land and the Promoter not willing to invest heavily on the land, both enter into an agreement with the land, construct an apartment building, sell and share the profit earned. The share will be proportional to their investment which is Land Cost for the Landlord and the Cost of Construction for the Promoter. The scope of the valuer in this context is to work out the share of the owner and the promoter.

4.13 EXAMPLES ON SHARE AND COMPOSITE RATE CALCULATIONS Mr. ‘X’ enters in to a joint venture agreement with a promoter, to develop an apartment in his piece of plot of 10,000 sft in a central locality where the FSI of 2.0. Land cost is Rs. 10,000/sft. Building rate is Rs. 3,000/sft.

Calculate the share of each and the composite rate as on 10.04.2017.

Share Calculations Land rate

=

Rs. 10,000/-

FSI

=

2

Land component (10,000/2)

=

Rs. 5,000/-

Building rate

=

Rs. 3,000/-

49

Total Land & Building Component

=

Rs. 8,000/-

Landlord’s share (5,000/8,000)×100

=

63%

Promoter’s share(3,000/8,000)×100

=

37%

Total Land & Building Component

=

Rs. 8, 000/-

Add profit 25%

=

Rs. 2, 000/-

Composite rate

=

Rs. 10,000/-

Composite Rate Calculations

4.14 PROJECT REPORT AND PROJECT FINANCE REPORT FOR BANKS Housing Loans are availed by individuals for the or purchase of new flat in an apartment. The individual has to submit the following documents to the bank for availing loan along with his application: 

Details of flat to be purchased such as UDS of land, SBA of the flat proposed to be purchased and Composite Rate quoted.



Sale agreement for the un-divided share of land and builders’ agreement for the construction of the flat



Approved Drawing, Approval Letter, Working Plans, Legal Opinion etc.

Since there are a number of flats the Promoter has to provide with all the necessary documents to each of the prospective buyer to facilitate them to apply for housing loan with the banks. This becomes a repetitive process and cumbersome to the promoter.

Hence the banks have come forward to take decisions based on a consolidated project report providing complete details of the apartment project such as FSI, UDS and SBA for each flat, Composite Rate quoted and specifications etc.

50

The Promoter himself obtains a Project Report from the Bank’s Panel Valuer(s) and submits to the Bank(s) and gets a Provisional Approval of their Project. This Report is called as Project Report for Approval for Advance Processing Facility.

Since the Bank’s Panel Valuer has already certified the project the decision making becomes easy for the banks when the individual buyer approaches for the loan.

Sometimes the Promoters themselves avail loan for the construction of the Apartment for which they have to obtain a Project Finance Report and submit to the bank for obtaining loan for construction and promotion of the project.

51

Chapter 5

VALUATION FOR BANKS 5.1 VALUATION REQUIREMENT FOR BANKS Valuation of Immovable Properties for Banks is required for many purposes. It is preferred that the Valuation be done by a competent technically qualified person, as self-valuation by non-technical bank staff may lead to many issues at a later date in terms of technical and other related aspects.

Hence the Civil Engineers who have appreciable experience in the field of Valuation of Immovable Properties are being empanelled by Banks to Value the Immovable Properties concerned. Mostly the Banks empanel the Valuers who are Registered Valuers of Income Tax Department – Central Board of Direct Taxes. Presently the Banks prefer Valuers who are registered with Insolvency and Bankruptcy Board of India after clearing an examination conducted by the Board.

5.2 VARIOUS PURPOSES OF VALUATION REQUIRED FOR BANKS Banks require Valuation of an Immovable Property for many purposes/circumstances. Few are discussed below: Housing Loan: This may be for the construction of a new building where it is required to certify the genuineness of the estimate provided by the applicant, and the total cost on completion of construction. It may be for the Additional Constructions wherein it is required to certify the market value of the existing property and to certify the cost of new construction. It may be also for Purchase of Ready-built Property where the Present Market Value of the Property is to be certified to sanction the loan to the applicant for the purchase of the said property.

52

Disbursement of Loan: To certify the stage value of construction of the building and also the cost at completion of the building based on which the bank will release further installment of the loan.

Mortgage Loan: Loans are given by the Banks against Properties as Collateral security, for various purposes like business loans, overdraft withdrawal, Educational Loans etc. It is required to certify the Present Market Value of the Property offered for mortgage, its Forced Sale Value and the Auction Sale Value.

Debt Recovery: When the Loan taken against property is not repaid then the Banks declare it as a Non Performing Asset (NPA). In these circumstances the banks give a chance to the borrower for one-time settlement. In case if he is unable to settle then the banks auction the property and realize the loan amount. Valuation is done in order to know the value the property will fetch through Auction. The purpose is to know whether the offer of One Time Settlement by the client can be justified or whether the bank can proceed with Auction of the property.

Liquidation of Sick Units: To certify the auction value of sick units for liquidation purposes under court order, to facilitate auctioning by the official liquidator.

Insurance Value for Bank’s Assets: To certify the value of the bank building premises, under request from the manager, in order to calculate the premium to be paid for obtaining insurance for the premises of the Banks.

Fixation of Fair Rent: To fix the fair rent payable for the premises that is occupied by the bank on rental basis, for its business under request from the manager.

53

Project Approval: When a promoter launches a new residential project, they submit a report of their Project to several banks mentioning the details of their project along with the Valuer’s Certificate on the genuineness of the Rates for the specifications mentioned and get pre-approval of their projects for loans in order to facilitate the prospective buyers approaching banks for loan for purchase of the flat. The buyer need not submit any such details and the only criteria the bank has to verify is the eligibility of loan amount for the said client.

5.3 VALUATION OF BUILDING UNDER CONSTRUCTION Valuation of Building under construction is required by the banks for two purposes:  To certify the stage value of completion of construction 

To sanction loan for acquiring a building under construction

The Valuer should visit the site and the building under construction personally and scrutinize the documents as given in Table 5.1 Table 5.1 Sl. No

Items of Scrutiny

1.

Copy of the Land Document

2.

Layout Drawing

Purpose of Scrutiny  To verify the ownership of the property  To identify the property with respect to the survey nos., village etc., boundaries and dimensions specified in the document  To verify the DTP approval details, the Survey No., Layout Name, Site No., Boundaries and Dimensions, the details with that in the Approved Drawings

54

Original 3. Approved Drawing Copy of Detailed 4. Estimate Approved by Bank Rates Approved 5. by the Bank Items of work 6. completed

 To verify the Survey No., Layout Name, Site No., Boundaries and Dimensions  To verify the validity of the approval  To examine any deviations from the approved drawing  To verify whether the quantities are as per the drawings  To verify whether the execution is done with the same specifications as per the approved drawings  To certify the value of completed works  To certify the value of completed works

The Valuer should adopt the following procedure in certifying the Stage Value of Construction of the Building: 1) The above said documents and drawings are to be perused and scrutinized.

2) A detailed measurement of the works done is conducted.

3) Determine the cost of construction of the completed quantity of items of work based on the approved rates in the estimate and Prepare a report appropriately.

4) The Value of the works completed in all respects are alone must be included. For e.g. cost of the door frame, if it is fabricated and but not erected in position should not be included in certifying the cost of completion.

55

5.4 VALUATION OF READY BUILT BUILDING As in the case of Certifying the Stage Value of Construction, the detailed scrutiny of documents has to be carried out. The valuer can then Value the Building following procedure below by any one of the appropriate method, viz. 

Land & Building Method



Rent Capitalization Method



Composite Rate Method



Comparable Sale Instance Method.

5.5 VALUATION OF A MULTISTOREYED BUILDING Valuation of a Residential Building with more than one or two floors may be done by one of the following methods: 

Land & Building Method



Composite Rate Method



Rent Capitalization Method

The Valuer has to then certify the Present Value appropriately by adopting the Value arrived by one of the methods. The following Example explains the Method.

5.6 VALUATION OF PROPERTY OFFERED AS COLLATERAL SECURITY The Valuer should first determine the Present Value of the property which is given as a collateral security to financial institution for obtaining loan. Then the following Values are to be certified in his report 

Fair Market Value



Forced or Distressed Sale Value

56



Realisable Value



Auction Value

Present Value of the Property Present Value of the Property is determined by Land and Building Method, by adding the Value of the Land at the Prevailing Market Rate, Depreciated Value of the Building along with the Services and Amenities.

Fair Market Value If the property is sold by the owner in the open market when it is in his possession the value it fetches 5% less than the PMR due to certain practical difficulties, giving scope for negotiations with the buyer.

Fair Market Value = 85% - 115% of Present Value Forced or Distress Sale Value The bank disposes the property when the borrower becomes a defaulter within the shortest possible time on “as is where is” condition at a value normally less by 15 % of the Fair Market Value Forced or Distress Value = 85% of Fair Market Value Realisable Value The expenses normally involved in the disposal of the property through forced sale or auction sale will be 5% of the Forced Sale Value Realisable Value = 95% of Forced or Distress Value Auction Value Due to various influential factors the Auction Value will be 30% less than the Fair Market Value of the Property Auction Value = 70% of Fair Market Value

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5.7 EXAMPLE FOR DIFFERENT VALUES FOR BANKS Value of Plot based on Prevailing Market Rate (PMR)

=

Rs. 50, 00, 000/-

Depreciated Value of Building

=

Rs. 40, 00, 000/-

Depreciated Value of Services & Others

=

RS, 10, 00,000/-

Total Value of Property based on PMR

=

Rs. 1, 00, 00, 000/-

Value of Plot based on Guide Line Rate (GLR)

=

Rs. 30, 00, 000/-

Depreciated Value of Building

=

Rs. 40, 00, 000/-

Depreciated Value of Services & Others

=

RS, 10, 00,000/-

Total Value of Property based on GLR

=

Rs. 80, 00, 000/-

Fair Market Value The property fetches 5% less than the PMR, in the open market when it is sold by the owner himself giving scope for negotiations Less 5% of PMR

=

Rs. 5, 00, 000/-

Fair Market Value of the Property

=

Rs. 95, 00, 000/-

Forced Sale or Distress Sale Value The bank disposes the property within the shortest possible time on “as is where is� condition through auction and the property fetches normally 15 % less than the Fair Market Value Fair Market Value of the Property

=

Rs. 95, 00, 000/-

Less 15% for factors affecting forced sale

=

Rs. 14, 25, 000/-

Forced Sale Value of the Property

=

Rs. 80, 75, 000/-

58

Realizable Value Expenses in disposal through auction will be 5% of Forced Sale Value. Hence the Realizable Value will be 95% of Forced Sale Value Forced Sale Value of the Property

=

Rs. 80, 75, 000/-

Less 5% towards expenses on FSV

=

Rs. 4, 03, 750/-

Realizable Value of the Property

=

Rs. 76, 71, 250/-

Auction Value The Auction Value will be 30% less than Fair Market Value Fair Market Value of the Property

=

Rs. 95, 00, 000/-

Less 30% for factors affecting forced sale

=

Rs. 28, 50, 000/-

Auction Value of the Property

=

Rs. 66, 50, 000/-

Summary Value

% less on Present Value

Rs. 1, 00,00, 000/-

---

Fair Market Value

Rs. 95, 00, 000/-

5%

Forced Sale Value

Rs. 80, 75, 000/-

20%

Realizable Value

Rs. 76, 71, 250/-

23%

Auction Value

Rs. 66, 50, 000/-

33%

Value Certified Present Value

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5.8 STAGE VALUE CERTIFICATION FOR BANKS When any bank decides to offer loan to a borrower for the purchase of a flat, it seeks the valuation reports and all technical details regarding the apartment based on which it can sanction the loan. In order to release the proportionate share of loan to the borrower, a report on stage-wise completion of the apartment is required by the banks.

5.9 STAGE VALUE CERTIFICATION FOR BUILDINGS Approximate stage wise percentage cost of construction of a building on the total cost of construction, at different stages of work is given below.

TABLE 5.2 S.No.

Stage of work

% of Cumulative cost %

1

Excavation & concrete in foundation

4%

4%

2

Brick work up to basement

11%

15%

3%

18%

7%

25%

8%

33%

3 4 5

Basement filling & levelling course Superstructure brick work upto lintel Above lintel & B.W. upto roof level

6

Roofing

20%

53%

7

Inside & ceiling plastering

5%

58%

8

Joinery frames fixed

7%

65%

9

Flooring works

5%

70%

60

10

Outside plastering

2%

72%

11

Fixing of shutters & grills (7% + 2%)

9%

81%

3%

84%

13

Painting – Interior & Exterior

Sanitary & water supply works

7%

91%

14

Electrical works

4%

95%

15

Common services like compound wall, pavement, sump/well, etc.,

5%

100%

12

In case of flats the above percentages can be adopted for a ground floor flat. If the flat is in any upper floor, upto the casting of roof slab of previous floor, the value of concerned flat is 18%. If the superstructure is progressing, item No. 4 to 15 will be applicable.

While certifying the stage value percentage of actual works completed alone are to be certified and not based on the percentage stipulated in the builder’s agreement.

It should be remembered that for an individual building the certification of cost of construction is certified based on the percentages given in the Table 5.2. Here the land cost should not be included. But while certifying the stage value of a flat in addition to the cost of construction of the building, the value of cost of undivided share of land is to be included.

5.10 EXAMPLE ON CERTIFICATION OF STAGE VALUE OF A BUILDING UNDER CONSTRUCTION (Period June – December 2017) A building under construction consists of ground floor of plinth area 1200 sft. The building rate approved by the bank is Rs. 2,000/per sft. The total value of the building on completion is Rs. 24,00,000/-

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Case 1: The basement of the Building is completed.

Stages of work completed

=

Basement Completed

Estimated % age of work completed

=

18%

Estimated stage Value (0.18 × 24,00,000)

=

Rs. 4,32,000/-

The Certified Stage value of the building is Rs. 4.32 Lakhs Case 2: Superstructure Works completed Foundation & basement

=

18%

Brick work for super structure

=

15%

Roofing

=

20%

Joinery Frames

=

7%

Plumbing & Electrical Works

=

5%

Miscellaneous works

=

4%

Total % of Works Completed

=

69 %

Estimated Stage Value (0.69 × 24,00,000)

=

Rs. 16,56,000/-

The certified Stage Value of Building is Rs. 16.56 Lakhs Case 3: Construction fully completed – Building ready for occupation.

Unit Construction Rate

=

Rs. 2,000/-

Plinth Area of the Building

=

1200 sft

Value on completion (1200 × 2000)

=

Rs. 24,00,000/-

The certified completion cost of the Building is Rs. 24.00 Lakhs

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5.11 EXAMPLES ON STAGE VALUE CERTIFICATION OF FLAT An apartment building consists of Ground + 3 Floors. A flat is booked on the First Floor. The Plinth Area of the Flat is 1320 sft and the Undivided Share of Land is 660 sft. The Composite Rate is Rs. 6000/- per sft. The Land Rate is Rs. 5000/- per sft. The sale deed for UDS is executed and a builder’s agreement for cost of construction is signed. The Total Value of the Flat on completion is Rs.79,20,000/- (Break up: Land UDS Rs.33,00,000/- & Building Rs.46,20,000/-) The FSI is 2. The Land Component of the Composite Rate is Rs. 2,500/- the Building Component is Rs. 2,500/- and the Promoter’s Profit is assumed as 20% Case 1: The promoter has completed the basement. Sale deed for UDS has been executed. The genuineness of the composite rate is certified.

Land Cost of UDS of Plot (660 × 5000/sft)

=

Rs. 33,00,000/-

Stages of work completed

=

Basement Completed

Estimated % age of work completed

=

18%

Estimated stage Value (0.18 × 46,20,000)

=

Rs. 8,31,600/-

=

Rs. 33,00,000/-

=

Rs. 41,31,600/-

Building

Add Land Value Total

The Certified Stage value is Rs. 41.32 Lakhs Case 2: Frame works for all floors completed. For the concerned flat, brickwork completed, door and window frames fixed, internal plastering is done.

63

Foundation & basement

=

18%

Brick work for super structure

=

15%

Roofing

=

20%

Plastering (Inner Walls and Ceiling)

=

5%

Joinery Frames

=

7%

Electrical works

=

2%

Miscellaneous works

=

4%

=

71 %

Estimated Stage Value (0.71 Ă— 46,20,000)

=

Rs. 32,80,200/-

Cost of UDS of Plot (660 Ă— 5000/sft)

=

Rs. 33,00,000/-

=

Rs. 65,80,200/-

Total % of Works Completed

Total Value of Land + Building

The certified Stage Value is Rs. 65,80,200/Case 3: The construction is fully completed in all respects. Water supply connection is given. Drainage connection is given. Power Supply is available. Lift is operating. External services are available. Flat is ready for occupation.

Percentage of Works Completed

=

100%

Unit Composite Rate

=

Rs. 6,000/-

Super Built-up area of flat

=

1320 sft

Value on completion

=

Rs. 79,20,000/-

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5.12

VALUATION UNDER SARFAESI ACT (Securitization And Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002)

Due to the mounting levels of Non-Performing Assets (NPA) which means that the Assets pledged with the banks have become default and the loan repayment is not realized, the Government introduced this Act. The objective of the Act is to improve the recovery process by vesting powers with the banks to take possession of the securities and sell them in case the borrowers fail to repay the loan.

The Act provides the following: Before effecting the Sale of the immovable property the authorized officer shall obtain valuation report from an approved valuer and in consultation with the secured creditor fix the reserve price of the property and sell the whole or part of the property by: 

Obtaining quotations from persons dealing with similar secured assets or otherwise interested in buying such assets



Inviting tenders from the public



Holding public auction.

65

Chapter 6

VALUATION FOR FIXATION OF FAIR RENT 6.1 INTRODUCTION Rental Market is a part of Real Estate Market. Buildings are taken on Lease or Rent for various purposes – residential, commercial or industrial. The Rent is fixed based on the prevailing rental value in a particular locality. If there is a dispute between the landlord and the tenant in the fixing of the rent on the belief that rent is exorbitant, it is required to fix a Fair Rent for the occupied Premises.

The Tamil Nadu Buildings Lease and Rent Control Act 1960, subsequently amended in 1973 and in 1980 were enacted to settle such issues. Fair Rent for a Building which is let out is determined based on the guidelines laid down by The Act. The rent is based on the Present Value of the Building along with Services based on PWD Plinth Area Rates and the Value of the Land Appurtenant to the Building based on the Guide Line Rate along with the amenities assessed as per the act.

6.2 RENT – DEFINITIONS Rent - The payment made by the tenant to the landlord for the use of the property for a fixed period is called as rent.

Gross Rent - The total amount received periodically (per month or per annum) from the tenant including all the outgoings or expenses made by the landlord is called as gross rent.

Standard Rent - The maximum rent legally chargeable by the Landlord is called as Standard Rent. The fundamental concept is that the investor expects a fair and reasonable return on his investment while recovering the outgoings he is likely to make.

66

Fair Rent – The Rent fixed by the Rent Controller under the provisions of the Rent Control Act as applicable is called as Fair Rent.

6.3 VALUATION FOR FIXATION OF FAIR RENT FOR A BUILDING Section 4 of the Tamil Nadu Buildings Lease and Rent Control Act 1960, subsequently amended in 1973 and in 1980 has laid out the procedure for Fixing the Fair Rent of any Building.

As per Section 4 of the act the sub-sections 2 and 3: 

The fair rent for any Residential Building shall be NINE PERCENT gross return per annum on the total cost of such building



The fair rent for any Non-residential Building shall be TWELVE PERCENT gross return per annum on the total cost of such building

The Sub-section 4 says: The total cost referred above shall consist of the market value of the site in which the building is constructed, the cost of construction of the building and the cost of provision of anyone or more of the amenities specified in Schedule I of the Act as on the date of application for fixation of fair rent.

While calculating the Market Value of the Site, ONLY that portion of the site on which the building is constructed and a portion of upto FIFTY PERCENT thereof, of the vacant land if any, appurtenant to such building has to be considered and the excess land if any is treated as amenity.

Further as per Subsection (4), cost of the provision of the Amenities as specified in Schedule I shall not exceed FIFTEEN PERCENT of the Cost of Site and the Building in case of Residential Building and TWENTY FIVE PERCENT in case of Non-residential Building.

67

Sub-section 5 of the Act says: The cost of construction of the building along with services is determined by the rates prescribed for the purpose of estimation by the PWD for the area concerned. As specified in Schedule II, a percentage of the cost of the building including services is deducted towards depreciation and the same is calculated by Linear Method.

6.4 SCHEDULE I – AMENITIES The following items are treated as amenities in a building in addition to the excess site area appurtenant to the building and the depreciated cost of these, whichever is available may be added to the Cost of Building plus Services. 

Air Conditioner/Electrical Heater/Lift/ Sun-breakers



Garden/Playground/Tennis/Badminton Courts



Amenity referred in first proviso to subsection (4) of Section 4.

6.5 RATES OF DEPRECIATION The depreciation shall be calculated by linear method using the expression, )

(

P – Final Depreciated Value of the Building; A – Total Cost of Construction of the Building; r – Rate of Depreciation per annum; n – Age of the Building in years Normally ‘r’ may be adopted as 1% per annum for a Framed Structure and 1.5% per annum for a Load Bearing Structure.

The amount of depreciation shall not be less than 10% of the Cost of the Construction of the Building.

68

6.6 EXAMPLE – Property whose Rent is to be Fixed as on 10.06.2017 Extent of the Land

-

260 sq.m

Land Rate

-

10820/- per sq.m

Structure

-

Load Bearing 30 yrs old

Plinth Area (GF only)

-

130 sq.m

Year of Construction

-

1987

Fair Rent fixation as on

-

10.06.2017

Depreciation Rate

-

1%

Purpose

-

Residential

Assessed Value of Internal Services

-

Rs. 2,00,000/-

Assessed Value of External Services

-

RS.1,9,000/-

-

Rs. 1,00,000/-

-

Rs.16500/- per sq.m

Internal Services (PWD Rates)

-

Rs. 1,680/- per sq.m

External Services(PWD Rates)

-

Rs. 1,320/- per sq.m

Assessed Value of Amenities (Schedule I) Plinth Area Rate of Construction (PWD - 2017-18)

A. CAPITAL COST OF THE PROPERTY Total Extent of the Land

=

260 sq.m

Plinth Area of Ground Floor

=

130 sq.m

Land Appurtenant to Building (130 + 0.5 × 130)

=

195 sq.m

Guideline Rate of Land/sq.m

=

Rs. 10820/-

Value of Land appurtenant to Building

=

Rs. 21,09,900/-

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Plinth Area of the Building

=

130 sq.m

Replacement Rate of the Building per sq.m

=

Rs.16,500/-

Replacement Value of the Building

=

Rs. 21,45,000/-

Present Value Factor @ 1% p.a. for n = 30 yrs

=

0.74

Depreciated Value of Building

=

Rs. 15,87,300/-

Services

Based on PAR

Actuals

Least

Internal Services

Rs.2,18,400 /-

Rs.2,00,000/-

Rs.2,00,000/-

External Services

Rs. 1,71,600/-

Rs.1,90,000/-

Rs. 1,71,600/-

=

Rs. 3,71,600/-

Total Value of Services

Total Value of Building with Services

=

Rs. 19,58,900/-

=

Rs. 1,00,000/-

Value of Excess Land @ Rs.10820/- per sq.m

=

Rs. 7,03,300/-

Total Value of Amenities (as per Schedule I)

=

Rs. 8,03,300/-

(b) 15% of (Value of Appurtenant Land + Present Value of Building with Services)

=

Rs. 5,98,620/-

Value of Amenities (Least of (a) & (b)

=

Rs. 5,98,620/-

Value of Amenities (a) Assessed Value of Amenities

70

Abstract Value of Appurtenant Land

=

Rs. 21,09,900/-

Value of Building with Services

=

Rs. 19,58,900/-

Value of Amenities

=

Rs. 5,98,620/-

Total Capital Cost

=

Rs. 46,67,420/-

Total Capital Cost

=

Rs. 46,67,420/-

Rate of Return per annum (Residential)

=

9%

Annual Rent(0.09 × 46,67,420 = 4,20,067/-)

=

Rs. 4,20,000/-

Monthly Rent (4,13,048 ÷ 12)

=

Rs. 35,000/-

B. FAIR RENT

Fair Rent as per The Act is Say Rs. 35,000/But since it is a 30 year old, building the above rent may not be feasible.

Hence the Rate of Return on Investment is assumed 2.5% Total Capital Cost

=

Rs. 46,67,420/-

Rate of Return per annum (Residential)

=

2.5%

Annual Rent(0.045 × 46,67,420 = 2,10,033/-)

=

Rs. 2,10,000/-

Monthly Rent (2,10,000 ÷ 12 = 11,667/-) say

=

Rs. 17,500/-

Hence the Building may be let out at a Fair Monthly Rent of Rs. 17,500/-

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ANNEXURE – I FORMAT FOR VALUATION OF IMMOVABLE PROPERTY (CBDT) FORM O-1 [See rule 8D] Report of valuation of Immovable property (Other than agricultural lands, plantation, forests, mines and quarries) Part I – Questionnaire All question to be answered by the registered valuer. If any particular question does not apply to the property under valuation, he may indicate so. If the space attached on separate sheets Name of registered valuer Registration No. General: Purpose for which valuation is made Date as on which valuation is made Name of the owner/owners If the property is under joint ownership/coowner-ship, share of each such owner. Are the shares undivided?

Brief description of the property Location, Street, Ward No. Survey/Plot No. of land Is the property situated in residential / commercial/ mixed area/industrial area?

Classification of locality – high class/middle class/poor class

72

Proximity to civic amenities, like schools, hospitals, offices, markets, cinemas, etc.

Means and proximity to surface communication by which the locality is served Land: Area of land supported by documentary proof, shape, dimensions and physical features Roads, streets or lanes on which the land is abutting Is it leasehold, the name of lessor/lessee, nature of lease, dates of commencement and termination of lease and terms of renewal of lease: Initial premium Ground rent payable per annum Unearned increase payable to the lessor in the event of sale or transfer Is there any restrictive covenant in regard to use of land? If so, attach a copy of the covenant Are there any agreements of easements? If so, attach copies Does the land fall in an area included in any Town Planning Scheme or any Development Plan of Government or any statutory body? If so, give particulars Has any contribution been made towards development or is any contribution been made towards development or is any demand for such contribution still outstanding?

Has the whole or part of the land been notified for acquisition by Government or any statutory body? Give date of the notification Improvements Attach plans and elevations of all structures standing on the land and a lay-out plan

73

Furnish technical details of the building on a separate sheet [The Annexure to this Form may be used] Is the building owneroccupied/tenanted/both?

If partly owner-occupied, specify portion and extent of area under owner-occupation What is the Floor Space Index permissible and percentage actually utilized?

Rents: Names of tenants/lessees, etc.

Portions in their occupation Monthly or annual rent/compensation/licence fee, etc. Paid by each Gross amount received for the whole property Are any of the occupants related to, or close business associates of, the owner?

Is separate amount being recovered for the use of fixtures like fans, geysers, refrigerators, cooking ranges, built in wardrobes, etc., or for service charges? If so, give details Give details of water and electricity charges, if any, to be borne by the owner Has the tenant to bear the whole or part of the cost of repairs and maintenance? Give particulars If a lift is installed, who is to bear the cost of maintenance and operation – owner or tenant?

If a pump is installed, who has to bear the cost of maintenance and operation -----owner or tenant?

Who has to bear the cost of electricity charges for lighting of common space like entrance, stairs, etc.

What is the amount of property tax? Who is the bear it? Give details with documentary proof

74

Is the building insured? If so, give the policy No. amount for which it is insured and the annual premium Is any dispute between landlord and tenant regarding rent pending in a court of law?

Has any standard rent been fixed for the premises under any law relating to the control of rent?

Sales: Give instances of sales of immovable property in the locality on a separted sheet, indicating the name and address of the property, registration No., sale price and area of land sold Land rate adopted in this valuation If sale instances are not available or not relied upon, the basis of arriving at the land rate Year of commencement of construction and year of completion What was the method of construction ---by contract/ by employing labour directly/both?

For items of work done on contract, produce copies of agreements For items of work done by engaging labour directly, give basic rates of materials and labour supported by documentary proof Part II – Valuation Extent of Plot Ground floor Age of Floors First floor

75

Life of the Building assumed Prevailing unit rate of plot Unit rate of construction assumed Amenities provided in the building Services available

I. Value of Plot Extent of plot Prevailing rate of land Present Value of Land

Ground Floor

II. Value of Building Plinth area of the building Replacement rate of construction Replacement value (2) x (3) Depreciation @ 10% salvage value Present value Total Value of Building

76

First Floor

III. Value of Amenities Ward robes, Kitchen Cupboards etc.

Architectural works, False Ceiling etc.

Total Value of Amenities

IV. Value of Services Water supply arrangements Drainage Arrangements Compound wall & Gate Electrical arrangements Total Value of Services Abstract I

Land

II

Building

III

Amenities

IV

Services

Total Present Value of Property by Land & Building Method: _____________________________

77

Part III – Certificate I hereby declare that 1.

The information furnished in part I is true and correct to the best of my knowledge and belief

2.

I have no direct or indirect interest in the property valued;

3.

I have personally inspected the property on

Place:

Signature of Valuer

Date:

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ANNEXURE TO FORM O-1 No. of floors and height of each floor Plinth area floor-wise(As per IS : 3861-1966) Ground floor 1st floor 2nd floor, etc.

Year of construction Estimated future life Type of construction (load bearing walls/ RCC frame) Type of foundations Walls Basement and plinth Ground floor Superstructure above ground floor Partitions Doors and windows (Floor-wise) : Ground floor 1st floor 2nd floor, etc.

Flooring (Floor-wise) : Ground floor 1st floor 2nd floor, etc.

Finishing (Floor-wise) : Ground floor 1st floor 2nd floor, etc.

Roofing and terracing Special architectural if any

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Internal wiring: surface or Conduit Class of fittings : Superior/ordinary/poor Sanitary installations : No. of water closets No. of lavatory basins No. of urinals No. of sinks No of bath tubs No. of bidets No. of geysers Class of fittings: Superior coloured/white ordinary Compound wall : Height and length Type of construction No. of lifts and capacity Underground Sump(capacity and type of construction) Overhead tank : Where located Capacity Type of construction Pumps --- No. and their horse Power Roads and paving within the compund, approximate areaand type of paving Sewage. If septic tanks provided,No. and capacity

Signature of Registered Valuer

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