Valuation:Crossroads or cul de sac?

Charles CowapRICS 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:A Business Asset?

Agricultural Property?

None of the above?

Woodland as a Business AssetBusiness Property ReliefNot investment business (Balfour)

How to demonstrate Business Nature?

Woodland as agricultural propertyAgricultural Property ReliefNature of agricultural propertywith and ancillary

Agricultural Value

None of the AboveWoodlands ReliefPrairie 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

ValuesFreehold market value 70,000Agricultural value 40,000Prairie value 15,000Value of trees and underwood 20,000

BPRClaim at 100% of MV

Nil IHT

APRClaim 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 ValueIHT due on 15,000 @ 40% = 6,000

Further IHT on subsequent sale of timber (if ever)

Woodlands Relief (2)Literal interpretationMarket Value Timber and underwood value70,000 - 20,000 = 50,000IHT on 50,000 @ 40% = 20,000

No claim for reliefMarket Value at 40% IHT

28,000

One woodFive different IHT scenariosNo relief: 28,000Literal Woodland Relief: 20,000Prairie Value Woodland Relief: 6,000APR but no BPR: 12,000Full BPR and/or APR: Nil

The striking impact of Amenity ValuePrairie ValueTimber and UnderwoodThe rest: Amenity Value?Where does this go?

The moral of this storyMAKE IT AND KEEP IT COMMERCIALAND 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 arms 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 ValueInvestment ValueWorthMarket ValueBequest ValueExistence Value

Renewable Investment Example10 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 MethodsIn practice widely undertaken for larger developments

Market Value??

Appraisal of worth to investor

Would the market make same assumptions?

DCF: Discounting Future Cash FlowsTotal NPV + WorthwhileTotal NPV Not worthwhile

DCF AppraisalRemaining 25 yearsBoth rents adjusted for 3.5% inflation paOpening Valuation from Investment valuationPV of 1 at 15% gives NPV of -172,000IRR 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:

QuestionToo high

About right

Too low

BACK TO BASICSPurpose of ValuationScope of investigations to be undertakenAssumptions and Special AssumptionsPreliminary InformationCapacity and assumed durationAfter uses, continuation, redevelopmentReporting Requirements

ReportingRationale for chosen method(s)Detailed consideration of instructions, assumptions, sources and reliability, extent of independent verificationSensitivityCommentary on Risk?

RiskOperator/Covenant RiskMarket RiskTechnology RiskShropshire Star and Daily Mail

Some Common IssuesOperator Risk

Complex lease or agreement terms

Performance data

Development Proposals for new Sites

Hope Value

Hope Value??Time

Some Common IssuesReporting Requirements

Detailed instructions

Market evidence

Cases

Ham v Ham [2013] EWCA Civ 1301Farming partnershipYoung John leaves family partnershipMum and dad elect to buy out shareCalculation of net value?John had introduced no capitalLand shown at book valueBook value or market value?Market valueNeed for clarity in partnership agreements

Freemont (Denbigh) Ltd v Knight Frank LLP [2014] EWHC 3347 (Ch)A former asylumA valuation for secured lendingWas 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