MAHATMA EDUCATION SOCIETY’S
Pillai HOC College of Architecture Rasayani
Valuation
Module – 2
Professional Practice – 2 (B. Arch, Mumbai University)
Dr. Joydeep Dutta – Fall 2020-21
Valuation: Module 2: Topics to be covered
• Methods of Valuation:
• Open Land
• Land with property
• Methods for land with property
• Land & Building method
• Rent Capitalization method
• Residual Method
• Wealth Tax Act Method (Schedule III)
• Profit Method
• Direct Sales Comparison Method
• Solved numerical examples
Methods of Valuation
• For purposes of valuation, real estate properties may be classified into:
• (1) Open lands
• (2) Lands with property (buildings)
Methods of Valuation for Open Lands
• Open lands are two broad types: Urban lands and Farm lands
• Urban lands have designated land-uses (Development Plan) – and
• their value depends on the potential for development, by constructing
appropriate structures over them
• Farm lands are agricultural fields – and
• are capable of producing earnings themselves, by primary sector occupations
• Valuation of urban lands can be done by three methods:
• (1) Comparative Method
• (2) Abstractive Method
• (3) Belting Method
Methods of Valuation for Urban Open Lands
• (1) Comparative Method
• Various transactions of nearby lands are studied and compared
• Needs to be active market (where info is available)
• Depends on market conditions (stable/volatile) – element of time is important
• Factors taken into account while making sales comparisons:
• Location / neighbourhood
• Size / shape / frontage & depth/ corner plot / land-locked
• Level / Soil type/ Ground water level
• Development guidelines – FSI/ Height/ Open spaces/ Ground Coverage
• Encumbrances: Easements/ encroachments/ Litigations/ Beliefs (vastu)
• Miscellaneous advantages: Good views/ proximity to facilities/ potential value
Methods of Valuation for Urban Open Lands
• (2) Abstractive Method
• When no information is available about recent open land transactions in the
area, this method is helpful
• It considers data for recently sold ‘land with building’ property and
interpolates (abstracts / adjusts) the value for just the open land
• Three simple steps are followed:
• (a) Find market value (or actual price) of similar plot (with building) = C
• (b) Find the replacement value (w/ depreciation) of building on it = S
• (c) Find Cost per unit area (abstracted) = (C – S)/A …. If A is the plot
area
• Care needs to be taken while calculating the replacement value –
depreciation needs to be calculated correctly
Methods of Valuation for Urban Open Lands
• (3) Belting Method
• When the plot size is very large, and when plot depth ACCESS ROAD
is larger than plot frontage, this method is used
d
• It assumes that land abutting the access road is more
valuable than the rear land away from the front
1.5d
• Generally the plot is divided into three “belts” or
zones and land values are adjusted accordingly:
2.25d
• Front belt has least depth = d (say) … to be wisely
decided
• Middle belt has about 1.5 times depth of front belt =
1.5d
• Rear belt has about 1.5 times depth of mid-belt = 1.5 x
1.5d = 2.25d
Methods of Valuation for Properties
• (1) Land & Building Method (Cost Method)
• (2) Rent Capitalization Method
• (3) Development Method (Residual Method)
• (4) Profit Method
• (5) Direct Comparison Method
• N.B: The first one is a Cost Approach
• Nos. 2, 3, 4 are all Income Approach
• Last one is Sale Comparison Approach
(1) Land & Building Method (Cost Method)
• By this method, the market value of the land and the value of building are
assessed separately and added to get the present value of the property
• Depreciation is calculated and deducted from replacement value of
building
- either by straight line method or applying linear method
• Present Value of the Property = Value of the building + Value of
the land + Value of the amenities & services
• Applied for valuation of properties where there is no direct evidence of
rent (e.g. schools, public libraries, welfare centres, hospitals, police
stations, industrial buildings, etc.)
• N.B: It is an approximate method, since replacement cost is ideally equal to
the value, only when the property is just constructed (i.e. no depreciation)
(2) Rental Capitalization Method
• Rental method of valuation consists in capitalizing the Net Annual
Rental Income (NARI) at an appropriate rate of interest or rate of
capitalization.
• Net annual rent income equals to Gross Annual Rental Income (GARI)
minus outgoings like:
• Property Tax,
• Repairs, maintenance,
• Service Charges, Insurance Premium,
• Rent Collection and Management Charges etc.
(3) Development Method (Residual Method)
• This method is used to evaluate such property where there is a
development potential, so that the value of the property after
development will be increased more than the expenditure incurred
• It is called Residual since it refers to the portion of the land/property
that is yet to be developed
• E.g. a large portion of land can be divided into small plots and
developed fully so as to provide plots of land for a residential Colony
• or a large complex of multi-storied buildings, housing ownership flats
in a Co-operative Housing Society
(4) Profit Method
• This method is applicable to hotels, cinema theatres, marriage halls
and other public places for hire
• This method deals in working the profit from a property and
subsequently capitalizing the same at appropriate rate of return
depending upon a number of factors
• (i) The net profit to be adopted should be an average of last three
years of profit
• (ii) Part of the profits is due to goodwill which should be properly
reflected in the rate of return
(5) Direct Comparison Method
• Apart from the above four methods, a valuer can estimate the
present worth/ market value of property consisting of Land &
Building by adopting comparable sale instances of the composite rate
• Under the comparison of properties, no two properties are
not same, hence to get exact comparison of the properties is difficult
• But here realistic value can be obtained following some standard
factors, that are considered in this method
General procedure to do Valuation of a Building
1. Measure the Plinth Area. Observe the specification and other
factors which affect the value.
2. Adopt suitable Replacement Rate of construction (for the Building
portion alone) depending upon the existing conditions and
specifications.
3. Multiply the plinth area by the unit rate to get the Replacement
value of the building.
4. Ascertain the age of the Building.
5. Estimate suitable total life of the Building.
6. Assume suitable % for salvage value. Calculate Depreciation by
Straight line method.
General procedure to do Valuation of a Building
7. Depreciation % = (Age / Total life) x (100 - % Salvage value).
• If the age is not known or if the building has crossed its service life, estimate
future life and calculate the depreciation by using the formula:
• Depreciation % = (Total life – Future Life)/(Total Life) x (100 - % Salvage value).
8. Depreciation % multiplied by the Replacement value will be the
Depreciation Value.
9. Present Value = Replacement Value – Depreciation Value. This is the
value of Building.
10. Add suitable depreciated value for other works like amenities, extra
works, miscellaneous works etc.
11. Add suitable value separately for services depending upon the actual’s
specifications.
Valuation by Land & Building Method
• In this method of valuation building portions being valued separately after
allowing depreciation and the land is valued separately and their added to get
the present value of the property
• Present Value of the Property = Value of the building + Value of
the land + Value of the amenities & services
• Procedure:
• Ascertain from the applicant the exact purpose of valuation.
• From the document available, note down the measurement of the plot and other
details.
• Verify the measurements and the extent at site.
• Assess suitable unit rate based upon the prevailing market rate or from the recent
comparable sale instances of a similar vacant plot with almost similar characteristics.
• Arrive the value of Building by adopting the procedure.
Valuation by Land & Building Method
• Procedure continued:
• Addition of value of Land and Building will be the present value of the property.
• If the aim of valuation is to assess the market Value, do adjustments if any
1. Apply the reduction factor to the value of land.
2. Add suitable percentage towards any potential value
3. Deduct any percentage towards negative factors.
• Analyze any other points depending upon the individual merits of the case.
• Give valuation report in the appropriate format.
• Solved Example:
Solved Example: Land & Building Method
• An R.C.C Roofed Residential Building of G.F 1600 sft & F.F 1000 sft is
existing in a plot of size 3600 sft. Age of G.F is 10 years and that of F.F is
5 years. Find the market value of the property.
• Valuation is done to assess the market value by adopting Land and
building method:
• I: Valuation of the Land:
• Plot size = 3600 sft
• Prevailing market value = Rs. 50.00 / sft
• Adopted unit rate 85% = 50.00 x 85% = Rs. 42.50 / sft
• Assessed value of plot = 3600 x 42.50 = Rs. 1,53,000/-
Solved Example: Land & Building Method
• An R.C.C Roofed Residential Building of G.F 1600 sft & F.F 1000 sft is existing
in a plot of size 3600 sft. Age of G.F is 10 years and that of F.F is 5 years. Find
the market value of the property.
• II: Valuation of the Building:
(A): Ground Floor:
• Plinth area of Ground floor = 1600 sft
• Replacement Rate of construction = Rs. 500.00 / sft
• Replacement value = 1600 x 500 = Rs. 8,00,000 /-
• Age of building = 10 years
• Total life assumed = 80 years
• Formula: Depreciation % = (Age / Total life) x (100 - % Salvage value).
• Depreciation % (assuming salvage value of 10%) = (10/80) x (100 – 10) = 11%
• Depreciation Value = 8,00,000 x 11% = Rs. 88,000/-
• Depreciated Value of Ground Floor = 8,00,000 – 88,000 = Rs. 7,12,000/-
Solved Example: Land & Building Method
• An R.C.C Roofed Residential Building of G.F 1600 sft & F.F 1000 sft is
existing in a plot of size 3600 sft. Age of G.F is 10 years and that of F.F is
5 years. Find the market value of the property.
• II: Valuation of the Building:
(B): First Floor:
• Plinth area of First floor = 1000 sft
• Replacement Rate of construction = Rs. 400.00 / sft
• Replacement value = 1000 x 400 = Rs. 4,00,000 /-
• Depreciation % (assuming same as G.F) = 11%
• Depreciation Value = 4,00,000 x 11% = Rs. 44,000/-
• Depreciated Value of First Floor = 4,00,000 – 44,000 = Rs. 3,56,000/-
• TOTAL value of building = GF + FF = Rs. 10,68,000/-
Solved Example: Land & Building Method
• An R.C.C Roofed Residential Building of G.F 1600 sft & F.F 1000 sft is
existing in a plot of size 3600 sft. Age of G.F is 10 years and that of F.F is
5 years. Find the market value of the property.
• III: Other Depreciated value:
• Amenities existing in the building = Rs. 30,000/-
• Water supply services = Rs. 20,000/-
• Septic tank & plumbing services = Rs. 6,000/-
• Compound Wall = 224 RFT x Rs. 100 / RFT = Rs. 22,400/-
• Electric Bill Deposit + Miscellaneous = Rs. 5,000/-
• TOTAL other depreciated value = sum of the above = Rs. 83,400/-
Solved Example: Land & Building Method
• An R.C.C Roofed Residential Building of G.F 1600 sft & F.F 1000 sft is
existing in a plot of size 3600 sft. Age of G.F is 10 years and that of F.F is
5 years. Find the market value of the property.
• IV: Abstract of the Valuation:
• Value of Land = Rs. 1,53,000/-
• Value of Building = Rs. 10,68,000/-
• Other depreciated value = Rs. 83,400/-
• TOTAL valuation = Rs. 13,04,400/-
(Rupees Thirteen lakh four thousand and four hundred only)
Tutorial Example: Land & Building Method
• An RCC Residential Building stands on a plot of land that admeasures
100’ x 40’. The Ground floor has built up area (BUA) of 1800 sft (built 39
years ago) and first floor has BUA of 1000 sft (built 30 years ago).
• Do a valuation to assess the market value by adopting Land and building
method, given the following assumptions:
• Prevailing markets value of land is Rs. 125/sft (adopted unit rate 80%)
• Estimated life of building is 70 years
• Present rate of construction is Rs. 500/sft (for GF) and Rs. 400/sft (for FF)
• Assume salvage value as 10%
• Total original cost of amenities (built 39 years ago) = Rs. 164,285/-
• Total present value of other depreciated services/items = Rs. 70,925/-
Tutorial Example: Solution (L&B method)
• An RCC Residential Building stands on a plot of land that admeasures
100’ x 40’. The Ground floor has built up area (BUA) of 1800 sft (built 39
years ago) and first floor has BUA of 1000 sft (built 30 years ago).
• Abstract of Valuation (L&B method):Rs. 12,01,017/-
• Land Value = Rs. 4,00,000/-
• Building Value = Rs. 6,50,000/- (4,50,000 + 2,00,000)
• Other depreciated amenities = Rs. 82,142/-
• Other depreciated services/items = Rs. 70,925/-
• Total valuation = Rs. 12,03,067/- (approx. Rs. 12 lakh only)
Valuation by Rent Capitalization Method
• When there is a fair idea of what rent will be received from the property, this
method is used. It falls under the purview of Rent Control (Restriction) Act
• Basically, the Net rent = Gross rent – Outgoings (expenditures)
• Gross Annual Rental Income (GARI) – outgoings = Net Annual Rental Income (NARI)
• If the rent has not been revised for a long time for some reason or the other, the rent
calculated should be as per the market value, as on the date on which the valuation is made
• N.B: The rent itself is initially fixed as a percentage of value of the property
• Rent Yield = Annual Rent / Property Value
• In India, generally rent yield of residential ~ 3.5%, and for commercial ~ 7%
• e.g. Rental yield = (30,000 x 12) / 1,00,00,000 = 3.6% ……….. residential
• or, Annual Rent = RY x PV = 0.07 x 2,00,00,000 = 14,00,000/- (Rs. 1.17L/mo)….Commercial
• Related important terms for Rent Capitalization Method:
• Rate of Return
• Gilt-edged securities
• Year’s purchase (Y.P.)
• Capitalized Value
Valuation by Rent Capitalization Method
• Rate of Return (RR)
• The income what we receive annually for our initial capital
• If amount invested in Rs. 2,00,000/- and RR = 10%, then Annual income is Rs. 20,000/-
• Gilt-edged securities
• They are high-grade bonds or first-class securities (safest & most certain) that national governments
issue in an effort to generate revenue – they fetch best RR
• Why this name? Since originally the bond certificates were printed on paper stock with gilded edges
(thin border of gold leaf or gold paint)
• Year’s purchase (YP)
• A figure or multiplier, which when multiplied by the net income gives us the capitalized value of a
property on the material date of valuation.
• Capitalized value = Net income x YP
• If income is expected for a reasonably long period, it is considered as continuous or perpetual
• YP = 100 / RR …. (RR is the rate of interest in decimal)
• Capitalized Amount & Value
• Capitalization Amount = Annual Net income x (YP) = 20,000 x (100/10) = Rs. 2,00,000/-
• Capitalized Value of property = NARI x YP …. NARI is sometimes called Net Maintainable Rent (NMR)
• Generally Year’s Purchase (YP) is considered as 12.5 in India
Solved Example: Rent Capitalization Method
• A shop (freehold property) fetches a monthly rent of Rs. 2,000/-. The refundable
advance amount received from the tenant is Rs. 30,000/- and an additional
premium amount of Rs. 1,00,000/- for 10 years. The Property tax payable by owner
is Rs. 1200/-. What is the valuation of the shop (without considering land value)?
• I: GARI (Gross Annual Rental Income):
• Monthly rent = Rs. 2,000/-
• Annual rent = 12 x 2000 = Rs. 24,000/-
• Premium amount (annual) = Rs. 1,00,000 / 10 years = Rs. 10,000/-
• Add interest on advance (at 12%):
• Assume Safety net 3 months rent, so
• Excess rent for investment = 30,000 – 6000 = Rs. 24,000
• Interest gained on excess rent = 12% of 24,000/- = Rs. 2,880/-
• GARI = 24,000 + 10,000 + 2,880 = Rs. 36,880/-
Solved Example: Rent Capitalization Method
• A shop (freehold property) fetches a monthly rent of Rs. 2,000/-. The
advance amount received from the tenant is Rs. 30,000/-. The Property
tax payable by owner is Rs. 1200/-. What is the valuation of the shop
(without considering the land value)?
• II: Outgoings:
• Property tax annual = Rs. 1,200/-
• Operations & Maintenance cost = 15% of GARI = 15% x 36,880 = Rs. 5,532/-
• Total outgoings = 1,200 + 5,532 = Rs. 6,732/-
• III: NARI (Net Annual Rental Income):
• NARI = GARI – Outgoings = 36,880 – 6,732 = Rs. 30,148/-
• IV: Capitalized Value of Property:
• Capitalized Valuation = NARI x YP = 30,148 x 12.5 = Rs. 3,76,850/-
• (Rupees Three lakhs seventy six thousand and eight hundred and fifty only)
Tutorial Example: Rent Capitalization Method
• Mr. Rajan has let out his godown (freehold) for a monthly rent of Rs.
8,000/-. He has received a refundable advance Rs. 1,50,000/- and
premium amount of 2,00,000 for 20 years. The tenant is paying 10,000/-
as Corporation tax per annum.
• Calculate the valuation of the godown (except land) by the rent
capitalization method, given the following assumptions:
• Interest earned on refundable advance is 6% (keep 3 month rent as safety net)
• Repairing cost borne by tenant is about 10% of his monthly rent
• Ops & Maint cost borne by the owner is about 15% of GARI
• Year’s purchase (YP) is 12.5
Tutorial Example: Solution (Rent Capitalization Method)
• Mr. Rajan has let out his godown (freehold) for a monthly rent of Rs.
8,000/-. He has received a refundable advance Rs. 1,50,000/- and
premium amount of 2,00,000 for 20 years. The tenant is paying 10,000/-
as Corporation tax per annum.
• I. GARI = Rs. 1,33,160/-
• II. Outgoings = Rs. 19,974/-
• III. NARI = Rs. 1,13,186/-
• IV: Capitalized Valuation = Rs. 14,14,825/-
Solved Example: Residual Method
• A freehold plot of land admeasures 600 sqm. A three storied building (max
height allowed) stands on it with the following information available. Find
the value of the property.
• BUA of G.F. = 180 sqm
• Permissible Ground Coverage = 1/3 of plot
• Total BUA on 3 floors = 250 sqm
• Average net rent = Rs. 4/- per sqm of BUA
• Estimated future life of building = perpetuity
• Estimated rate of land = Rs. 40/- per sqm
• Amount of usual outgoings = 1/6 of gross rent
• Rate of Interest for Capitalization = 7%
Solved Example: Residual Method
• A freehold plot of land admeasures 600 sqm. A three storied building (max allowed height) stands on it with
the following information available. Find the value of the property. BUA of G.F. = 180 sqm | Permissible
Ground coverage = 1/3 of plot | Total BUA on 3 floors = 250 sqm | Average net rent = Rs. 4/- per sqm of
BUA| Estimated future life of building = perpetuity | Estimated rate of land = Rs. 40/- per sqm | Amount of
usual outgoings = 1/6 of gross rent | Rate of Interest for Capitalization = 7%
• Solution:
• Gross Annual Rent (GARI): 250 sqm x Rs 4 x 12 months = 12,000/-
• Outgoings: 1/6 of 12,000/- = 2,000/-
• NARI = GARI – outgoings = 12000 – 2000 = 10,000/-
• YP in perpetuity = 100/RR = 100/7 = 14.3
• Capitalized Value of Building = 10,000 x 14.3 = 1,43,000/-
• Residual Calculation by 2 approaches:
• (1) Owner won’t add BUA
• (2) Owner will build up entire FSI Continued on Next slide
Solved Example: Residual Method
• A freehold plot of land admeasures 600 sqm. A three storied building (max allowed height) stands on it with the
following information available. Find the value of the property. BUA of G.F. = 180 sqm | Permissible Ground coverage
= 1/3 of plot | Total BUA on 3 floors = 250 sqm | Average net rent = Rs. 4/- per sqm of BUA| Estimated future life of
building = perpetuity | Estimated rate of land = Rs. 40/- per sqm | Amount of usual outgoings = 1/6 of gross rent |
Rate of Interest for Capitalization = 7%
• Solution: Capitalized Value of Building = 1,43,000/- (already calculated)
• Residual Value: Approach (1): Owner won’t add to existing BUA
• Extra land available after existing GF = 200 – 180 = 20 sqm
• Proportionate land area for this Gr. Cov = 20 x 3 = 60 sqm (since Gr.Cov allowed is 1/3)
• Value of this open land = 60 x 40 = 2,400/- || Thus, total Cap value = 143000 + 2400 = Rs. 1,45,400/-
• Residual Value: Approach (2): Owner will build up entire FSI
• Residual FSI = (1/3 of 600 x 3 floors) – already Built up = 600 – 250 = 350 sqm
• Additional GARI = 350 x 4 x 12 = 16,800/- || Addl Outgoings = 1/6 x 16800 = 2,800/- || Addl NARI = 14,000/-
• Total NARI = 10,000 + 14,000 = 24,000/- || Thus, Total Cap Value = 24000 x 14.3 = Rs. 3,43,200/-
• Difference of Cap value between 2 approaches = 343,200 – 145,400 = Rs. 197,800/-
• So, how much could an owner spend on additional new construction to gain this difference value? (Critical Cost)?
• = 197,800 / 350 = Rs. 565.14 ... if present Cost of Replacement > 565.14, owner has no reason to follow Approach (2)
Valuation by Wealth Tax Act method (1989)
• Schedule III, Part B, Section 7(1) of Wealth Tax Act is to be followed for
the valuation of all immovable property, w.e.f. Apr 1, 1989.
• All other valuation methods may be deemed invalid by Govt.
• The important provisions to be required for valuation calculations are as follows:
• Item 3: Find Cap value by multiplying NMR (Net Maintainable Rent) by 12.5
(constant)
• Item 4: Calculating NMR:
• (a) Taxes levied to be deducted for net rent
• (b): 15% of GMR (Gross Maintainable Rent) to be deducted
• Item 5: Calculating GMR:
• GMR = Actual (or probable) amount of rent OR Govt. valuation whichever
is higher
• Add Taxes paid by tenant in GMR
• If repairs borne by tenant, then add 1/9th of actual rent
Valuation by Wealth Tax Act method (1989)
• Schedule III, Part B, Section 7(1) of Wealth Tax Act … continued
• Item 6: Adjustments in value for unbuilt plot area:
• Difference (D) = Unbuilt plot area - specified Area of plot. The Specified Area
roughly implies allowable Ground coverage % – and % varies for cities
• Delhi, Mumbai, Kolkata, Chennai = 60%
• Ahmedabad, Allahabad, Amritsar, Bangalore, Bhopal, Cochin, Hyderabad, Indore,
Lucknow, Nagpur, Patna, Sholapur, Surat, Trivandrum, Vadodara, etc. = 65%
• Other cities not mentioned in the list = 70%
• Then %D is calculated; i.e. (D / total plot area) x 100
• (a) If 5% < %D < 10%, then add 20% of Cap Value as per Item 3
• (b) If 10% < %D < 15%, then add 30% of Cap Value as per Item 3
• (c) If 15% < %D < 20%, then add 40% of Cap Value as per Item 3
• Item 7: Adjustments for unearned increase in land value
• For leasehold property, Govt (or municipal body) is entitled to a % of the value gain
• Item 8: Special Conditions where Cap Value is invalid (as/item 3).
• E.g. If %D > 20%, then Cap Value is invalid
Solved Example: WT Act method
• Calculate the value of a freehold property in Ahmedabad as per
Schedule III (part B, section 7(1)) of Wealth Tax Act
• Land Area 1200 sqm
• BUA of GF = 200 sqm
• Total BUA on all floors = 360 sqm
• Actual rent received by owner = 1,20,000/- (higher than annual
assessed value)
• Local tax paid by tenant = 86,663/-
• Expenditure of repairs borne by owner
Solved Example: WT Act method
• Calculate the value of a freehold property in Ahmedabad as per Schedule III of Wealth Tax Act
• Land Area 1200 sqm | BUA of GF = 200 sqm | Total BUA on all floors = 360 sqm | Actual rent received by owner =
1,20,000/- (higher than annual assessed value) | Local tax paid by tenant = 86,663/- | Expenditure of repairs borne
by owner.
• Solution:
• GMR (Gross Maintainable Rent) = Rent + tax paid by tenant = 120,000 + 86,663 = 206,663/- (as per item 5)
• Outgoings = Tax paid + 15% of GMR = 86,663 + (206,663 x .015) = 86,663 + 31,000 = 117,663/- (as per item 4)
• NMR (Net Maintainable Rent) = GMR – outgoings = 89,000/-
• Capitalized Value of property = 12.5 x 89,000/- = 11,12,500/- (as per item 3)
• For extra residual land:
• Plot Area = 1200 sqm || Specified Area (Ahmedabad) = 65% x 1200 = 780 sqm (Item 6)
• Unbuilt Plot area = 1200 – 200 = 1000 sqm
• Difference (D) [Unbuilt plot – Specified Area] = 1000 – 780 = 220 || %D of total plot = (220/1200)x 100 = 18.33%
• As per item 6 (c) … If 15% < %D < 20%, then add 40% of Cap Value as per Item 3 i.e. 11,12,500 x 1.4 = 15,57,500/-
Solved Example (2): WT Act method
• Calculate the value of a freehold property in Ahmedabad Rasayani as per Schedule III of Wealth Tax Act
• Land Area 1200 900 sqm | BUA of GF = 200 sqm | Total BUA on all floors = 360 sqm | Actual rent received by
owner = 1,20,000/- (higher than annual assessed value) | Local tax paid by tenant owner= 86,663/- | Expenditure
of repairs borne by owner tenant.
• Solution:
• GMR (Gross Maintainable Rent) = Rent + tax paid by tenant + Repairs by tenant
• = 120,000 + 86,663 + (1/9 x 120,000) = 120,000 + 13,333/- = 133,333/- (item 5)
• Outgoings = Tax paid + 15% of GMR = 86,663 + (206,663 133,333 x .15) = 86,663 + 20,000 = 106,663/- (item 4)
• NMR (Net Maintainable Rent) = GMR – outgoings = 133,333 – 106,663 = 26,670/-
• Capitalized Value of property = 12.5 x 89,000 26,670/- = 3,33,375/- (as per item 3)
• For extra residual land:
• Plot Area = 1200 900 sqm || Specified Area (Ahmedabad Rasayani) = 65 70% x 900 = 630 sqm (Item 6)
• Unbuilt Plot area = 900 – 200 = 700 sqm
• Difference (D) [Unbuilt plot – Specified Area] = 700 – 630 = 220 70 || %D of total plot = (70/900)x 100 = 7.78%
• As per item 6 (c)(a) … If 5% < %D < 10%, then add 20% of Cap Value as per Item 3, i.e. 3,33,375 x 1.2 = 4,00,050/-
Valuation by Profit Method
• Estimating the Fair Market Value by using Profit Method deals in
working the profit from a property and subsequently capitalizing the
same at appropriate rate of return depending upon a number of factors:
• Profit method is applicable to Hotels, Cinemas, Auditoriums, Marriage
Halls and other public places given out on rent for short time periods.
• It is the most appropriate method of valuation if the owner/operator of
the property (who conducts the business) assesses the value himself
• The value of the Profit is determined by capitalizing the net profit (from
tangible and intangible assets) at an appropriate rate of return
• PROFIT = GROSS INCOME – EXPENSE
Valuation by Profit Method
• Case of a Cinema theatre
• PROFIT = GROSS INCOME – EXPENSE
• Gross Income = Income from running shows + Income from other sources –
expenses (operating costs, all kinds of taxes, etc.)
• Gross Income:
• Yearly Gross Income from shows = (Ticket prices of full show occupancy) x (Average
occupancy rates) x no. of shows per month x 12 – Less Entertainment Tax paid to Govt.
• Occupancy rates depend on various factors such as:
• Competition / Locational Advantages / Environment of locality / Buying power of area
• Capacity of the Auditorium / Number of daily shows
• Interior decoration / Aesthetics of Foyer / Furniture /
• Technical quality of movie infrastructure (projection system/ sound system / AC / power backup)
• Quality of films (demand / film reviews / box office sales)
• Entertainment tax varies from state to state – e.g. 40% of daily collection
Valuation by Profit Method
• Income from other sources:
• Income from exhibiting Advertisements
• (outdoor hoardings, wall displays, jingles, slides, etc.)
• Rental Income from Concessionaires
• (Food Stalls, Coffee shops, ice-cream parlours, kiosks, vendors, etc.)
• Rental Income from Car Parking and Cycle Stands
• Miscellaneous Income from Weighing Machines, etc.
• Interest for the deposits paid by the concessionaires
• Heads of Expenditures:
• Preliminary Expenses
• Operating Costs (Working expenses)
• Maintenance Costs - Repairs and Depreciation
• Owner’s Profit
Valuation by Profit Method
• Preliminary Expenses:
• Film hire charges to the distributors
• Hire charges for the Indian News Reels
• Property tax, Local Tax, rents, if any
• Other Taxes connected to Cinema Business
• Operating Costs (working expenses):
• Establishment charges like Staff Salary, Gratuity, Bonus, Provident Fund, etc.
• Running cost of projectors, audio systems, generators, cooling appliances, etc.
• Electricity Cost
• Marketing – Promotions, Printing, Postage, Publicity, Social media, stationery
• Office Expenses, Furniture
• Traveling & Conveyance, Packing and Forwarding
• Various License Fees, Legal Expenses, Auditors fees
• Bank Commissions, insurance premiums (building, plant / machinery, equipment)
• Subscription to Associations, Entertainment of Guests, Events
• Miscellaneous, etc.
Valuation by Profit Method
• Maintenance Costs – Repairs & Depreciation:
• Suitable depreciation
• Standard rates: Building 2.5%, Furniture 15%, Machinery 20%, AC 10%, Electrical fittings 15%
• Repair of maintenance of buildings/ interiors
• Maintenance of plant and machinery, technical equipment
• Sinking fund – for furniture, screens, etc.
• Sinking fund deduction is required for furniture, Fixtures, Plant & Machinery, etc., which
require periodic replacements. The deduction is calculated not on the prime costs but on
prevailing costs of replacement, less accumulated sinking fund reserves of earlier year on
remaining period of anticipated life
• Owner’s profit:
• If the owner operates the business himself, generally 15 % on total gross income excluding
the entertainment tax is kept aside as Owner’s profit (and accounted as an expense)
• This profit % covers items such as:
• Interest on Capital Blocked up in his assets
• Interest on Capital required for day to day Working
• Trade Profit which is due to his effort, time, skill and Management (networking)
• Allowance for Risk Element
Valuation by Profit Method
• Profit & Capitalizing:
• Profit = Gross Income – Expenses
• The profits are to be apportioned to 2 categories, namely:
• 1. Profit from intangible assets and
• 2. Profit from tangible assets
• The ratio of Intangible profit to Tangible profit is normally 1:3
• While Capitalizing, a higher rate of interest is to be adopted for intangible
profit than tangible profit since efficient, running the Cinema business
depends upon the good management, goodwill and license
• Generally 14% capitalization is adopted for intangible profit (1/4) and
12% Capitalization is adopted for tangible profit (3/4).
• See Case Study Example from “Principles of Valuation” by Sabapathy
Strategies used by real estate builders / brokers
• If you are interested in gaining further tips of current market practices, the
following videos may be helpful
• Asset Yogi (Mukul Malik) – in Hindi
• Fair Market value method https://www.youtube.com/watch?v=S5ipCt6VOvA
• Land & Building Method https://www.youtube.com/watch?v=ICgPWYLwY9E
• Rent Yield Method https://www.youtube.com/watch?v=3sRr6WKPRlI
Thank you
• End of Module 2 (Valuation)
