VALUATION
PRASHANT PAL
5TH YEAR 9TH
SEM
COLLEGE: IIA
VALUATION
VALUATION IS AN ADVENTURE IN ECONOMIC RESEARCH, LEADING TO AN
ECONOMIC DECISION OF A VALUE WHICH INDICATES THE CONCLUSIONS
ARRIVED AT AFTER TAKING INTO CONSIDERATION ALL FACTORS LIKE
ECONOMIC, SOCIAL, POLITICAL, LEGAL AND PHYSICAL WHICH AFFECT THE
VALUE ONE WAY OR ANOTHER.
VALUATION IS THE PROCESS OF DETERMINING THE CURRENT WORTH OF AN
ASSET OR A COMPANY; THERE ARE MANY TECHNIQUES USED TO DETERMINE
VALUE.
VALUE, PRICE AND COST:
A PRICE IS A FACT AND A VALUE IS AN ESTIMATE OF WHAT THE PRICE
OUGHT TO BE.
VALUE, PRICE AND COST DO NOT COME INTO EXISTENCE UNLESS AND
UNTIL AN EXCHANGE OF COMMODITIES OR SERVICES TAKES PLACE
AND THE EXCHANGE USUALLY TAKES PLACE DEPENDING UPON
UTILITY, SATISFACTION, TRANSFERABILITY AND THE EXTENT TO
WHICH A COMMODITY IS SCARCE.
ESSENTIAL CHARACTERISTICS
VALUE IN ORDER THAT A COMMODITY CAN HAVE VALUE, IT MUST POSSESS
THREE ESSENTIAL QUALIFICATIONS, NAMELY:
I. IT MUST POSSESS UTILITY.
II. IT MUST BE SCARCE.
III. IT MUST BE TRANSFERABLE OR MARKETABLE.
PRICE IT IS THE COST OF A COMMODITY PLUS ADDITIONAL REWARD TO
THE PRODUCER FOR HIS LABOR AND CAPITAL.
COST EXPENDITURE TO PRODUCE A COMMODITY HAVING A VALUE.
MARKET VALUE:
THE MARKET VALUE HAS BEEN DEFINED AS THE AMOUNT WHICH
MIGHT BE EXPECTED TO REALIZE FROM A WILLING PURCHASER ON A
SALE OF A PROPERTY BY A WILLING SELLER IN THE OPEN MARKET.
IN THE OPEN MARKET” MEANS THE PROPERTY IS OFFERED FOR SALE IN
SUCH A MANNER THAT EVERY PERSON WHO DESIRES TO PURCHASE
CAN MAKE AN OFFER.
A WILLING SELLER” IS A PERSON WHO WILL NOT SELL THE PROPERTY
UNLESS HE OBTAINS SOMETHING MORE THAN HIS RESERVE PRICE.
MIGHT BE EXPECTED TO REALIZE” REFERS TO THE EXPECTATIONS OF
THE PURCHASERS AFTER THEY HAVE BEEN SUPPLIED WITH ALL THE
NECESSARY DATA, ETC. AND AFTER THEY KNOW THE CONDITIONS OF
THE MARKET.
CHARACTERISTICS OF MARKET VALUE:
VENDOR MUST BE WILLING TO SELL.
PURCHASER MUST BE WILLING TO PURCHASE AND MUST BE A
PRUDENT ONE WHO CAN PUT THE LAND TO THE MOST BENEFICIAL USE.
NO COMPULSION ON EITHER IN THE TRANSACTION.
URGENT NECESSITY OF PURCHASE OR SALE TO BE DISCARDED.
DISINCLINATION OF VENDOR TO BE IGNORED.
SENTIMENTAL VALUE TO THE VENDOR WILL HAVE NO PLACE.
PRESENT AND FUTURE USES KNOWN AS POTENTIALS ARE TO BE TAKEN
INTO ACCOUNT.
OPEN MARKET:
IN THE OPEN MARKET MEANS THE PROPERTY IS OFFERED FOR SALE IN
SUCH A MANNER THAT EVERY PERSON WHO DESIRES TO PURCHASE
CAN MAKE AN OFFER AND THAT THE NECESSARY STEPS ARE TAKEN TO
ADVERTISE ITS SALE IN PAPERS AND ALL NECESSARY MEANS ARE
ADOPTED TO BRING TO THE NOTICE OF ALL THE PURCHASERS THAT
THE PROPERTY IS FOR SALE IN THE MARKET UNDER THE MOST
FAVORABLE CONDITION.
THE TERM OPEN MARKET IS USED GENERALLY TO REFER TO AN
ECONOMIC SITUATION CLOSE TO FREE TRADE.
VALUE CLASSIFICATION
ASSESSED VALUE:
THE VALUE OF A PROPERTY WHICH IS RECORDED IN THE REGISTER OF
A LOCAL AUTHORITY AND USED FOR THE PURPOSE OF DETERMINING
THE AMOUNT OF PROPERTY TAXES TO BE COLLECTED FROM THE
OWNER OF THE PROPERTY.
BOOK VALUE:
IT IS ALSO KNOWN AS BOOK COST WHICH SHOWS THE ORIGINAL
INVESTMENT OF A COMPANY ON ITS ASSETS,
INCLUDING PROPERTIES AND MACHINERIES LESS DEPRECIATION FOR
THE PERIOD PASSED.
SALVAGE VALUE:
VALUE OF A MACHINERY REALIZED ON SALE WHEN ITS USEFUL SPAN
OF LIFE IS OVER BUT IT HAS NOT BECOME USELESS.
SCRAP VALUE OR JUNK VALUE:
VALUE OF MACHINERY REALIZED WHEN IT BECOMES ABSOLUTELY
USELESS EXCEPT FOR SALE AS JUNK.
IT ALSO APPLIES TO BUILT-UP PROPERTIES WHICH HAVE OUTLIVED
THEIR USEFUL SPAN OF LIFE AND IN SUCH CASES THE VALUE OF THE
OLD MATERIALS OF SUCH BUILDINGS LESS COST OF DEMOLITION WILL
REPRESENT THE SCRAP VALUE OR BREAK UP VALUE. IT IS ALSO
KNOWN AS “DEMOLITION VALUE”.
REPLACEMENT VALUE:
IT INDICATES THE VALUE OF A BUILDING OR PORTIONS THEREOF IF
THESE HAVE TO BE REPLACED IN THE FORM OF ACCEPTABLE
SUBSTITUTES, AT THE CURRENT MARKET RATES.
IF THE SUBSTITUTES FORM SUBSTANTIALLY IDENTICAL NEW ONES, IN
OTHER WORDS CONSTRUCTED OR MANUFACTURED TO ORDER,
THE VALUE IN SUCH A CASE WILL BE KNOWN AS “REPRODUCTION
VALUE”.
EARNING VALUE:
IT IS THE PRESENT VALUE OF A PROPERTY WHICH WILL START
YEILDING AN INCOME IN FUTURE.
POTENTIAL VALUE:
THE LAND HAS GOT AN INHERENT VALUE WHICH MAY GO ON
INCREASING DUE TO PASSAGE OF TIME OR DUE TO SOME ALTERNATIVE
USE FETCHING MORE RETURN.
THIS INHERENT VALUE IS KNOWN AS “POTENTIAL VALUE”.
IT INCLUDES THE FOLLOWING:
BENEFICIAL PRESENT USE OF LAND.
FUTURE USEFULNESS.
SPECIAL SUITABILITY FOR A DEFINITE PURPOSE.
BETTER LAY OUT.
DISTRESS VALUE:
WHEN A PROPERTY IS SOLD AT A LOWER PRICE THAN THAT WHICH CAN BE
OBTAINED FOR IT IN AN OPEN MARKET, IT IS SAID TO HAVE “DISTRESS
VALUE”.
IT MAY BE DUE TO THE FOLLOWING: I
FINANCIAL DIFFICULTIES OF VENDOR.
INDIRECT BENEFIT TO VENDOR OR PURCHASER.
PART CONSIDERATION PAID OTHERWISE.
PANIC DUE TO WAR AND RIOTS.
SPECULATIVE VALUE:
WHEN THE PROPERTY IS PURCHASED SO AS TO SELL THE SAME AT A
PROFIT AFTER A SHORT DURATION,
THE PRICE PAID IS KNOWN AS SPECULATIVE VALUE AND THE CHIEF
AIM BEHIND THE PURCHASE IS NOT THAT OF DEVELOPMENT SO AS TO
EARN RENT BUT THAT OF SPECULATION.
MONOPOLY VALUE:
FOLLOWING THE LAW OF SUPPLY AND DEMAND AS THE NUMBER OF
AVAILABLE PLOTS IN A LOCALITY GOES ON DECREASING,
THE VALUE OF THE LAND GOES ON INCREASING AND A TIME COMES
WHEN VERY FEW PLOTS REMAIN IN THE MARKET.
THE FANCY PRICE DEMANDED BY THE VENDOR FOR THOSE FEW
REMAINING PLOTS WILL BE KNOWN AS MONOPOLY VALUE.
SENTIMENT VALUE:
THE FANCY PRICE WHICH IS DEMANDED BY A VENDOR WHEN HE
ATTACHES SOME SENTIMENTAL VALUE TO HIS PROPERTY IS KNOWN AS
SENTIMENTAL VALUE HAVING NO RELATIONSHIP WITH THE MARKET
VALUE.
ACCOMMODATION LAND AND ACCOMMODATION VALUE:
THE LAND ON THE OUTSKIRTS OF A TOWN USED FOR THE PURPOSE OF
PLAY GROUNDS, GARDENS, ETC. IS KNOWN AS ACCOMMODATION
LAND. IT HAS A VALUE GREATER THAN THAT OF AGRICULTURAL LAND
AND LESS THAN THAT OF BUILDING LAND.
CLASSIFICATION OF OWNERSHIP FOR BUILDING/LAND
THERE ARE TWO FORMS OF OWNERSHIP, NAMELY, FREEHOLD AND
LEASEHOLD AND THIS QUALIFICATION OF THE PROPERTY IS DESIGNATED BY
THE WORD “TENURE”.
TENURE:
IT INDICATES THE TERMS AND CONDITIONS UNDER WHICH A PROPERTY
CONSISTING OF LAND OR LAND WITH BUILDING CAN BE OWNED. IN WIDER
SENSE THERE ARE TWO TYPES OF TENURES, NAMELY.
FREEHOLD,
LEASEHOLD.
FREEHOLD TENURE:
THIS TYPE OF TENURE INDICATES THAT THE LAND CAN BE OWNED
WITHOUT ANY RESTRICTIONS WHATSOEVER SO FAR AS IT’S USE IS
CONCERNED. IT DOES NOT REQUIRE PAYMENT OF ANY CHARGES OR
GROUND RENT.
HOWEVER, THE RULES AND REGULATIONS OF THE GOVERNMENT OR
LOCAL AUTHORITY WILL HAVE TO BE COMPLIED WITH, FOR ITS
DEVELOPMENT AS THE FREEHOLD TENURE IS NOT EXEMPTED FROM
THE SAID RESTRICTIONS WHICH ARE MEANT FOR THE WELFARE OF
CITIZENS IN GENERAL.
IT IS THE HIGHEST FORM OF OWNERSHIP OF LAND.
THE FREEHOLDER HAS GOT:
RIGHT TO ITS OCCUPANCY AND USE.
RIGHT TO SELL IN WHOLE OR IN PART.
RIGHT TO GIFT.
RIGHT TO CONTRACT FOR ITS USE TO OTHERS FOR A PERIOD OF TIME.
LEASEHOLD TENURE:
THE PROPERTY IS A “BUNDLE OF RIGHTS” WHICH CAN BE RETAINED AS
IT IS; OR CAN BE DIVIDED BY A LEASE OR LEASES SO AS TO CREATE
TWO OR MORE INTERESTS IN THE PROPERTY LIKE LESSOR’S INTEREST,
LESSEE’S INTEREST, SUB-LESSEE’S INTEREST, ETC.
LEASE:
IT IS A REGISTERED INSTRUMENT WHICH CONTEMPLATES A TRANSFER
OF A RIGHT TO ENJOY A PROPERTY PROPOSED TO BE LEASEDOUT FOR
CERTAIN TIME OR IN PERPETUITY IN CONSIDERATION OF A PRICE
WHICH MAY BE PREMIUM OR RENT OR A COMBINATION OF BOTH AND
SUBJECT TO OTHER TERMS AND CONDITIONS AS MAY HAVE BEEN
AGREED.
LESSOR:
HE IS THE SUPERIOR OWNER OF THE PROPERTY OR FREEHOLDER WHO
SURRENDERS THE RIGHT AND OCCUPANCY FOR THE TERM AND
RENTAL STATED IN THE LEASE, RETAINING THE RIGHT OF REVERSION.
REVERSION:
IT INDICATES THE RIGHT TO REPOSSESS THE PROPERTY AT THE END OF
THE LEASE TERM.
LESSEE:
HE IS THE PERSON WHO ACQUIRES THE RIGHT OF USE AND OCCUPANCY
IN A PROPERTY FOR A SPECIFIED PERIOD IN EXCHANGE FOR RENTALS
OR PREMIUM OR A COMBINATION OF BOTH AND SUBJECT TO OTHER
TERMS AND CONDITIONS OF THE LEASE.
PREMIUM OR SALAMI:
IT IS THE JUMP SUM CONSIDERATION PAID FOR TRANSFER OF RIGHTS IN
A PROPERTY.
DURATION OF LEASE PERIOD:
IT IS NORMALLY OF 21, 50, 98 OR 999 YEARS OR EVEN OF SHORT
DURATION THAN 21 YEARS WITH DIFFERENT TERMS AND CONDITIONS
AND ALSO AS REGARDS GROUND RENT AND RENEWAL PERIODS.
SOMETIMES THE LEASE OF THE PROPERTY CAN BE FOR THE LIFE TIME
OF AN INDIVIDUAL AND SUCH LEAS IS KNOWN AS THE “LIFE LEASE”
ON THE DEATH OF THE LESSEE THE PROPERTY REVERTS TO THE
LESSOR.
TYPES OF LEASES:
TWO COMMON TYPES OF LEASES IN OUR COUNTRY ARE:
BUILDING LEASE
OCCUPATION LEASE
BUILDING LEASE:
OPEN PLOT OF LAND IS LEASED OUT ON PAYMENT OF PERIODIC
CONSIDERTION KNOWN AS “GROUND RENT” (UNSECURED GROUND
RENT)
PERIOD OF LEASE IS USUALLY 50,98, OR 999 YEARS OR MAY BE FOR
DIFFERENT PERIOD BUT OF LONG DURATION.
SECURED GROUND RENT:
IT IS THE PERIODIC PAYMENT MADE BY THE LESSEETO THE LESSOR
UNDER THE UILDING LEASE CARRIES AN OBLIGATION ON THE LESSEE
TO IMPROVE THE LAND BY PUTTING UP A BUILDING THERE ON AT HIS
OWN COST
WHEREBY THE GROUND RENT BECOMES WELL SECURED AND IN CASE
OF “REENTRY” THE LESSOR IS SURE OF HIS GROUND RENT.
THUS THE BUILDING ON THE PLOT FORMS A SECURITY FOR THE
REGULAR PAYMENTOF THE GROUND RENT.
UNSECURED GROUND RENT:
IT IS THE PERIODIC PAYMENT MADE BY THE LESSEE TO THE LESSOR
FOR AM OPEN PLOT OF LAND WITHOUT ANY IMPROVEMENTS THERE
ON.
IT IS NOT SECURED AS THERE IS NO IMPROVEMENT ON THE OPEN PLOT.
OTHER FORMS OF RENT
PEPPER CORN RENT (ACKNOWLEDGMENT RENT):
A NOMINAL RENT CHARGED TO EXPRESS THE RELATIONSHIP OF A
TENANT AND A LANDLORD OR A LESSEE AND A LESSOR.
NOMINAL RENT:
IT IS SOMETHING MORE THAN THE PEPPER CORN RENT HAVING THE
SAME PURPOSE AS THAT OF PEPPER CORN RENT.
OCCUPATION LEASE
COMPLETE PROPERTY CONSISTING OF LAND AND BUILDING IS GIVEN
ON LEASE ON PAYMENT OF PERIODOC CONSIDERATION KNOWN AS
“RACK RENT” THAT IS FULL RENT OF THE PROPERTY.
AS THE DAY PASS ON, THIS RACK RENT OF RENT CONTROLLED
PROPERTIES (LEASE) WILL SUFFER FROM ECONOMIC OBSOLESCENCE.
PERIOD OF LEASE MAY BE FOR 7, 14, 21 YEARS.
CONVENANTS AND CONDITIONS SETTING FORTH THE RIGHTS AND
OBLIGATIONS OF EACH PARTY UNDER THE LEASE INCLUDING “RENT
REVIEW CLAUSE” AS WELL AS TO SURRENDER THE PROPERTY AT THE
EXPIRY OF THE LEASE PERIOD.
HEAD RENT:
WHEN THE PROPERTY HELD UNDER OCCUPATION LEASE IS FURTHER
SUB-LEASED THE RENT RESERVED UNDER THE HEAD LEASE IS KNOWN
AS HEAD RENT.
IMPROVED RENT:
WHEN THE PROPERTY HELD UNDER OCCUPATION LEASE IS FURTHER
SUB-LEASED FOR A TERM SHORTER THAN THE TERM OF THE ORIGINAL
HEAD LEASE, AT A RENT WHICH USUALLY EXCEEDS THE HEAD RENT, IS
KNOWN AS “IMPROVED RENT”.
IF THE IMPROVED RENT REPRESENTS FULL RENTAL OBTAINABLE IT
WILL BE KNOWN AS “RACK RENT”.
