Valuation:Crossroads or cul de sac?

Charles Cowap

RICS Wales Rural Conference Llandrindod Wells

December 2014

Valuation is becoming ….

• Broader

• More Complex

• More Challenging

• Riskier

Down in the woods today …

Inheritance tax

Is Woodland:

1. A Business Asset?

2. Agricultural Property?

3. None of the above?

Woodland as a Business Asset

• Business Property Relief– Not investment business

(Balfour)

• How to demonstrate Business Nature?

Woodland as agricultural property

• Agricultural Property Relief– Nature of ‘agricultural

property’– ‘with’ and ‘ancillary’

• ‘Agricultural Value’

None of the Above

• Woodlands Relief– Prairie Value – the custom

and practice

– What the IHTA 1984 (s125) says

An example10 acre woodland, broadleaf, vacant possession, location accessible, upmarket and popular

Various scenarios

Values

• Freehold market value £70,000

• Agricultural value £40,000

• Prairie value £15,000

• Value of trees and underwood £20,000

BPR

• Claim at 100% of MV

• Nil IHT

APR• Claim at 100% of Agricultural Value

(£40,000)

• BPR on balance (£30,000)

• Nil IHT

• BPR not available? IHT on £30,000, ie £12,000

Woodlands Relief (1)

• Value to Prairie Value

• IHT due on £15,000 @ 40% = £6,000

• Further IHT on subsequent sale of timber (if ever)

Woodlands Relief (2)Literal interpretation

• Market Value – Timber and underwood value

• £70,000 - £20,000 = £50,000

• IHT on £50,000 @ 40% = £20,000

No claim for relief

• Market Value at 40% IHT

• £28,000

One woodFive different IHT scenarios

• No relief: £28,000

• Literal Woodland Relief: £20,000

• Prairie Value Woodland Relief: £6,000

• APR but no BPR: £12,000

• Full BPR and/or APR: Nil

The striking impact of Amenity Value

Prairie Value

Timber and Underwood

The rest: Amenity Value? Where does this go?

The moral of this story

MAKE IT AND KEEP IT

COMMERCIAL AND be able to

prove it!

Other valuation challenges

• Market Value

• Fair Value

• Worth

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. (IFRS 13)

The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. (IVS 2013). The value of an asset to the owner or

a prospective owner for individual investment or operational objectives.

Fair Value

Investment Value

Worth

Market Value

Bequest Value

Existence Value

Renewable Investment Example

10 ha site for 7 wind turbines on 28 year lease, 3 years expired

Turbines: 7 x 2.3 MW x 27% capacity. Output (Elec + ROC) = £83/MWh

Basic Rent: £7,000 + RPI for 14 years; £12,000 + RPI thereafter

Turnover Rent: 5% of gross income for 14 years; 9% thereafter

Lease is taken from a larger site , rough grazing, of 100 ha in total

Let to a large well established generator

DCF Methods

► In practice widely undertaken for larger developments

► Market Value??

► Appraisal of worth to investor

► Would the market make same assumptions?

DCF: Discounting Future Cash Flows

Total NPV +

WorthwhileTotal NPV

–Not

worthwhile

DCF Appraisal

► Remaining 25 years► Both rents adjusted for 3.5%

inflation pa► Opening Valuation from

Investment valuation► PV of £1 at 15% gives NPV

of -£172,000► IRR is 14% including

Inflation, ie 10.5% net of inflation

In view of the DCF Valuation we have just looked at, does the previous investment valuation of £1.6 million

for the freehold interest look:

Question

1) Too high

2) About right

3) Too low

BACK TO BASICS

• Purpose of Valuation• Scope of investigations to be undertaken• Assumptions and Special Assumptions

• Preliminary Information

• Capacity and assumed duration• After uses, continuation, redevelopment• Reporting Requirements

Reporting

► Rationale for chosen method(s)► Detailed consideration of instructions, assumptions, sources and reliability,

extent of independent verification► Sensitivity► Commentary on Risk?

Risk

► Operator/Covenant Risk► Market Risk► Technology Risk

Shropshire Star and Daily Mail

Some Common Issues

► Operator Risk

► Complex lease or agreement terms

► Performance data

► Development Proposals for new Sites

► Hope Value

‘Hope’ Value

????

Time

Some Common Issues

► Reporting Requirements

► Detailed instructions

► Market evidence

Cases

Ham v Ham [2013] EWCA Civ 1301• Farming partnership

– Young John leaves family partnership– Mum and dad elect to buy out share

• Calculation of ‘net value’?– John had introduced no capital– Land shown at book value– Book value or market value?

• Market value– Need for clarity in partnership agreements

Freemont (Denbigh) Ltd v Knight Frank LLP [2014] EWHC 3347 (Ch)

• A former asylum• A valuation for secured lending• Was Knight Frank liable when P relied on it to

judge an offer on the property?• NO

– Exclusively for secured lending purposes

Valuation is becoming ….

• Broader

• More Complex

• More Challenging

• Riskier

Contact DetailsTranslating new knowledge for rural professional

practice

cdcowap@gmail.com 07947 706505Twitter: @charlescowapBlog: http://charlescowap.wordpress.com/Slideshare: http://www.slideshare.net/cdcowap