Valuation Notes 1

2014
REAL ESTATE VALUATION
Real Estate Valuation Notes 2014
Contents
1. Property3
2. Land Ownership.....5
3. Estate..8
4. Characteristics of Real Estate....12
5. Valuation14
6. Market Approach...17
7. Cost Approach..23
8. Income Approach..26
9. Leasehold Interest.28
10.Agricultural Land.32
1. PROPERTY
1.1 Introduction
Land and buildings together are termed as Real Estate. Real Estate plus bundle of legal rights are
termed as Real Property.
The dictionary meaning of Property is things owned possession.
All useful things owned by man are classified as wealth. Property, on the other hand, is an intangible
concept, being the right to own or possess wealth and to put it to legal uses if one wishes. Property is
thus a legal right that expresses the relationship between owners and their possessions.
The dictionary meaning of Asset is anything owned by a person, company etc. that has money
value and that may be sold to pay debts.
Asset is thus an all encompassing term and includes land and buildings, agricultural land, orchards.
plantations, tanks, fishery, wells, mineral property, plant and machinery, business including intangible
asset, stocks, shares, debentures, intellectual property, gems and jewelery, currency antiquities, arts
and artifacts.
1.2 Property
It is essential that the meaning of the word property be understood clearly before embarking on any
assignment in its valuation.
Definition
Continuous, everlasting use, control and disposition exercisable by owner over thing or object.
Property signifies sum total of all rights and powers incident to ownership.
1.3 Types of Property

1) Corporeal or Tangible
2) Incorporeal or Intangible
TangibleOwnership in material things which can be physically touched or felt, e.g. land, furniture,
jewelery etc.
IntangibleOwnership of non-material things which cannot be possessed in physical sense e.g.
copyrights, leases, goodwill, easement rights etc.
Customary Classification
1) Movable.
2) Immovable.
Movablefurniture, plant and machinery, stocks, shares, debentures, intellectual property, gems and
jewellary, currency, arts and artifacts etc.
Immovableland and buildings etc.
1.4 Possession
Word property implies belonging or possession.

Concept of possession is an abstract notion.
It is not purely legal concept.
Possession is a factual concept.
It denotes both physical control as well as having physical custody of the thing.
Person having possession also has power to exclude all others from interfering with his
possession.
1.5 Immovable Property

Definition
A. General Clauses Act -- Section 3(26)
Immovable property shall include land, benefits to arise out of land and things attached to the earth
or permanently fastened to anything attached to the earth.
Attached to earth means1. Rooted in earth as trees.
2. Imbedded in earth as walls, building.
3. Attached to embedded for permanent beneficial enjoyment.
B. Transfer of Property Act
No positive definition
Act states that Immovable property does not include standing timber growing crops and grass.
C. Judicial decisions
Immovability is incapacity of a thing of suffering alteration in relation to place, without injury or
damaging its surroundings
1.6 Criteria
The line of distinction between movable and immovable is thin.

The intention of parties key
The mode of annexationimportant
If plant or fixture cannot be removed without great damageintended to be annexed in
perpetuity.
2. LAND OWNERSHIP
2.1 Introduction
Land is original and basic factor of production.
Land as nature provided consists of the earths crust.
Legally, possession of part of earths crust includes rights to control minerals, gas and oil below the
earths surface as well as air space above the ground.
Shapeinverted pyramid.
2.2 Realty
Land originally provided by nature no longer exists anywhere on earth.
All land directly (by construction if improvements on site) or indirectly (by improvements related to
site) modified by man.
Land together with improvements, is designated as realty
Realty includes land and buildings, as also anything permanently affixed to land i.e. fixtures.
Ownership of realty classified as property.
2.3 Two types of Property

1. Personal property ownership is for a limited term of years.
2. Real property ownership of realty extends for a lifetime.
Lessee possesses personal property in realty, where as lessor owns real property.
Real property consists of land and objects permanently attached to ground.
2.4 Ownership
Ownership is conglomeration of legal rights.
Ownership denotes the legal relation between a person and an object.
It is the sum total of rights a person has over an object .
2.5 Rights:
1) The right to possess an object (though he may not have the physical possession)
2) The right to use and enjoy the thing owned
3) The right to consume, destroy or alienates the things owned.
These are known as the liberties of ownership and power.

4) The right to enjoy a property indefinitely.
Thus house property remains under the ownership of the landlord until sold.
5) The right to retain residual right over a property.
When property let on lease, owner retains right of reversion i.e. to receive back the
expiry of lease.
property on
2.6 Types of Ownerships

Ownership of a property need not be always exclusive. It could be shared one. Property may have
several owners.
Ownership is bundle of rights in a property. The bundle of rights could be of diverse nature
depending on the property in question and must be clearly defined.
Sole ownership
Real property taken in the name of a single juristic person
Co-ownership
When two or more persons own a real property, the right of each member to the property is the right
of co-ownership
Each member is co-owner. The property is not divided amongst members.
Each member owner of property, but the right to own entire property becomes complete only when
all the co-owners come together. Only then they get the right to dispose the property.
Duplicate ownership
Duplicate ownership allows separation of the powers of management and the right of enjoyment.
Example is trust property.
Trust property may be owned by two persons at the same time. One is under obligation to use
property for the benefit of the other. Former is trustee and his ownership is trust-ownership.
Latter is known as beneficiary and his has the beneficial ownership
Vested and contingent ownership
Ownership is vested when the owners title is perfect and clear.
It is contingent when the owners title is imperfect, but would become perfect on fulfillment of
certain conditions.
Example
B transfers a property to A by way of gift.
As ownership becomes vested as soon as b transfers it.

If B transfers it to A say only after his death, As ownership is contingent one, and becomes
vested on Bs death.
Concurrent ownership
Co-operatives and condominiums are a form of concurrent ownership in multi-unit building complexes
in urban areas.
This is vertical sub-division as well as horizontal, as against only horizontal, where the property is in
the form of exclusive land and building.
This type is extended to commercial uses in addition to residential.
Co-operative societies
Entire land and building comprising the common property belongs to society, which administers the
areas of common uses and facilities.
The individual flat/ shop owner as a member of society, enjoys title to and exclusive right over his
own premises together with proportionate share in areas of common use and facilities.
Society has right of pre-emption on sale.
Condominiums
Building complexes with concurrent ownership by a group of flat owners not falling below a minimum
number.
Apartment ownership act enables such construction.
Flat holders association administers areas of common uses and facilities.
No constraint of pre-emption on transfer.
3. ESTATE
3.1 Introduction
If term estate used to designate an interest owned, meaning of real estate and real property is
same.
3.2 The kind of estate

Measures the rights and interests an owner has in real property in terms of:
Duration time
Geographical extent breadth, depth and height
Degree sole or co-ownership
Character leasehold, easements
Term Estate has broader meaning than term Title.
3.3 Types of Estates

Freehold or Fee Simple
Highest form of right with regard to real estate.
Owner can:
1.
2.
3.
4.
5.
Use property in any manner

Abuse property so long as it does not result in a nuisance.
Enjoy property by exclusive possession
Derive benefits, income or profit from property.
Dispose the property by sale, gift or will.
3.4 Government Limitations

Theoretically freeholders right is absolute.
However, even the freeholder is restricted from absolute enjoyment.
Government limitations on ownership imposed for welfare of all citizen
1.
2.
3.
4.
Police power - restrict use of property

Eminent domain compulsory acquisition
Right of taxation
Escheat assume ownership of unowned property
3.5 Police Power

Sovereign power inherent in the government, delegated to local authority/ governing agency
To restrict the use, occupation and rights in property to protect wellbeing welfare, morals or safety
-- of citizen.

Without any compensation.
Resource taken for city planning, zoning and building control.
Regulations of building, fire and health departmentlimitations upon use of land.
3.6 Eminent Domain

Sovereign power inherent in the government
To take any land, by due process of law.
Two requirements to be met:
1) Use must be public
2) Just compensation must be paid.
Used to obtain land for streets, parks, public buildings, public/social purpos
3.7 Right of Taxation

Taxes are levied by government for its support and for maintenance of its branches that protect and
benefit citizen.
It is only fair that citizen pay for protection and benefits received.
Land, due to its permanence and accessibility is convenient article to tax.
It is, therefore, basis for local taxation. Taxes are a cost of land use and operations.
3.8 Escheat
Reversion or escheat of land to the state.
When owner dies, leaving no heirs or will to dispose the land.
Logical solution since land cannot become unowned.
3.9 Other Limitations

Private or contractual limitations on ownership
Usually contained in deeds easements and leases or mortgage instruments.
Freeholder is vested with and has control over bundle of rights. He may grant lease, create
mortgage, induct license, impose charge & so on.
3.10 Lesser Estates in Property

Freeholders right superior to all other rights.
Estates in land of lesser quantity than whole ownership.

Estate that belongs to a person only under certain terms and conditions or revert in case of certain
events, are less than absolute.
3.11 Lease or Estate for Years

Lease: Freehold estate given by freeholder for use for a fixed duration under certain terms and
conditions.
Lessor: freeholder or landlord.
Lessee: person accepting lease.
Rent: lessee pays to lessor rent or compensation for use of land
Lease Document: written promise / commitment to perform certain duties e.g. pay taxes, maintain
property and return in good condition on termination of lease.
3.12 Sub-Lease
Lessee may transfer his interest for a shorter period than the remaining period of lease, with approval
of lessor and in conformity with the lease terms .
Sub lessee: the transferee
Head lessee: the main lessee.
Head lessee collects the profit rent.
3.13 Mortgage
Another property interest is created when freeholder mortgages his property i.e. pledges it as security
against loan.
Mortgagor: Owner of property
Mortgagee: Lender of loan
Failure to return principal or interest authorizes mortgagee to sell the mortgaged property to
liquidate the debt.
Equity: Mortgagors property rights.
The mortgagor and the mortgagee have become the diverse owners in a single property.
Their interests are complementary
3.14 Life Estate
10

Duration of interest of person is limited to his lifetime.
Person / owner of life interest, provided with use of property during his lifetime, after which it
terminates.
After termination, the estate may revert to freeholder -- or as desired by him -- to another person
called the Remainder.
Since property is conveyed to a person for the term of his life:
1.
2.
3.
4.
Life estate holder has control over property only till death.
He, therefore, cannot make any contract beyond the term of his life.
He must also use the land reasonably so as to leave it intact for reversioner
.His responsibility for payment of taxes should not exceed the benefit he derives from the
land.
As per the provisions of section 6(d) of the Transfer of Property Act, an interest in the property
restricted in its enjoyment to the life estate holder personally cannot be transferred by him.
3.15 Easements
Easements are means by which one party may gain the use of someone elses land without obtaining
the title.
Owner may use adjacent land owned by his neighbour on a temporary or permanent basis
Definition:
A right granted by a landowner to someone for the nonexclusive use of a portion of the land for a
specific purpose.
Easement rights are freely bought or sold in the open market.
Types of Easements:
1. Right of passage or access through private alleyways
2. Right of use of airspace over a property
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4. CHARACTERISTICS OF REAL ESTATE

4.1 Special Characteristics of Landed Property
1) It is more durable than other commodities.
2) Landed property is heterogeneous.
3) The price of landed property tends to be high relative to current income.
4) Landed property is often purchased as an investment.
5) The supply & demand & also value of property is usually affected by legal factors.
6) Dealing with landed property requires lengthy and complicated professional advice.
7) Landed property is immovable.
4.2 Factors Affecting the Demand for Landed Property

1] Increase or decrease in population.
2] Changes in the general standard of living.
3] Change in taste and fashion.
4] Change in type of society.
5] Change in technology.
6] Movements of population.
7] Improvements in methods of transport and communications.
4.3 Factors Affecting Supply of Landed Property

1] Changes in taste and fashion.
2] Changes in Govt. Policy & Legislation.
3] Changes in prices of building material.
4] Changes in technology.
5] Changes in the economic situation.
6] Institutional factor Institutional Planning.
4.4 Real Estate Market

Property market differs from market of other commodities.
Perfect competition is hard to obtain.
Special Characteristics of Property Market
i.
Heterogeneity and lack of standardization.
ii.
Total supply of land is fixed.
iii.
Inelasticity of supply.
iv.
Effect of various legislations.
12

v.
No central market.
vi.
Imperfect and inadequate information.
Imperfect and Inadequate Information

Lack of correct and adequate information about transactions contributes to imperfect competition.
Such inadequacy is mainly due to
1. Method of conducting transactions conducted privately.
2. Various rights and interests are transacted which makes comparison difficult.
3. Non-availability of adequate and reliable information information available from authentic sources /
offices, authorities needs to be supplemented by site enquiries.
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5. VALUATION OF REAL ESTATE

5.1 Cost and Price
COST Expenditure on inputs.
PRICE Expenditure on input + Profit.
5.2 Value
- Result of Interaction of Demand and supply.
-
Value is not intrinsic in Object. People create Value.
Individual / Subjective Value.
Market / Objective Value.
5.3 Characteristics of Value

Fundamental principle of economics is that, for an object to have value. It must satisfy following basic
conditions
Utility The power to render a service or fill a need.
Scarcity In relation to supply and demand and possible alternative uses.
Demand Need with monetary power to fill demand.
Transferability Rights of possession and control of ownership of property.
5.4 Valuation
It is an art or science of estimating the value for a specific purpose of a particular interest in property at
a particular moment in time taking into account all features of the property and considering all factors of
the market.
Valuation is always for highest, best and most profitable legal use.
5.5 Purpose of Valuation

I) Purchase for investment or for occupation.
ii) Sale / Transfer of the property.
iii) Mortgage and other security.
iv) Rent Fixation.
v) Land Acquisition.
vi) Betterment Charges.
vii) Auction bids.
viii) Probate.
ix) Speculation.
x) Taxation.
xi) Insurance.
xii) Partition.
xiii) Court Fees & Stamp Duty Ready Reckoner.
xiv) Ratable value.
xv) Arbitration.
XVI) Leases interest/lessees interest.
Xvii) Merger and acquisition of industrial units. Revaluation of assets for market capitalization.
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5.6 Interests in Landed Property
1] Freehold interest.
2] Leasehold interest.
3] Sublease hold interest.
4] Life interest.
6] Rights of occupancy.
7] Right of way.
8] Right of light and ventilation.
Particular Moment in Time
The valuation of a property is related to the date of valuation and is different at different moments in
time.
5.7 Features of the Property

Location
Situation
User Residential/Industrial/Commercial
Size Small/Gross
Shape Regular/Irregular
F.S.I. permissible
Road Frontage Small / Large, Important Road / Local Road
5.8 Factors of Market

Impact of Political, Legal, Social, Urban and Economic forces influence the valuation of the property.
5.9 Types Of Landed Property

1] Residential.
a) Houses of various types.
b) Flats and Tenements.
2] Industrial.
i) Factories.
ii) Warehouses and Godowns.
3] Commercial.
a) Shops.
b) Offices.
4] Agricultural.
5.10 Definition of Market Value

The market value of a particular interest in landed property may be defined as the amount money
offered by a willing purchaser to a willing seller of that interest, in the open market, where there is
competition, and both parties are being actuated by economic considerations, and where there is no
undue pressure on either of them.
15

5.11 Types of Values
Property has two types of values:
1. Capital value
2. Rental value
5.12 Types Of Valuations

1] Statutory valuations valuations governed by legislation.
2] Non-statutory valuations valuations, which stem from natural events.
5.13 Approaches to Valuation

Three approaches to valuation.
1 Market Approach
2 Cost Approach
3 Income Approach
Not exclusive of each other.
All three approaches involve comparisons of various legal, physical, social and economic factors.
5.14 Methods of Valuation

1] The Direct Comparison or Comparative Method.
2] The Contractors Method.
3] The Profits or Accounts Method.
4] The Residual Method.
5] The Investment Method.
16
6. MARKET APPROACH
6.1 Comparative Method
- Data collection (similar properties, recent transactions)
Find out consideration actually paid for other similar properties in the same locality and three to five
years prior to the date of valuation.
6.2 Factors to Be Taken Into Consideration:

1] Location of property.
2] Situation.
3] Level of amenities & facilities.
4] User of property.
5] Age of property.
6] Condition of property.
7] Facilities available in the property.
8] Size (floor area) of property.
Comparative Method
The
TheEvidence
evidence
The
TheMarket
Market
Should be based on
Transactions
Transactionsof
ofsimilar
similar
properties
properties
Comparative
COMPARATIVE
Valuation
VALUATION
Should
Shouldbebefair
stable
Fairly stable
IN
Inthe
thesame
samearea
area
Obtained from
Recent
RecentRecords
Records
of
Frequent
Frequent
transactions
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Underlying
Underlying
economic
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Economic
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Factorsbe
should
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Be studied
6.3 Total Weightage Score System

17

- There are about 70 to 85 factors of comparison
- Adopt weightages for each based on site enquiries giving the preferences of the local people.
- Find out total weightage score for properties in sales transactions and the property under
Valuation and compare.
- This would bring objectivity to the process.
6.4 Factors or Aspects Of Comparison

1 Physical
Land
Location / situation
Building
2 Legal Aspect
Title
Tenure
Easement rights
Other encumbrances
Town Planning acts
Central and State govt. legislations
3 Social Aspects
4 Economic Aspects
Physical Aspects
Land
Size
Shape
Access
Frontage
Frontage depth ratio
Topography / level
Soil classification
Orientation
Vista
View aspect
Status of land
Stigma effect
Vastu shastra aspect
Feng shui aspect
Location
18
Natural forces
Environmental aspects
Work places
Business centre / places
Social facilities
Recreational amenities
Civic amenities
Transport facilities
Railway stations
City bus services
Shops
Availability of utility services
For Residential Flats or Shops
Floor
Front or back side
Orientation
Buildings
Engineering aspect
Architectural aspect
Utility services within premises
Common services and amenities
Engineering Aspect
Specification
Workmanship
Type of structure
Structural design / strength
Type and strength of foundation
Maintenance and repairs
Age and future life
Area
Architectural Aspects
Architectural design
Arrangement of spaces
Rooms
Light and ventilation
Faade and elevation
Utility Services
Water supply
Electricity
Sewerage
Drainage
Common Services
19

Parking for vehicles
Lifts
Terrace facilities
Garden / childrens play area
Sweeper
Watchman
Fire fighting
Club / gymnasium / swimming pool
Legal Aspects
Title or Ownership
Single owner
Joint owners
Co-owners with undivided shares
Tenure
Basically freehold
And leasehold
Toka
Foras
Inami
Devsthan inam
Sanadi
Easement Rights
Right of way
Right of light and ventilation
Dominant property
Subservient property
Other Encumbrances
Mortgage
Litigation in court
Encroach
Slums /hutments
Town Planning Acts
Development plan
Land use zoning
Land designated for acquisition
Development Control Rules
Central and State Govt. Legislation
Rent Control Act
Urban Land Ceiling Act
National Highways Act
Railways Act
Civil Aviation Authority
20

Coastal Regulations
Indian Electricity Act
Social Aspects
Community aspect
Economic and social status of residents
Anti- social elements
Economic Aspects
Gross annual income
Annual outgoings
Net annual income
Immediate repairs required
Financial liabilities
6.5 Belting Method

If the depth of the plot is more than the depth of the comparable plots in sales considered, this method is
adopted to value the land.
Belting Method
3rd Belt
Remaining
Value
Of 1st Belt
Recess Land
of Belt Value
2nd Belt
Recess Land
of Belt Value
1st Belt
1X
3/4th Value
Of 1st Belt
Full Value
R O A D
Consideration for Different Lands
Land with return frontage: - Give positive allowance depending on the importance of road on
which return frontage.
Land with irregular shape: - Carve out regular shape by drawing perpendiculars to road and give
negative allowance to remaining land.
21

Hypothetical Layout Method
This method is used to value property with Development potential.
Development potential is also called Latent Value.
Increased value of property after carrying out development will be more than expenditure incurred.
Method
Assess optimum development for the property. Estimate gross Development value [A].
Assess cost of development [B].
Assess Developers risk and Profit [C].
Residual Value= [A] {[B] +[C]}.
Cost of each item of infrastructure is estimated and allowances made for each relevant factor which are
deducted from sale value of small plots, carved out from larger plot
Cost of development will include:1. Building costs
2. Architects fees [% of cost of development]
3. Engineers fees
4. Other professional fees [% of proceeds of sell]
5. Advertising and legal fees
7. COST APPROACH
7.1 Contractors Method
22

Used in assessment in case of properties not usually sold, not intended to be sold or even incapable of
being sold in open market.
Properties classified into three groups:
1] Public properties -Museums, schools, colleges, libraries.
2] Properties having potential for profit
Stadiums, theatres, music halls, race course etc.
3] Properties of public utility undertakings
Railways, water works, electricity undertakings, docks.
Method
1] Estimate value of land in its existing use.
2] Estimate cost of construction of building.
3] Allow for depreciation on account of age, obsolesance etc.
4] capital value = land value plus depreciated cost of building
Methods To Determine Replacement Cost Of Building:1. Plinth area rate.
2. Cubical content rate
3. Item-rate.
4. Cost Index Method.
7.2 Cost Index Method

Mainly devised and adopted by Central PWD engineers for working out quickly cost estimates.
Cost Index
Cost index is worked out by
1. Select one base year.
2. Select standard building design as per government norms.
3. Work out its detailed quantity as per standard govt. Specifications
4. .Adopt rates of building items as prevalent in locality.
5. .Work out cost per unit area rate.
6. This is cost index of 100 for that base year.
Cost index for other years are worked out by considering the price rise in building materials and labour in
Delhi area.
Basic cost index and subsequent cost indices worked out similarly for other cities by considering price
variations in building materials and labour costs in base year at Delhi as compared to that in the year of
valuation in the city where property under valuation is situated.
7.3 Depreciation
Depreciation is calculated for period of present life with due consideration to its future life and total life.
23

Approximate life span:R.C.C. framed Structure
R.C.C. Brick built
75-90 years
60-65 years
C.G.I.Sheet+BBMasonary
50-60 years
A.C.C.Sheet+BBMasonary
40-50 years
Country Tiled + bricks
20-30 years
Temporary sheds
10-20 years
Weakness of Contractors Method

No direct co-relation between cost of property and Market value, which depends on forces of supply and
demand.
Requires assumptions relative to unit costs. More probability of assumption being wrong.
Requires assumptions as to original economic life and/or remaining economic life. Greater probability of
assumptions being in error.
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8. INCOME APPROACH
8.1 Concept
Capability of landed property to produce income over time provides the basic for the income
approach to valuation.
8.2 Landed Property as Investment

Investment can be defined as the outlay of funds on the purchase of any asset which is not consumed
immediately but instead yield up its benefits in a stream overture.
8.3 Investment Method of Valuation

The income from the landed property is the rent
Rent bears the relationship with the capital value.
Capital value = rent x multiplier
Gross rent is not income
Capital value = (rent- outgoing) x multiplier
But (rent- outgoing) = net income
Capital value = net income x multiplier
Multiplier is called Years Purchase in U K
Or Rent Multiplier or Conversion Factor in U S A.
8.4 Years Purchase

Definition:
Capitalized value required to be paid once and for all, in order to receive annual income of Re. 1/-for
specified period of time at specified rate of interest.
YP
Capital value x Re. 1

-----------------------------------Rate of capitalization
Factors determining the soundness of investment:

1.
2.
3.
4.
5.
Safety of capital
Liquidity of capital
Safety of income
Regularity of income
Ease of collection of income.
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Order of Priority
Order
1
2
3
4
5
6
7
8
9
10
Type of Investment
Govt. security
Agricultural land
Residential houses
Shops in good position let to single tenant
Offices let to single tenant
Shops in secondary position
Offices let in suits
Residential hall
Factories
Ware houses, godowns
Yield
Relative advantages and disadvantages of an investment will be reflected in the yield, which carries
with the price.
As the price of investment goes up yield decreases and as the price of the investment goes down the
yield increases.
General rule
Lower the risk involved in a given investment, the lower is the rate of interest expected by an investor
and
More the risk involved, the higher the rate of interest expected by an investor.
8.5 Gilt Edged Security

Advantages as an alternative investment
1.
2.
3.
4.
Safest avenue of investment

Fulfill all criteria of security
Bench mark for other types of investments
Index for decision making for other forms of investments by comparing with gilt edged
securities.
8.6 Remunerative Rate of Interest

It is the rate of interest at which the capital is remunerated.
The investor is always interested in this rate of interest.
If government security is considered as a datum line, we can derive the rate of interest appropriate to
various forms of the landed property, depending upon various factors that an investor would consider
while making the investment decision.
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8.7 Remunerative Rates for Different Types Of Landed Properties

Type of Property
Agricultural land
Shops in good position let to single tenant
Shops in secondary position
Offices let to single tenant
Offices let in suits
Factories
Warehouses
Houses
Flats
Chawls
Rate of Interest
6%
6 to 8%
8 to 10%
6 to 7%
6 to 9%
10 to 12%
10 to 12%
6 to 8%
7 to 10%
8 to 12%
8.8 Accumulative Rate of Interest

It is the rate at which the capital is accumulated.
This investment is the safest form of investment.
Naturally the rate of accumulation of capital is always less than the remunerative rate of interest
8.9 Sinking Fund

Definition:
An annual recurring fund required to be set aside every year, for a given period of time, at the given
rate of interest to recoup capital invested in a property, interest or return from which would cease
after a given period of time.
Hedge against Inflation
An investment, which appreciates so as to maintain its real value during the time when the purchasing
power of a rupee is falling, provides the investor, with a security which is referred to as a "Hedge
against Inflation".
An investor may be willing to accept a lower yield; that is he will be willing to pay a higher price for
an investment, which can provide a hedge against inflation".
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9. LEASEHOLD INTERESTS
9.1 Rights in Property
A property is made up of bundle of rights. Freehold right is the highest form of right with regard to
Real Estate. However, there are contractual limitations on ownership, which are usually contained in
deeds such as easements and leases or mortgage instruments.
9.2 Leasehold Right

.
When an owner of Real Estate does not wish to personally use the property or wants to derive some
measure of income from its ownership, he or she can allow another person to use it in exchange for
valuable consideration.
This is usually accomplished by means of an agreement known as a lease.
Lease
A lease is a contract between a property owner (known as the lessor) and a tenant (the lessee) that
transfers the right to exclusive possession and use of the landlord's property to the tenant for a
specified period of time.
This agreement sets forth the length of time the contract is to run, the amount to be paid by the
lessee for the right to use the property, and other rights and obligations of the parties.
Rent
Periodical payment to the landlord / lessor for use of the property.

Amount at which a property would let at a particular time
By willing tenant to willing owner of property
Landlord considering the merits and demerits of his property and tenant weighing advantages
and disadvantages of various properties available
9.3 Types of Rent

Market rent:
market
Fair and reasonable rent decided by landlord and tenant in open and competitive
Ground rent: Rent as payment for land only.

Two types Unsecured
-- Secured
Rack rent: Payment for land and building
Gross rent: Total rent received from the property
Net rent: Rent exclusive of all outgoings
Rising rent: Rent which goes on increasing during the term
Virtual rent: Rent + annual equivalent of premium or capital expenditure.
Hypothetical rent:
Principle of hypothetical rentrent reasonably be expected from hypothetical tenant.
Principle of communibus anistake things by average.(average year)
Principle of rebus sic stantibus consider circumstances prevailing at the time of assessment (natural
or due to acts)
Standard rent:
Rent fixes by court under clause (d) of section 11(1) of the rent act.
Or, rent at which property let on or before 1st Sept.1940
Or, rent at which property was first let after 1st Sept. 1940.
28
9.4 Outgoings
1.
2.
3.
4.
5.
6.
7.
8.
Property tax
Land revenue
Ground rent
General repairs
Insurance
Upkeep and services (to landlord where let to several tenants)
Collection and management charges
Losses through voids
9.5 Leasehold Estate

When an owner of real property leases his or her property to a tenant, the tenant's right to occupy the
land for the duration of the lease is called a leasehold estate. Leasehold estate, though it gives the
lessee an interest in real property, it is in fact personal property.
Requirements for a Valid Lease
Competent parties.
Mutual assent.
Legality of object.
Contract in writing.
Valuable consideration.
Description of the premises.
Signatures.
Yield from Leasehold
Whenever there is some disadvantage attached to an investment, an investor expects a higher return
on such investment.
Naturally, the investor in leaseholds who is faced with some disadvantages would expect a higher
return or yield to compensate him for these disadvantages.
Valuation of Interests
The landed property is not owned per se; what a person owns is an interest, may be either a freehold
interest or leasehold interest.
Even though a lessor gives property to a lessee on lease, he still continues to own an interest in the
property.
It is therefore possible for many different persons to have interest in the property, so that there may
be a hierarchy of interests in that property at any given time.
Disadvantages of Leasehold Property
The income from the leasehold property is available for limited number of years. Hence, the capital
of an investor is sinking slowly to the zero level at the end of the term of the lease. The lessee is,
therefore, expected to set aside a certain amount / fund to recoup the sinking capital.
This fund is called a sinking fund. The provision and management of this sinking fund create
additional difficulties of management of leasehold property.
Lessee has to make payment of rent to the lessor and at the end of the term re-invest the capital in
some other form of investment. This adds to his managerial responsibilities
As the unexpired period of the lease goes on diminishing the difficulties in selling such interest goes
29

on increasing. Thus liquidity of capital becomes rigid.
The lessee is governed by the covenants of the lease. Therefore, he has less freedom as compared to
the freeholder.
Effect of Disadvantages
Whenever there are some disadvantages attached to an investment, an investor expects a higher
return on such investment.
Naturally, the investor in leaseholds who is faced with the above disadvantages, would expect a
higher return or yield to compensate for these disadvantages.
Effect on Interest Rates
It is the usual practice to consider remunerative rates of interests in case of leasehold properties
higher by 0.5% to 2% than the corresponding remunerative rates of interests in freehold interest.
The smaller increase will apply to the more secure type of investments and the larger increases to the
less secure properties such as factories, warehouses etc.
Value of Lessees Interest
The value of the lessees interest in the property, when the term of the lease begins, is maximum and
on the date of expiry of the lease, it becomes zero, because on the expiry of the lease, the income
from the property is zero.
Thus the value of lessees interest goes on diminishing as the time elapses.
It is maximum on the date of beginning of the terms of the lease. It then gradually reduces and
becomes zero on the date of the expiry of the terms of the lease.
Provision by Investor
A prudent investor will have to make provision in such a way that he recoups his investment at the
end of the term of the lease.
This can be done by setting aside certain amount and investing it so that by the end of the term of the
lease that amount accumulates to original value of investment.
This investment, which gives him his original invested amount, will have to be invested in the safest
form of investment.
It is, therefore, axiomatic that it would be at the less rate of interest.
Dual Rate of Capitalization
While valuing the leasehold interest dual rates are used.
Remunerative rate of interest, at which the capital is remunerated and Accumulative rate of interest
at which the capital is accumulated.
Hence while valuing the leasehold properties dual rate valuation tables are used to find out Years
Purchase (multiplier) to find out value from net income.
30

Value of Leasehold Property
Value of the leased property consists of
Lessees interest and
Lessors interest.
Lessors Interest
Value of lessors interest will be capitalized value of the lease rent (net value) for unexpired period of
the lease plus the present value of the stream of income, which he is likely to receive from the
property after the expiry of the lease. This later part is called reversion of the estate to the lessor.
Lessees Interest
Value of lessees interest will be the capitalized value of the net income (profit rent) for the
unexpired period of lease. (Dual rate ).
31
10.
VALUATION OF AGRICULTURAL LAND
10.1 Approaches
1. Market approach
2. Income approach
10.2 Market Approach

Factors of comparison
1.
2.
3.
4.
5.
Land
Irrigation facilities and electric supply
Cropping pattern and trees
Ancilliary buildings, fencing etc.
Equipment and machinery
Land
Size / area
Shape
Situation
Access
Transport facilities
Soil classification
Lie of land (slope, contours, height etc )
Land drainage
Revenue assessment
Land development
Deep ploughing / sub-soiling
Soil and water conservation measures
Water holding capacity
Manures and fertilisers
Cropping Pattern
Quality and depth of soil
Irrigation facilities available
Seasons and climatic conditions
Trees
Fruit bearing trees:
1.
2.
3.
4.
Quality of fruit
Fruit bearing capacity
Fruit bearing life
Gestation period
Crop Rotation
To help building up of / infestation of pests and diseases
To help soil to recoup fertility / maintain structure
To build cash flow management / regulate supply of a product in the market.
32
Crop Nutrition
Nitrogen physical growth and enhancement of clorophyll in leaves
Prosperous building disease and pest resistance
Potassium reproduction / flowering
10.3 Income Approach

Recommendations of Paranjpe Committee
Mainly applicable for non-irrigated lands where data and evidence for gross annual income, annual
cost of cultivation including expenditure on inputs is available or can be worked out.
Method
Steps
1. Adopt appropriate crop pattern.
Village form xiii at village level
Major crop taken over 70% to 80% of
Village area
Adjusted to 100%
Averaging it over last 7 years
Note: exclude crops requiring perennial irrigation
--- banana, sugarcane
2. Estimate average yield of crop.
Taluka level average yield rates per hectare for non-irrigated crops
Available with statistical branch of the state directorate of agriculture
3. Estimate gross income from main produce at prevailing market price.
4. Estimate gross income from bye products and total gross annual income
5. Estimate annual cost of cultivation
Labour hired labour wages
Inputs Cost of seeds.
- Fertilisers,
- Insecticides and pesticides
--Taxes -- land taxes / assessment,
- Irrigation cess ,
- Electricity charges
- Interest on borrowed capital
6. Estimate net annual income per hectare.
7. Capitalise net annual income at appropriate rate of interest.
(6.75% in perpetuity i.e. Y p 14,8 say 15)
8. Add depreciated reproduction cost of structures.
33

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2014

REAL ESTATE VALUATION

Real Estate Valuation Notes 2014

Real Estate Valuation Notes 2014

1.3 Types of Property

Real Estate Valuation Notes 2014

Word property implies belonging or possession.

1.5 Immovable Property

The line of distinction between movable and immovable is thin.

Real Estate Valuation Notes 2014

2.3 Two types of Property

Real Estate Valuation Notes 2014

2.6 Types of Ownerships

Real Estate Valuation Notes 2014

Real Estate Valuation Notes 2014

3.2 The kind of estate

3.3 Types of Estates

Use property in any manner

3.4 Government Limitations

Police power - restrict use of property

3.5 Police Power

Real Estate Valuation Notes 2014

3.6 Eminent Domain

3.7 Right of Taxation

3.9 Other Limitations

3.10 Lesser Estates in Property

Real Estate Valuation Notes 2014

3.11 Lease or Estate for Years

3.14 Life Estate

Real Estate Valuation Notes 2014

Real Estate Valuation Notes 2014

4. CHARACTERISTICS OF REAL ESTATE

4.2 Factors Affecting the Demand for Landed Property

4.3 Factors Affecting Supply of Landed Property

4.4 Real Estate Market

Heterogeneity and lack of standardization.

Total supply of land is fixed.

Effect of various legislations.

Real Estate Valuation Notes 2014

Imperfect and inadequate information.

Imperfect and Inadequate Information

Real Estate Valuation Notes 2014

5. VALUATION OF REAL ESTATE

Value is not intrinsic in Object. People create Value.

Individual / Subjective Value.

Market / Objective Value.

5.3 Characteristics of Value

5.5 Purpose of Valuation

Real Estate Valuation Notes 2014

5.7 Features of the Property

5.8 Factors of Market

5.9 Types Of Landed Property

5.10 Definition of Market Value

Real Estate Valuation Notes 2014

5.12 Types Of Valuations

5.13 Approaches to Valuation

5.14 Methods of Valuation

Real Estate Valuation Notes 2014

6.2 Factors to Be Taken Into Consideration:

6.3 Total Weightage Score System

Real Estate Valuation Notes 2014

6.4 Factors or Aspects Of Comparison

Real Estate Valuation Notes 2014

Real Estate Valuation Notes 2014