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The European Group of Valuers Associations

EUROPEANVALUATIONSTANDARDS

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EUROPEAN VALUATION STANDARDS

2012

SEVENTH EDITION

www.gva.rg

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Seventh edition

ISBN 9789081906005

TEGoVA

Printed in Belgium by Gillis nv/sa

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Contents

Peae ...............................................................................................................................................................................5

Intodtion .................................................................................................................................................................. 7

Part 1 - EuroPEan Valuation StandardS and aPPlicationS ..............13

1A - EurOPEAN VAluATION STANDArDS .......................................................................................15

EVS1 Maket Vae .............................................................................................................................................17EVS2 Vaation Bases Othe than Maket Vae ........................................................................35EVS3 The Qaied Vae ..........................................................................................................................43EVS4 The Vaation Poess........................................................................................................................51EVS5 repoting the Vaation ..................................................................................................................59

1B - EurOPEAN VAluATION APPlIcATIONS ................................................................................. 65

EVA1 Vaation o the Ppose o Finania repoting ......................................................67

EVA2 Vaation o lending Pposes................................................................................................77EVA3 Popety Vaation o Seitisation Pposes ...........................................................85EVA4 Assessment o Insabe Vae...................................................................................................91EVA5 Appiation o Investment Vae (Woth) o Individa Investos................99EVA6 cossbode Vaation .................................................................................................................103EVA7 Popety Vaation in the context o the Atenative Investment

Fnd Manages Dietive ............................................................................................................107EVA8 Popety Vaation and Enegy Eieny......................................................................113

Part 2 - EuroPEan union lEgiSlation and ProPErty Valuation 123

1. Genea Intodtion ......................................................................................................................1242. The Eu Intena Maket..................................................................................................................128

A. Intena Maket Povisions on the Vaation o Popety.......................128A.1 Vaation o Popety o company Aonts........................................128A.2 Vaation o Popety o Finania Instittions ..................................130A.3 Vaation o Popety o State Aid res ..................................................131

B. Intena Maket Taxation legisation .....................................................................132

B.1 Vae Added Tax (VAT) and Popety .............................................................1323. Heath and Saety .............................................................................................................................1404. Enegy .........................................................................................................................................................141

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5. Envionment ..........................................................................................................................................1435.1 Genea .........................................................................................................................................1435.2 Envionmenta Impat Assessments and Stategi

Envionmenta Assessments .......................................................................................1455.3 Wate ..............................................................................................................................................1465.4 contaminated land and Envionmenta liabiity ......................................1485.5 Potion ......................................................................................................................................1495.6 Asbestos and Othe Sbstanes...............................................................................1505.7 Biodivesity and consevation................................................................................151

6. The common Agita Poiy...........................................................................................152

Part 3 - othEr tEchnical documEntS .............................................................................157

TEGoVAs code o Ethis and condt................................................................................................159Smmay o TEGoVAs Minimm Edationa reqiements..........................................163Smmay o TEGoVAs reognised Eopean Vae (rEV) Sheme ..........................165Inomation Pape Sstainabiity and Vaation.....................................................................167code o Measement o Distane, Aea and Vome ...........................................................185Inomation Pape Appotionment o Vae between land and Bidings ......197Inomation Pape cetiation o Vaes ..................................................................................203Eopean Popety and Maket rating: A Vaes Gide ...................................................207Euopean Motgage Fedeation Pofle o risk related citeia o Valuations..221

cassiation o TEGoVAs Tehnia Doments .......................................................................225Gossay ......................................................................................................................................................................227Membeship o the Eopean Vaation Standads Boad ................................................231Membeship o TEGoVA .................................................................................................................................233

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Preace 5

Preace

It is oten stated that real estate is not EUpolicy. This is largely true and good as housingpolicy and property law are not the EUscompetence. There is a strong local aspectto much regulation o property which mustindeed be as close to citizens as possible, otenbelow the national level. And yet, or veryimportant reasons, real estate is also at the

heart o European politics and it is extremelytimely that European Valuation Standardshave made our work and our goals part o thesubstance o valuation practice.

Across the Union, real estate markets, closely dependent on bank nance, have all beenaected by the crisis and in some areas have been part o the systemic problem. TheEuropean Parliament has been at the oreront o the wave o EU legislation designed to

make it ar more dicult or such cascading market ailures to happen again. Valuationis clearly a key component o property market saety and security, and it is thereoreto be welcomed that European Valuation Standards comprise specic applications onvaluation issues raised by the Services Directive and the Alternative Investment FundManagers Directive.

Land and buildings are also the single most important stake in the sustainability debate,buildings alone accounting or 36% o EU carbon ootprint and land use being anotherkey climate actor. Land and buildings are the matrix o EU policy on soil protection, ood

management, water saving, environmental liability, environmental impact assessment,strategic environmental assessment, renewables and energy eciency. But EUlegislation cannot achieve its goals without proper take-up, and ecient transpositiono EU Directives into national law is only part o this. Increasingly, it is important toensure authentic understanding and ownership o EU policy goals by citizens. Heretoo, it is commendable that European Valuation Standards contain a specic applicationhelping valuers help their clients to make the most out o the opportunities oered bythe Energy Perormance o Buildings Directive.

I preside over the European Parliaments Urban Intergroup, a purpose o which isto monitor and discuss the impact o EU policies on the urban environment so thatparliamentarians, European Commission ocials and civil society are more conscious o

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6 European Valuation Standards 2012

the interrelations, impacts and trade-os between dierent policies. European citizenswould benet rom such a holistic view and I thereore welcome the section o EuropeanValuation Standards giving a comprehensive survey o the relevant EU legislation that

applies to property.

Jan Obyht MEP

Pesident, urBAN IntegopEopean Paiament

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Introduction 7

Introduction

Like its previous editions, this book is intended to serve the needs o valuers that aremembers o the 45 valuers associations rom 26 countries representing the membershipo TEGoVA. To aid transparency and to assist clients in their understanding o theramework o these standards, an online version is also available at the TEGoVA websitewww.tegova.org.

A singularity o EVS has always been to highlight the origins in EU law o concepts as

basic to the proession as market value and mortgage lending value, or the EU denitiono asset valuer or state aid rules, or again, under the Capital Requirements Directive, theconcepts o independent valuer and valuation reporting or the purposes o monitoringand reporting the values o property used as collateral. But EVS 2012 takes coverage andunderstanding o the EUs inuence on property and valuation to another level.

Besides the inevitable updating and associated rewriting, this edition goes beyond theprovision o standards and their application. Divided into three parts, this book contains

European Valuation Standards and their application in Part I, European Union legislationpertinent to property valuation in Part II and a series o technical documents in Part III.

This, the seventh edition o European Valuation Standards replaces the previous editionwith eect rom 1 June 2012.

Part IA - European Valuation Standards

Some o the substantive changes to EVS1 EVS5 are described in the paragraphs thatollow.

The denition o Market Value in EVS1 is the same as that used in both EVS 2009 and theCapital Requirements Directive save that it now reers more broadly to the asset ratherthan the property and uses the phrase valuation date rather than date o valuationas the latter has proved to cause some international conusion. These changes do notaect its interpretation or property. The denition o Market Rent continues to reer

to a property as it concerns the rent or a leasehold interest. Some Assumptions andSpecial Assumptions that may be made in orming an opinion o Market Value areset out and conrmation is provided that Forced Sale Value is not a basis o valuation,

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though once all the relevant constraints are identied it may be seen as a market valueassessment on the special assumption o a stated but limited period or marketingthe property. Clarication o the concept o highest and best use is provided in a

considerable commentary explaining that in essence it is the use that is permitted atthe valuation date that oers the highest value based on reasonable expectations.

As the application o Fair Value is used in two particular but distinct contexts, twoseparate denitions are provided in EVS2. A General Denition to be used as a basiso valuation or real estate as between specic participants in an actual or potentialtransaction is set to reect the act that the result may oten produce a value that diersrom the market value o a property. A denition For Accounting Purposes ollows;specically adopted as a term under International Financial Reporting Standards or

which, albeit with slightly looser assumptions than the ull denition o Market Value,the same gure as Market Value may oten result.

In EVS3 all Qualied Valuers and their representative proessional or technicalorganisations are now required to adhere to the TEGoVA Code o Ethics and Conduct, asprovided within Part III o this book.

EVS4 considers the procedural steps to be ollowed in preparing a valuation report.Detailed terms o engagement that must be agreed in writing with the client priorto submission o any valuation report are provided, stressing that these are minimumterms. Apart rom the benets to the valuer o a clear and concise record which hasbeen prepared and agreed in advance o the assignment, this new requirement ensuresthat the client and the clients proessional advisers know what to expect and are able tojudge whether what they receive is what they wanted and expected.

As a Valuation Report must adequately report all matters set out within the terms oengagement, EVS5 now states that these terms should virtually mirror the headings o

the report, and provides additional requirements, including provision o a description othe valuation methodology and analysis utilised in orming the opinion o value.

Part IB - European Valuation Applications

EVS 2012 contains eight valuation applications, three more than the previous edition. Allo the applications included within EVS 2009 have either been updated or replaced, withthe scope o each application being clearly set out.

The new applications address specic qualities and skills needed by valuers or cross-border valuation, EU valuation rules or hedge unds including real estate unds, and the

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Introduction 9

specic valuation challenges o the Energy Perormance o Buildings Directive.

EVA6 - Cross-border valuation

The EU Treaties and the Services Directive guarantee the reedom o valuers to provideservices anywhere in the Union, but they contain nothing on the particular skills andqualities required by valuers operating outside o the home country. EVA6 providesguidance to the valuer carrying out a valuation in a member state other than his own.It complements the Services Directive by covering the experience, competence andreporting requirements required when undertaking a cross-border valuation. Theapplication covers qualications, proessional experience and market knowledge, terms

o engagement, compliance with local rules, conicts o interest, ethics, insurance andthe report.

EVA7 - Property Valuation under the Alternative Investment Fund Managers Directive

The crisis has led to considerable toughening o supervisory and regulatory control overnancial markets and a massive shit o that control rom the national to the EU level.One result is the new Alternative Investment Fund Managers Directive covering, interalia, real estate und managers, and containing a detailed valuation article. EVA7 reviewsthe Directives requirements concerning the independence o the valuer, proessionalregistration requirements, the criteria concerning the procedures or the propervaluation o the assets, the proessional guarantees the valuer must be able to urnish toeectively perorm the valuation unction, and the requency o valuation.

EVA8 - Property Valuation and Energy Eciency

Another important sphere o EU inuence is action against climate warming. Asbuildings account or 40% o the entire European carbon ootprint, it is not surprisingthat the EU has produced extremely coercive legislation on the energy perormanceo buildings. EVA8 provides guidance on all valuation-relevant aspects o the EnergyPerormance o Buildings Directive, including how best to advise clients on whetherany renovation required by the building being valued is sucient in scale to trigger theupgrading o the buildings minimum energy perormance required by the Directive inthe event o major renovation. Further advice is given to assist in providing an objective

assessment as to what eect, i any, the rating and recommendations ensuing rom theDirective-required energy perormance certicate have on the valuers reporting o hisopinion as to the value o the property.

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Part II: General knowledge o EU property and valuation policy

There is a new Part II European Union Legislation and Property Valuation, separate

rom the standards and applications, giving valuers or the rst time a comprehensiveoverview o EU legislation as it applies to property and intended to oer generalassistance to valuers in their proessional capacity. It is explained that, although the EUdoes not regulate housing, property law or the relations between landlord and tenant,its general economic and social provisions directly impact property. In particular, thissection demonstrates how the thirty-year eort to complete the EU Internal Market hasalso led to an Internal Market or Real Estate, where ree movement o capital underpinsthe reedom to buy and sell property throughout the Union without obstacle whilereedom to provide services with or without establishment has ensured ree circulation

o the valuation proession.

Specic EU Internal Market provisions on the valuation o property are examinedincluding valuation o property or company accounts, nancial institutions and stateaid rules as well as an overview o Internal Market taxation legislation including VATand property. This is ollowed by a review o property and valuation aspects o EUhealth and saety policy, energy policy, environment policy including such propertyand valuation-relevant elds as environmental and strategic impact assessments, water,and environmental liability or contaminated land, pollution, asbestos, biodiversity

and conservation. The Common Agricultural Policy is also reviewed, as access to andlimitations on CAP payments are relevant to both capital values and rents o relevantproperty.

Part III: Technical Documents

This section consists o 11 separate chapters. TEGoVA codes relating to ethics and

conduct and measurement o distance, area and volume are included, together withsummaries o TEGoVAs Minimum Education Requirements and Recognised EuropeanValuer Scheme. Three Inormation Papers relating to sustainability and valuation, theapportionment o value between land and buildings and certication o valuers are alsoset out. The nal chapters provide a Classication o TEGoVAs Technical Documents, anupdated valuers guide to Property and Market Rating that enables a standardised andobjective risk assessment o properties; a copy o the European Mortgage FederationsProle or Risk Related Criteria or Valuations and, nally, a glossary.

The need or brevity prevents any comprehensive review o these documents, thoughspecic reerence is provided to the TEGoVA Code o Ethics and Conduct and theInormation Paper relating to Sustainability and Valuation.

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Introduction 11

TEGoVA Code o Ethics and Conduct

Whenever the spotlight is turned on the valuation proession issues relating to the

ethical behaviour o valuers are highlighted. To address this TEGoVA has approved acode that all member associations are required to adopt as a minimum requirement. Thiscode encompasses personal responsibility, corporate responsibility and responsibilityto the proession. The core values embedded in the Code include airness, a properproessional respect or others and or standards, responsibility and trustworthiness.Its core requirements include acting with integrity, recognising personal interests andmaintaining competence. Such proessional standards extend beyond the requirementso law, entailing a balance between transparency, openness, client condentialityand external communication with clients, stakeholders and anyone to whom an

established duty o care is owed. These principles reinorce the need or proessionalism,accountability and client ocus.

Inormation Paper - Sustainability and Valuation

The twin pressures o economics and public policy have led to greater attention beingpaid to a range o resource issues, many embracing the concept o sustainability. Itcan be expected that both regulation and market sentiment will make the issueso environmental perormance and sustainability increasingly important to those

concerned with property and buildings and so, where relevant, to valuation. Theinormation provided within this chapter is both broad and comprehensive embracingcorporate social responsibility, environmental management systems, green buildings,green leases and green rating tools. Sustainability is considered mostly in respect othe environmental terms that are salient in todays discussions, together with otherpractical issues o adaptability and exibility o the property and the space and acilitiesit oers to retain the ability to remain useul without major change.

And nally

The publication o EVS 2012 is the culmination o a journey that started immediately aterthe last edition was published. The quest or excellence has energised members rommany member associations and the endless work o the European Valuation StandardsBoard EVSB has in itsel resulted rom eedback, commentary, queries and requests oradditional inormation and guidance. It is hoped that the product o this work achievesits aim o enabling the advancement o the valuation proession Trans-Europe, where

valuations produced in accordance with these standards provide a consistent qualitythat can be relied upon a common benchmark or investors, the nancial industry,clients and valuers throughout the European Union and beyond.

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TEGoVA is indebted to the members o the EVSB and to Michael MacBrien, Gabriela Cuperand Francois Isnard o the TEGoVA secretariat or their respective roles in the productionand publication o this book. Whereas he would not wish to be distinguished rom

other members o the EVSB, special thanks go to Jeremy Moody or nding the time todemonstrate his drating skills, to be a major contributor o text and to share his wisdom.

John Hokey

chaiman, EVS Boad

May 2012

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Part 1 - European Valuation Standards and Applications 13

PART 1

EUROPEAN VALUATION STANDARDS ANDAPPLICATIONS

CONTENTS

1A Eopean Vaation Standads

EVS1 Maket Vae

EVS2 Vaation Bases Othe than Maket Vae

EVS3 The Qaied Vae

EVS4 The Vaation Poess

EVS5 repoting the Vaation

1B Eopean Vaation Appiations

EVA1 Vaation o the Ppose o Finania repoting

EVA2 Vaation o lending Pposes

EVA3 Popety Vaation o Seitisation Pposes

EVA4 Assessment o Insabe Vae

EVA5 Appiation o Investment Vae (Woth) o Individa Investos

EVA6 cossbode Vaation

EVA7 Popety Vaation in the context o the Atenative Investment

Fnd Manages Dietive

EVA8 Popety Vaation and Enegy Eieny

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Part 1A - European Valuation Standards 15

Part 1A

European Valuation Standards

EVS1 Market Value

Valuers should use the ollowing denition o Market Value unless otherwise directedby legislation:

The estimated amount or which the asset should exchange on the valuationdate between a willing buyer and a willing seller in an arms length transactionater proper marketing wherein the parties had each acted knowledgeably,prudently and without compulsion.

EVS2 Valuation Bases Other than Market Value

The valuer should establish the purpose or which the valuation is required beore usingany basis o value other than Market Value.

Save as required by European and national law and regulation in any particular case,the valuer should only use recognised bases o valuation that are compatible withthe purpose o the valuation and, in doing so, honour the principles o transparency,coherence and consistency.

Such other bases o value may need to be used as required by law, circumstances or aclients instructions where the assumptions underpinning Market Value are not qualiedor cannot be met. The result will not be a Market Value.

EVS3 The Qualied Valuer

Each valuation carried out in accordance with these Standards must be carried out by,or under the strict supervision o a Qualied Valuer.

Valuers will at all times maintain the highest standards o honesty and integrity andconduct their activities in a manner not detrimental to their clients, the public, theirproession, or their respective national proessional valuation body.

The valuer must be able to show proessional skill, knowledge and competenceappropriate to the type and scale o valuation and must disclose any actor which couldcompromise an objective assessment.

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All Qualied Valuers and their representative proessional or technical organisations arerequired to adhere to the TEGoVA Code o Ethics and Conduct and the Code o Conducto their Member Association.

EVS4 The Valuation Process

The terms o engagement and the basis on which the valuation will be undertakenmust be set out in writing and agreed beore the valuation is reported.

The valuation must be researched, prepared and presented in writing to a proessionalstandard.

EVS5 Reporting the Valuation

The valuation must be presented in clear written orm to a proessional standard,transparent as to the instruction, purpose, basis, method, conclusion and prospectiveuse o the valuation.

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EVS1 - Market Value 17

EVS1

Market Value

1. Introduction

2. Scope

3. TEGoVAs Approved Denition o Market Value

4. Denitions o Market Value in EU Legislation

5. Commentary

EUROPEAN VALUATION STANDARD 1

Valuers should use the ollowing denition o Market Value unless

otherwise directed by legislation:

The estimated amount or which the asset should exchange on the

valuation date between a willing buyer and a willing seller in an arms

length transaction ater proper marketing wherein the parties had each

acted knowledgeably, prudently and without compulsion.

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1. Introduction

1.1 Market Value is a key concept in establishing an inormed expectation as to the

price or something, one that is neutral as between buyer and seller. The nature o themarket in which that value is determined will dier according to the subject o the tradewhile market conditions will vary with the changing balance o supply and demand,changing knowledge, ashion, rules, expectations, credit conditions, hopes o prot andother circumstances. Value does not mean a specic price, the actual sum that mayprove to be paid in a given transaction between specic parties. At an individual level,the value o an asset to a person will reect its useulness to him when judged againsthis resources and opportunities. In the context o a market with competing parties,it is rather an estimate o the amount that could reasonably be expected to be paid,

the most probable price in market conditions at the valuation date. While the asset inquestion may have dierent values or dierent individuals who may be in the market,its market value is the estimate o the price in the present market on assumptions thatare deliberately neutral to achieve a standard basis o assessment or both buyers andsellers. These assumptions are explored in Section 4 below.

1.2 The market value o an asset is understood to mean its current value in the market,saleable value (Oxord English Dictionary) irrespective o actual parties. For a valuation,that means the date or which the opinion o value is applicable.

1.3 The ultimate test or Market Value, however determined, is whether parties in themarket place could really be expected in practice to pay the value that has been assessed,hence the importance o soundly analysing good quality comparable evidence where itcan be obtained. Any valuation arrived at with a purely theoretical underpinning mustace this nal test. This is particularly applicable to valuations o real property, given theusual nature o the assets and markets concerned, especially at times o ux.

2. Scope

2.1 EU legislation makes a number o reerences to Market Value. Most reer tonancial instruments or the aggregate capitalisation o businesses. These are generallybased on transaction prices or values reported rom ocial exchanges and othermarkets or generally homogenous, ungible and widely traded assets which can otenbe sold immediately at a price.

2.2 This Standard specically considers the application o Market Value to: realestateandrelatedpropertyrights which are less homogenous as an asset class

and or which such instant, liquid and reported market conditions rarely existbut or which market values oten need to be identied;

thataremarketable,thatistosaylegallyandphysicallysaleable.

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2.3 In marked distinction to many nancial instruments, real property is commonlymore individual in both its legal and physical nature, less requently traded, has buyersand sellers with varied motives, aces higher transaction costs, takes longer to market

and buy and is more dicult to aggregate or disaggregate. These eatures make thevaluation o real property an art requiring care, experience o the specic market,research and the use o market evidence, objectivity, and an appreciation o theassumptions required and judgement in short, proessional skills.

2.4 The denition o Market Value approved by TEGoVA at paragraph 3.1 is built on therange o assumptions explored in Section 5.

3. TEGoVAs Approved Denition o Market Value

3.1 Unless otherwise directed by legislation (see below), market value

means:

The estimated amount or which the asset should exchange on the

valuation date between a willing buyer and a willing seller in an arms

length transaction ater proper marketing wherein the parties had

each acted knowledgeably, prudently and without compulsion.

3.2 As in EVS 2009, TEGoVA recommends that its denition o Market Value, practicallyidentical to that in Directive 2006/48/EC, be used as the basic denition and interpretedin accordance with the commentary in Section 5 below, save where legislationspecically requires otherwise.

3.3 As a corollary and applying the denition o Market Value to leasehold interests, the

TEGoVA approved denition omarketrent, usually expressed as an annual gure, is:The estimated amount o rent at which the property should be leased on thevaluation date between a willing lessor and a willing lessee on the terms othe tenancy agreement in an arms length transaction ater proper marketingwherein the parties had each acted knowledgeably, prudently and withoutcompulsion.

4. Denitions o Market Value in EU Legislation

4.1 There are several denitions o Market Value within EU legislation, each providedor specic purpose EU law does not provide a general denition. Ater analysis

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and consideration o the legal cases and other rulings arising under these provisions

especially the 1997 State Aid rules see 4.3.1 below as the relevant regulation that hasbeen most closely analysed in practical situations by EU institutions these denitions

are perceived to be entirely consistent in practice with that set out in EVS1.

4.2 The Capital Requirements Directive Denition

4.2.1 European Union legislation has dened Market Value or the purposes o

assessing the value o real estate as collateral or a lending institution, in essence aspart o implementing the Basel 2 Agreement. Directive2006/48/ECrelatingtothetaking

up and pursuit o the business o credit institutions (recast) at paragraph 63 in 1.5.1a [Real

Estate Collateral] o Part 3 o Annexe VIII, Credit Risk Mitigation. The denition reads:The estimated amount or which the property should exchange on the dateo valuation between a willing buyer and a willing seller in an arms length

transaction ater proper marketing wherein the parties had each acted

knowledgeably, prudently and without compulsion.

4.2.2 The Capital Requirements Directive is currently under review and is expected to

be replaced by an EU Regulation on prudential requirements or credit institutions and

investment rms, transposing Basel III into European law. Hence, the cited numbering o

Articles will change.

4.2.3 The denition is invoked or the purposes o Articles 84 to 89 o the Directive

which under the heading o its Title V Principles and Technical Instruments orPrudential Supervision and Disclosure, Chapter 2 Technical instruments o prudential

supervision, Section 3 Minimum own unds requirements or credit risk provides as

sub-section 2, the EUs legal ramework or the Internal Ratings Based IRB Approach.

Article 76 provides that this Approach may be used to calculate an institutions risk

weighted exposure amount that it has to match with a minimum level o its own undsunder Article 75. Under Article 91, this IRB Approach can also be relevant to credit risk

mitigation. Thus, where a credit institution lends on the basis o property, these rules are

o signicant importance both to the amount o capital it needs to hold in its balancesheet and or its management o credit risk.

4.2.4 This denition is immediately ollowed in the same paragraph o the Capital

Requirements Directive by the provision that The market value shall be documented

in a transparent and clear manner. This is seen as a procedural requirement or thepurposes o the directive rather than a actor helping determine the market value o any

property and is thus addressed below in EVS5.

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4.3 The State Aid Communication and the Insurance Accounts Directive defnition

4.3.1 The denition used in both the State Aid Communication and the Insurance

Accounts Directive - This second denition is used in the EU legislation governing: the rules or assessing whether a sale o property by a public authority in theEuropean Economic Area to a business and which might distort internationalcompetition should be investigated as a potentially illegal state aid. These areset out in Commission Communication on State aid elements in sales o land andbuildingsbypublicauthorities(OJC209,10/07/1997,p0003-000531997Y0710(01))and extended to EFTA countries by EFTA Surveillance Authority Decision No275/99/COLof17November1999introducingguidelinesonStateaidelementsinsales o land and buildings by public authorities and amending or the 20th time the

Procedural and Substantive Rules in the eld o State aid; accounting or insurance undertakings requiring the market value or land andbuildings as provided inDirective91/674/EECof19December1991ontheannualaccountsandconsolidatedaccountsofinsuranceundertakings;

and states that or these purposes:

Market value shall mean the price at which land and buildings could be soldunder private contract between a willing seller and an arms length buyer on thedate o valuation, it being assumed that the property is publicly exposed to themarket, that market conditions permit orderly disposal and that a normal period,having regard to the nature o the property, is available or the negotiation o thesale.

StateAidCommunicationII.2.(a)(lastparagraph)andDirective91/674/EEC,Article49(2)

4.3.2 Until 2006, this denition was also used or the assessment o property ascollateral or secured lending by credit institutions, being replaced in 2006 or thispurpose by the denition now adopted above as the TEGoVA denition o Market Value.

4.3.3 In the State Aid Communication, where a value in question was achieved by aSale on Unconditional Bidding this is to be ater:

a suciently well-publicized, open and unconditional bidding procedure,comparable to an auction, accepting the best or only bid is by denition atmarket value

4.4 The VAT Denition - A third denition is provided or VAT purposes. VAT canapply to real estate under Articles 135 and 137 oCouncil Directive o 28 November 2006onthecommonsystemofvalueaddedtax(2006/112/EC) which consolidated VAT lawincluding the Sixth VAT Directive 77/338/EEC with its Articles 13A and 13B. Its Article 72

being Chapter 1 Denition o Title VII Taxable Amount provides a general denitiono open market value or the VAT system.

For the purposes o this Directive, open market value shall mean the ull amount

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that, in order to obtain the goods or services in question at that time, a customerat the same marketing stage at which the supply o goods or services takesplace, would have to pay, under conditions o air competition, to a supplier

at arms length within the territory o the Member State in which the supply issubject to tax.As this denition is provided or all VAT purposes and so applies to any goods or services,it is not drated with specic reerence to real property. However, it is seen to cover themain points o an assumed transaction between arms length, competitive, hypotheticalparties or an actual subject property.

4.5 The EU Accounting Denition - A urther provision is given or the EUs owninternal accounting when assessing tangible xed assets specically including land andbuildings or the accounts o an EU institution. Any asset acquired ree o charge is to beassessed at its market value which is dened as:

The price which a buyer would be prepared to pay or it, having due regard toits condition and location and on the assumption that it could continue to beused

at Article 192 o Commission Regulation EC No 2909/2000 o 29 December 2000 onthe accounting management o the European Communities non-nancial xed assets.

5. Commentary

5.1 The advantage o the denition used in EVS1 over other available EU

denitions is that it more clearly sets out the key concepts involved, namely:

the result; the real property being valued; the transaction; the valuation date; the nature o the hypothetical parties as willing and competitive; the necessary marketing; the consideration by the parties; other matters.This commentary takes each phrase o the denition in turn and explores its meaning inseeking the market value o real property.

5.2 The denition in EVS1:

is the same as that used in both EVS 2009 and the Capital RequirementsDirective o 2006 save that it now reers more broadly to the asset rather thanthe property and uses the phrase valuation date rather than date o valuation

as the latter has proved to cause some international conusion. These changesdo not aect its interpretation or property;

whiledieringinitsdraftingfromthenewdenitioninIVS2011,doesnotdier

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in its substance or the valuation o real property. IVS reers to the value o anasset or liability but also deems asset to include liability while EVS1, with itsocus on property, reers just to the value o the asset since liability is seen to

be more relevant to accounting concepts. IVS 2011 has also replaced whereinto read where but nothing o signicance is seen to turn on either point. isconsistentwithmostdenitionsofMarketValueinEuropeancountries,and canbe takenas settingabasicdenitionofMarketValuethat isavailablefor

general application.The same points essentially apply to the TEGoVA approved denition o Market Rent in3.3 above. As this concerns the rent or a leasehold interest EVS1, like IVS, continues toreer to a property. Developed rom the denition in EVS1, there are minor dierences oexpression in this denition rom that used in IVS 2011 but again nothing o signicance

is seen to turn on these.

5.3 The Result

5.3.1 The estimated amount - This reers to a price expressed in terms omoney normally in the local currency, payable or the asset in an arms length markettransaction. Market Value is measured as the most probable price reasonably obtainablein the market at the valuation date in keeping with the Market Value denition. It is

the best price reasonably obtainable by the seller and the most advantageous pricereasonably obtainable by the buyer.

5.3.2 This estimate specically excludes an estimated price inated or deated byany special terms or circumstances such as nancing which are not typical, sale andleaseback arrangements, special considerations or concessions granted by anyoneassociated with the sale, or any elements o Special Value.

5.3.3 Special Value is considered with related issues under EVS2 Valuation Bases

Other Than Market Value.

5.3.4 The application in practice o the 1997 EU State Aid rules may potentially haveregard to special value, whether specic marriage value or otherwise.

5.4 The Real Property Being Valued

5.4.1 an asset - This is where the property itsel with its legal, physical,

economic and other attributes is to be analysed with all its actual opportunities anddiculties. This is introduced into the denition o Market Rent at 3.3 above by the needto consider the terms o any tenancy agreement.

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5.4.2 Valuers must take due regard where the purchase price o any propertyincludes items additional to the property itsel, whether ttings, personal goods,incentives or the purchase or other matters.

5.4.3 The market value o an asset reects the ull potential o that asset so ar as itis recognised by the market place. It may thus take account o the possible uses o theasset that may be unlocked by changes aecting it, whether new development controlpermissions, relevant inrastructure, market developments or other possibilities.

5.4.4 Hope value also sometimes called uture value is used to describe anuplit in value which the market is willing to pay in the hope o a higher value useor development opportunity being achievable than is currently permitted under

development control, existing inrastructure constraints or other limitations currently inplace. It will reect an appraisal o the probability that the market places on that highervalue use or development being achieved, the costs likely to be incurred in doing so, thetime scale and any other associated actors in bringing it about. Fundamentally, it willallow or the possibility that the envisaged use may not be achieved. While descriptiveo that uplit, it does not exist as a separate value but helps explain the market value othe property which must be judged rom the available evidence just as much as anyother part o the valuation. Hope value is not a special value as it represents the marketplaces reasonable expectations as to the opportunities oered by the property.

5.4.5 As a actor reected in market value, hope value does not include any elemento special value that may be available rom particular purchasers.

5.4.6 The concept ohighest and best use is met in a number o countries andsome valuers in Europe may be asked to value a property on the assumption o its highestand best use. In essence, that is the use that is permitted at the valuation date thatoers the highest value based on reasonable expectations. On analysis, that excludesthe hope value that the market might place on a propertys potential opportunitiesthat are not currently available. While it is an assessment o the property as it is on thevaluation date it is not an assessment o the best use that the market might at that datereasonably envisage could be possible or it.5.4.7 Highest and best use has been more ormally dened in several ormulationsincluding:

the use o an asset that maximises its productivity and is possible, legallypermissible and nancially easible. International Valuation Standards 2011,p. 22

and

the reasonably probable and legal use o property, that is physically possible,appropriately supported, and nancially easible, and that results in the highestvalue. The Appraisal Institute o Canada

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5.4.8 It should be noted that there may be specic denitions o highest and bestuse applying under statute or practice in individual countries.

5.4.9 Key components o the usual denitions or the concept o highest and bestuse, to be assessed as at the valuation date, are: it is the most reasonably probable use so disregarding the specialist uses that

might occur to an individual bidder; legal this is perhaps the critical point with regard to market value. While a

common denition requires the use to be legally permissible, the commentariesmake it clear that this is within existing zoning or permissions and so disregardsany hope value or uture value that the market might pay or the possibilityo achieving new permissions. While most discussion is in terms o currently

permitted development, the same legal constraint applies where the propertyis let but the market might perceive that possible uture re-lettings or new usesoer a potential hope value that is excluded by the constraints o the highestand best use assumption;

physically possible again this appears to assess the propertys physicalcircumstances as at the valuation date and not take account o possibledevelopments such as a new road or a ood alleviation scheme which mightoccur and o itsel oer prospects or which some bidders would pay extra value;

supported by evidence; nancially easible; that oers the highest value for the property. This nal point is sometimes

discussed in terms o the use that oers the highest net return, as where thebenet o a higher value is oset by higher costs when a lower value use maysupport a higher bid.

5.4.10 That use will depend on the specic nature o the property in question and somight change where the property is aggregated with others or the valuation. Wherepractitioners apply the highest and best use assumption, it gives guidance as to whichproperties may oer the best comparable evidence to support their valuation and mayaect the choice o valuation method.

5.4.11 Unless instructed otherwise, it is the valuers task to determine the marketvalue o the land or property in accordance with the ull analysis o market value inEVS1. The hypothetical seller will accept no less or his property and the hypotheticalbuyer will not want to oer more than he would pay or an equivalent asset o similaruseulness to him. As each point o the denition o highest and best use except therequirement or evidence places some constraint on the denition o market value, thehighest and best use assumption will not necessarily be the same as market value, albeit

that it might be higher than existing use value. The most obvious common point odierence lies in the exclusion o potential permissions or other uture opportunities orwhich the market might express hope value and in doing so judge the prospects, risks

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and costs o that uture opportunity.

5.4.12 I particular conditions are imposed on the sale, the State Aid rules will only

regard the oer as unconditional` i all potential buyers would have to, and be able to,meet that obligation, irrespective o whether or not they run a business or o the natureo their business.

5.4.13 The 1997 State Aid rules or an unconditional oer are: ... when any buyer, irrespective o whether or not he runs a business or o thenature o his business, is generally ree to acquire the land and buildings andto use it or his own purposes, restrictions may be imposed or the preventiono public nuisance, or reasons o environmental protection or to avoid purely

speculative bids. Urban and regional planning restrictions imposed on theowner pursuant to domestic law on the use o the land and buildings do notaect the unconditional nature o an oer.StateAidCommunicationII.1.(b)

5.5 The Transaction

5.5.1 shouldexchange- It is an estimated amount rather than a predeterminedor actual sale price. It is the price at which the market expects a transaction to becompleted on the valuation date that meets all the other elements o the Market Valuedenition.

5.5.2 The use o should conveys that sense o reasonable expectation. The valuermust not make unrealistic assumptions about market conditions or assume a level oMarket Value above that which is reasonably obtainable.

5.5.3 The denition used in the State Aid rules expects the price to be that at whichthe land and buildings couldbesoldunderprivatecontract. The use o could reects thehypothetical nature o the transaction. This is not assumed to mean the best possibleprice that could be imagined but rather the reasonable expectation o the price thatwould be agreed.

5.5.4 The hypothetical sale is by private contract and so is the subject o negotiation.

5.6 The Valuation Date

5.6.1 onthevaluationdate - This requires that the estimated Market Value betime-specic to a given date and this is normally the date on which the hypothetical sale

is deemed to take place and is usually, thereore, dierent rom the date the valuationis actually prepared. As markets and market conditions may change, the estimatedvalue may be incorrect or inappropriate at another time. The valuation amount will

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reect the actual market state and circumstances at the eective valuation date, not ata past or uture date. The valuation date and the date o the valuation report may dier,but the latter cannot precede the ormer. The denition also assumes simultaneous

exchange and completion o the contract or sale without any variation in price thatmight otherwise be made in a Market Value transaction.

5.6.2 Market Value is quite expressly not an assessment o value over the longerterm but only at the time o the hypothetical transaction.

5.6.3 The phrases date o valuation and valuation date are used to reer to thedate at which the valuation is assessed or determined and or which the evidencesupporting it is to be relevant rather than the, usually later, date when the valuation isprepared and considered with the valuation report then completed or the client. Thecompletion o the valuation report will never be earlier than the valuation date as itwould then be contemplating circumstances that have not happened and may not andor which important evidence may yet be ound.5.6.4 The valuation date will not be later than the date o the Report. By providingthat the hypothetical exchange o contracts is deemed to take place on the valuationdate, this ensures that the valuation is inormed by those actors that would have beenin the expectations o the parties as to value at that point in time. However, nationalregulation might require that, in specic circumstances, the valuation date may coincidewith a later reerence date or the purposes o assessing the quality and situation o theproperty e.g. public compensation schemes.

5.7 The Parties - Hypothetical, Willing and Competitive

5.7.1 betweenawillingbuyer - This assumes a hypothetical buyer, not theactual purchaser. That person is motivated, but not compelled, to buy. This buyer isneither over-eager to buy nor determined to buy at any price.

5.7.2 This buyer is also one who purchases in accordance with the realities o thecurrent market and with current market expectations, rather than on an imaginaryor hypothetical market, which cannot be demonstrated or anticipated to exist. Theassumed buyer would not pay a higher price than that which the market requires himto pay. The present owner o the asset is included among those who constitute themarket.

5.7.3 Equally, the motivated buyer cannot be presumed to be reluctant or unwilling.He is attending to this as a practical man o business.

5.7.4 The State Aid rules reer to an arms length buyer unconnected with andindependent o the seller.

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5.7.5 andawillingseller - Again, this is a hypothetical seller, rather than theactual owner and is to be assumed to be neither an over-eager nor a orced seller whois prepared to sell at any price, nor one prepared to hold out or a price not considered

reasonable in the current market. The willing seller is motivated to sell the asset atmarket terms or the best price obtainable in the open market ater proper marketing,whatever that price might be. The actual circumstances o the actual owner are notpart o this consideration because the willing seller is a hypothetical owner.

5.7.6 Thus, while the asset to be valued is to be valued as it is in the real world,the assumed buyer and seller are hypothetical parties, albeit acting in current marketconditions. The requirement that they both be willing to make the transaction createsthe tension between them in which Market Value can be assessed.

5.7.7 Market Value is thus independent o and uninuenced by the objectives o theclient instructing the valuation.

5.7.8 in anarms length transaction - An arms length transaction is onebetween parties who do not have a particular or special relationship or example,parent and subsidiary companies, or landlord and tenant which may make the pricelevel uncharacteristic o the market or make it inated, because o an element o specialvalue. The Market Value transaction is presumed to be between unrelated parties, eachacting independently.

5.8 The Marketing

5.8.1 afterpropermarketing - The asset would be exposed to the market in themost appropriate manner to eect its disposal at the best price reasonably achievablein accordance with the Market Value denition. The length o exposure may varywith market conditions, but must be sucient to allow the asset to be brought to theattention o an adequate number o potential purchasers. The exposure period occursprior to the valuation date.

5.8.2 Under the guidance or applying the EU State Aid rules, the property is to havebeen:

repeatedly advertised over a reasonably long period two months or more inthe national press, estate gazettes or other appropriate publications and throughreal-estate agents addressing a broad range o potential buyers, so that it cancome to the notice o all potential buyers.II.1.(a),1stparagraph

As the EU rules are intended to ensure that transactions are at market value, they are

also concerned that, where the sale might attract international bidders, it should beadvertised accordingly and:

such oers should also be made known through agents addressing clients on a

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Europe-wide or international scale.II.1.(a),2ndparagraph

5.8.3 The State Aid rules are specic in expecting the sale to be one in conditionsthat allow orderlydisposal no undue haste is imposed that could limit the proper

testing o the market or compel the owner to sell precipitately. The rules reer to anormal period or the negotiation o the sale which is to be judged by the nature o the

property.

5.8.4 These actors, testing the general range o bidders that may come orward,

should subject to the market conditions that anyway rame the market value bring out

the qualities required o the hypothetical buyer.

5.9 The Parties Consideration o the Matter

5.9.1 whereinthepartieshadeachactedknowledgeably...- This presumes thatboth the willing buyer and willing seller are reasonably well inormed about the nature

and characteristics o the property, its actual and potential uses, and the state o the

market at the valuation date.

5.9.2 The parties will thus appraise what might reasonably be oreseen as at that

date. In particular, the hypothetical buyer may be better inormed or this assessment

than some or all o the real bidders. This does not just involve knowledge o the property

but also o the market and thereore the evidence including such comparables as maybe available on which to judge the value o the property.

5.9.3 prudently- Each party is presumed to act in their own sel-interest withthat knowledge, and prudently to seek the best price or their respective positions in the

transaction. Prudence is assessed by reerring to the state o the market at the valuationdate, not with the benet o hindsight at some later date. It is not necessarily imprudent

or a seller to sell property in a market with alling prices which are lower than previousmarket levels. In such cases, as or other purchase and sale situations in markets with

changing prices, the prudent buyer or seller will act in accordance with the best market

inormation available at the time.

5.9.4 andwithoutcompulsion- This establishes that each party is motivated to

undertake the transaction, but is neither orced nor unduly coerced to complete it.

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5.10 Assumptions and Special Assumptions, Alternative Use Value and

Forced Sale Value

5.10.1 Assumptions

5.10.1.1 The valuation instruction may require the valuer to make an assumption, as, orexample, on the time allowed or marketing in the context o a orced sale valuation see5.10.4 below. The valuer may have to make certain assumptions in order to completethe valuation eectively, oten in the absence o particular inormation. In either casethose assumptions should be clearly stated.

5.10.1.2 The valuer makes an assumption where he assumes or is instructed to

assume something on a matter o act which he does not or cannot know or reasonablyascertain.

5.10.1.3 The valuer must undertake inspections and investigations to the extentnecessary to produce a valuation which is proessionally adequate or its purpose.Where the inormation provided or available is limited or restricted, the valuer mayneed to make assumptions to enable an opinion o value to be reported in the absenceo ull data or knowledge. Assumptions may relate to acts, conditions or situationsaecting the valuation and, as they are in the absence o ull inormation, be thoseconsidered most likely to be correct. For matters such as, or example, title or asbestosthat may be beyond the valuers ability to check independently, the assumption may beaccompanied by a recommendation that the client have the acts established by thosewith right skills. Where assumptions made are subsequently ound to be incorrect, thevaluer may need to review and amend the gures reported and reer to that possibilityin the report.

5.10.1.4 The ollowing is an indicative, but not exhaustive, list o matters that may bereported as matters where assumptions have been made in arriving at an opinion ovalue:

i A detailed report on title that sets out any encumbrances, restrictions orliabilities that may aect the value o the property may not be available. Insuch a case, the valuer would have to assume the position he considers mostlikely, also stating that he accepts no responsibility or liability or the trueinterpretation o the legal title.

ii The extent o the inspection should be clearly set out in the report, consistentwith the nature o the instruction and type o property. It may be necessary

to make the assumption that while any obvious deects have been noted;other deects may exist requiring a more detailed survey or the appointmento experts to report on their ndings. This may be ollowed by comment that

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the opinion o value stated is based on the condition as reported and that anyadditional deects that exist may require the gures to be amended.

iii Assumptions may be needed with regard to the necessary statutory consentsor the current buildings and use together with reerence to any policies orproposals by statutory bodies that could impact positively or adversely on thevalue.

iv The competence o the valuer to report on any potential risk o contaminationor the presence o hazardous substances will need to be considered. It may benecessary to make assumptions in providing an opinion o value that either nosuch risks exist or that the valuer will rely on inormation prepared by specialistconsultants.

v The valuer may, on occasion, need to assume that all mains services providedare operational and sucient or the intended use.

vi It may be necessary to make an assumption as to whether the property hasnot, or will not be expected to ood or whether other environmental mattersmay bear on the opinion o value.

vii Where the property is let, it may be necessary to assume that detailedenquiries about the nancial status o tenants would not reveal matters that

might aect the valuation.

viii The valuer may need to assume that there are no planning or highwayproposals that might involve the use o any statutory powers or otherwisedirectly aect the property.

ix The valuer may need to assume that items o plant and equipment normallyconsidered to be part o the service installations to a building would pass withthe property.

x The assumptions required where a valuation without an inspection is requiredare considered in EVS4 at 6.4.

5.10.2 Special Assumptions

5.10.2.1 In distinction to an assumption the valuer has to make to undertake his task,the valuer makes a special assumption when he assumes, usually on instruction, a actor circumstance that is dierent rom those that are veriable at the valuation date. Theresult will be a market value on that special assumption.

5.10.2.2 This may oten be to inorm the client about the eect o changedcircumstances on the valuation. Examples o this include where the valuer is instructed

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to make special assumptions as to the value o the property: wereitvacantwheninfactthepropertyislet; wereplanningpermissiontobeobtainedforaparticularuse.

Forced sale value is an example o a market value on a special assumption as to theperiod or marketing.

5.10.2.3 Specic statute law may require special assumptions to be made, as perhapsor valuations or certain taxation or compulsory purchase purposes.

5.10.2.4 Where special assumptions are to be made they should be recorded in theterms o engagement and in the valuation report see also EVS4 at 5.9.

5.10.3 Alternative Use Value

5.10.3.1 Denition - This means the market value o the property without presumingthe continuation o its present use.

5.10.3.2 Commentary - While market value identies the best available value or aproperty however used, some valuations may be required only to assume the presentuse; or example, a business is being assessed as a going concern. I it is material toconsider alternative uses o the property which may not involve continuing the presentbusiness, then that would be its alternative use value, a market value. That value wouldnot reect any costs o ceasing the business.

5.10.3.3 This basis may also be relevant where a depreciated replacement costvaluation has been undertaken.

5.10.4 Forced Sale Value

5.10.4.1 Denition - A sum that could be obtained or the property where, orwhatever reason, the seller is under constraint requiring the disposal o the property.

5.10.4.2 Commentary - The need or a valuation may arise where the seller is undercompulsion to sell, is desperate to sell or a strict time limit is otherwise imposed. Thismight most obviously arise where the period in which the property is to be sold is tooshort to allow the proper marketing needed to be condent o the best bids. Moregenerally, potential buyers may be aware that the seller is under constraint and somoderate their bids rom those they may otherwise have oered. The nature o thesespecic constraints determines the situation in which the hypothetical transer takesplace without those constraints, it would simply be Market Value.

5.10.4.3 Forced Sale Value is not a basis o valuation. Once all the relevant constraintsare identied it may be seen as a Market Value assessment on the Special Assumption

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o a stated but limited period or marketing the property. Thus, the valuer should notundertake a valuation on a orced sale basis but rather on a market value basis on statedspecic special assumptions relevant to the case in hand.

5.10.4.4 The valuer needs to know and state the time allowed and the relevant constraintson the seller. As the value will reect those very specic circumstances o the assumptionthat is imposed, they should be stated in the terms o engagement and in the ValuationReport. The result will not be a Market Value as it is not based on a hypothetical willingseller but a real seller under actual constraint.

5.11 Other Matters

5.11.1 Documentation - While Market Value exists independently o documentation,a proessional valuation under this standard should be properly recorded in writing ina way that is transparent and clear to the client in accordance with EVS4 and to anyoneelse who might reasonably seek to rely on it or appraise it.

5.11.2 The denition o Market Value should be recorded in both the terms oengagement and the valuation report.

5.11.3 Transaction costs and taxes - Market Value is to be the estimated value o aproperty and so excludes the additional costs that may be associated with sale orpurchase as well as any taxation on the transaction. Market Value will reect the eecto all the actors that bear on participants in the market and so reect such inuences astransactions costs and taxes may have but, i they need to be recognised, this should beas a sum in addition to the Market Value. These actors may inuence the value but arenot part o it.

5.11.4 In particular, Market Value will be the value beore any taxes which may apply

to any real transaction in the property being valued. The act o transaction taxes orValue Added Tax as they may aect some or all potential parties will be part o the widerramework o the market and so, along with all other actors, inuence value, but thespecic taxation due on a transaction is over and above its Market Value.

5.11.5 However, the position on this may vary perhaps especially or accountingpurposes with dierent national legislation. In certain circumstances EU law also takesa dierent approach. Article 495 oDirective91/674/EECof19December1991ontheannualaccountsandconsolidatedaccountsofinsuranceundertakingsstatesthat:

Where on the date on which the accounts are drawn up and land and buildingshave been sold or are to be sold within the short term, the value arrived at ...shall be reduced by the actual or estimated realization costs.

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5.11.6 In such cases, the valuer may choose to state the market value both beore

and ater these costs o disposal. In either case, he should make it clear whether such

costs have been deducted and, i so, speciy how much has been deducted or each

identied cost.

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EVS2 - Valuation Bases Other than Market Value 35

EVS2

Valuation Bases

Other than Market Value

1. Introduction

2. Scope

3. Basis o Value

4. Fair Value5. Special Value

6. Investment Value or Worth

7. Mortgage Lending Value

8. Insurable Value

9. Depreciated Replacement Cost


The valuer should establish the purpose or which the valuation is

required beore using any basis o value other than Market Value.

Save as required by European and national law and regulation in any

particular case, the valuer should only use recognised bases o valuation

that are compatible with the purpose o the valuation and, in doing so,

honour the principles o transparency, coherence and consistency.

Such other bases o value may need to be used as required by law,

circumstances or a clients instructions where the assumptions

underpinning Market Value are not qualied or cannot be met. The result

will not be a Market Value.

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1. Introduction

Although the majority o proessional valuations will be on the basis o market value,

there are circumstances where alternative bases may be required or more appropriate.It is essential that both the valuer and the users o valuations clearly understand thedistinction between Market Value and other bases o valuation together with the eectsthat dierences between these concepts may create in the construction and productiono valuations.

2. Scope

This Standard denes, explains and distinguishes bases o value other than Market Value.

3. Basis o Value

3.1 Denition - A statement o the undamental assumptions or assessing avaluation or a dened purpose.

3.2 Commentary

3.2.1 A basis o value as a statement should be distinguished rom the methods ortechniques used to implement a chosen basis. Established terms and methods used inthe valuation should be dened in the valuation report.

3.2.2 In the event that none o the bases in EVS 2012 are suitable or the completiono an instruction, a clear and transparent denition o the basis used must be expresslystated, and the valuer should explain the reason or deviating rom a recognised basis.I the resultant valuation does not reect a sum that would equate to a valuationprepared on the basis o Market Value, this should be stated. Any assumptions or specialassumptions used should be set out in the valuation report.

3.2.3 By contrast, a basis o valuation or a valuation approach is a methodologythat can be used to determine a valuation rom the available evidence. The income,cost and depreciated replacement value approaches are thus, in principle, methods toachieve a valuation and not bases o value.

4. Fair Value

4.1 Denition - The term Fair Value is used in two particular but distinct contexts,giving it diering applications:

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i A General Denition - Fair Value may generally be used as a basis ovaluation or real estate as between specic participants in an actual orpotential transaction, rather than assuming the wider marketplace o possible

bidders. As such, it may oten result in a dierent value to the market value oa property. For this purpose it is dened as:The price that would be received to sell an asset or paid to transer aliability in an orderly transaction between willing market participantspossessing ull knowledge o all the relevant acts, making their decisionin accordance with their respective objectives.

This denition has regard to general market transactions where an opinion oFair Value would not be expected to be the same as an opinion provided toMarket Value.

ii For Accounting Purposes - Fair Value is specically adopted as a term underInternational Financial Reporting Standards or which, albeit with slightlylooser assumptions than the ull denition o Market Value, it may oten givethe same result as Market Value. This is more closely reviewed in EVA1. For thispurpose, it is dened as:

The price that would be received to sell an asset or paid to transer aliability in an orderly transaction between willing market participants atthe measurement date International Accounting Standards Board IASB,

International Financial Reporting Standards IFRS 13, par. 1.This new denition was introduced by IFRS 13 Fair Value Measurement inMay 2011 and will supersede the ormer denition provided by IAS 16 rom1 January 2013. Until this date, Fair Value is dened as the amount or whichan asset could be exchanged or a liability settled, between knowledgeable,willing parties in an arms length transaction IAS 16, par. 6.

4.2 Commentary

4.2.1 As a basis o value, Fair Value is less specic and exacting in its assumptionsthan Market Value. In particular, there is no requirement to expose the property to theopen market. There are many situations where it will be used to address the value o aproperty.

4.2.2 The Fair Value o a non-nancial asset like real estate takes into account a marketparticipants ability to generate economic benets by using the asset in its highest andbest use, that is the use o the asset that is physically possible, legally permissible andnancially easible at the valuation date see EVS5 4.6-10 above. In this non-nancial

context, Fair Value is likely to dier rom a valuation prepared in accordance with thedenition o Market Value see EVS1. This may be because it is assessed as betweenspecic participants, such as landlord and tenant.

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4.2.3 In respect o nancial reporting see EVA1, Fair Value is a recognised andpermissible basis o valuation which accords with International Financial ReportingStandards IFRS, subject to additional conditions, though any gures reported will

requently be indistinguishable rom Market Value. However, a companys auditorsmay want to exclude the eect o any development potential that does not yet haveplanning permission in which case the Fair Value o a property could dier, perhaps onoccasion substantially, rom its Market Value. Where IFRS excludes hope value, its FairValue may resemble Market Value as assessed on the highest and best use assumption.

4.2.4 The U.S. Financial Accounting Standards Board FASB emphasised in itsAccounting Standards Update N 2011-04 published in May 2011 that, in order to achievecommon Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,air value is a market-based measurement, not an entity-specic measurement. Itsobjective is to estimate the price at which an orderly transaction to sell the asset wouldtake place between market participants at the measurement date under current marketconditions FASB, Topic 820-10-05-1B. Fair Value is measured using the assumptionsthat market participants would use when pricing the asset FASB, 820-10-05-1C.

4.2.5 One important consequence o the less specic assumptions o Fair Value isthat it allows recognition o the individual value a property may have to one bidder.That is considered in the concept o Special Value.

5. Special Value

5.1 Denitions

5.1.1 Special Value is dened as an opinion o value that incorporates considerationo characteristics that have a particular value to a Special Purchaser.

5.1.2 A Special Purchaser is a purchaser who can optimise the useulness o an

asset compared to other market participants and whose opinion o price equates to aSpecial Value.

5.2 Commentary

5.2.1 Where particular qualities or characteristics o a property are valued by oneacquiring party at a level above that which would represent Market Value, that partymay be described as a Special Purchaser and any gures reported that equate to a sumrepresenting that purchasers opinion o value would represent a Special Value.

5.2.2 Special Value could be associated with elements o Going Concern Value. Thevaluer must ensure that such criteria are distinguished rom Market Value, making clearany special assumptions made.

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5.3 Synergistic Value or Marriage Value

5.3.1 This is a particular class o Special Value which valuers will commonly meet.

5.3.2 It is dened as an additional element o value created by the combination otwo or more assets or interests where the combined value is more than the sum o theseparate values IVSC, 2011, p.12.

5.3.3 Commentary - I a Special Value arises where a combination o interestsresults in a greater value than the total o those interests valued separately, this value isoten described as a Synergistic Value or Marriage Value arising rom the marriage gain.Terms o Engagement and Valuation Reports should clearly speciy where such values

are required or will be provided and Market Value should also be reported to identiy thedierential between the two bases.

5.3.4 This might oten be ound where the acquisition o a property, otena neighbouring one, unlocks extra value or the purchaser. It may be relevant totransactions between landlord and tenant. However, where a property oers synergisticvalue opportunities to several potential bidders as by oering any o them greater scaleo operation then that may more usually be a unction o Market Value.

6. Investment Value or Worth

6.1 Denition - Investment Value is the value o an asset to the owner or aprospective owner or individual investment or operational objectives IVSC, 2011, p.12.

6.2 Commentary

6.2.1 This subjective concept relates specic property to a specic investor, group oinvestors, or entity with identiable investment objectives and/or criteria. As valuationsprepared on this basis assess what an individual buyer may be prepared to bid, they arenot a measure o the overall judgement o the market on the property. Thus, they wouldnot be expected to be consistent with or equivalent to valuations prepared on any otherbasis, including Market Value. Such valuations: are to determine the value or a specic individual investor with his own actual

concerns rather than a hypothetical party;

do not assume an exchange o property between parties.

6.2.2 The application o this denition is discussed in EVA5.

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7. Mortgage Lending Value

7.1 Denition - The value o the property as determined by a prudent assessment

o the uture marketability o the property taking into account long-term sustainableaspects o the property, the normal and local market conditions, the current use andalternative appropriate uses o the property. Speculative elements shall not be takeninto account in the assessment o the Mortgage Lending Value.

7.2 Commentary

7.2.1 The above denition was incorporated in Directive 2006/48/EC the CapitalRequirements Directive at Annexe VIII, paragraph 64 in the context o real estatecollateral or the capital requirement and credit risk management o credit institutions.

This Directive will be replaced in 2012 by a new Regulation on prudential requirementsor credit institutions and investment rms transposing the Basel III Accord into Europeanlaw. The drat Regulation was published on 20 July 2011 COM 2011 452 nal and theMortgage Lending Value denition is included in its Article 4 par. 51.7.2.2 Both the Directive and the orthcoming EU Regulation recognise real estateas a security or as risk mitigating collateral inducing a lower risk weight, i.e. lowercapital requirements to be allocated by credit institutions. The Directive and the dratRegulation stipulate that:

the property shall be valued by an independent valuer at or less than the marketvalue. In those Member States that have laid down rigorous criteria or theassessment o the mortgage lending value in statutory or regulatory provisionsthe property may instead be valued by an independent valuer at or less than themortgage lending value Annex VIII, Part 3, paragraph 62 o the Directive andArticle 224 o the drat Regulation.

7.2.3 Both Directive 2006/48/EC and the drat Regulation expressly require propertyvaluations to be carried out by an independent valuer.

7.2.4 The concept o Mortgage Lending Value MLV is o particular value in someEuropean countries in the context o long term lending programmes. It is a value-at-riskapproach to manage the risk exposure o credit institutions taking into account specialsaety requirements. It is understood by banking supervisors as a risk management tool.In contrast, the concept o Market Value is universally understood as representing a spotvalue, a market assessment o value at a given point in time see EVS1 and EVA2.

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8. Insurable Value

8.1 The Insurable Value o a property means the sum stated in the insurance

contract applying to that property as the liability o the insurer should damage andnancial loss be caused to the insured by a risk specied in the insurance contractoccurring to that property. When instructed to provide an insurable value, the valuer isto determine the gure that will provide appropriate insurance cover or the property.

8.2 Commentary - I the insurable value proves to have been less than the damageand nancial loss suered when a risk occurs, then the insured has an unrecoverableloss.

8.3 The application and assessment o this basis o valuation is discussed in EVA4,Assessment o Insurable Value.

9. Depreciated Replacement Cost

9.1 Depreciated Replacement Cost DRC is recognised as a method to addressMarket Value in the absence o better evidence.

9.2 Denition - Depreciated Replacement Cost is the current cost o replacing anexisting asset with a notional modern equivalent asset, making appropriate adjustmentsor physical, unctional and technical obsolescence.

9.3 Commentary

9.3.1 Depreciated Replacement Cost, also known as the Contractors Method, canbe used to give a value to properties or which there are no relevant direct marketcomparisons, by reerring to a wider range o evidence rom the market. These mayoten be properties with non-conorming, unusual or distinctive attributes, either interms o construction, orientation, location or other spatial characteristics.

9.3.2 In some countries it is recognised as a basis o value; though it is generallyregarded as an approach to valuation leading to Market Value. The theoreticalunderpinning, namely that the relationship between cost and value can be correlated, isnot a sae proposition as cost is only one actor in determining supply and demand andit cannot be assumed that costs have been incurred wisely or successully. Accordingly,this method should only be used where an absence o demand or comparable evidenceprevents an alternative method being used, or or valuations required in respect o

matters relating to national taxation.

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9.3.3 The valuer is required to provide a considered opinion o the Market Valueo the land and buildings in their existing use to which is added the hypothetical costo providing a similar property and relevant site works. Deductions are made rom

this gross sum to account or matters that would inuence the value o any existingproperty, compared to any replacement property. Allowance is made or actorsincluding depreciation, age, condition, and economic and unctional obsolescence.

9.3.4 The application o this method will require, inter alia, a practical knowledgeo current building control regulations, current building costs and relevant health andsaety regulations.

9.3.5 The choice o depreciation rate is a valuation judgment.

9.3.6 In Germany, this method may be called the Asset Value method under whichthe valuer makes a nal adjustment, reecting his proessional view o what would bethe outcome o a transaction on the hypothetical terms, which results in Market Value.

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EVS3 - The Qualied Valuer 43

EVS3

The Qualied Valuer

1. Introduction

2. Scope

3. General

4. The Qualied Valuer

5. Commentary


Each valuation carried out in accordance with these Standards must be

carried out by, or under the strict supervision o, a Qualied Valuer.

Valuers will at all times maintain the highest standards o honesty and

integrity and conduct their activities in a manner not detrimental to

their clients, the public, their proession, or their respective national

proessional valuation body.

The valuer must be able to show proessional skill, knowledge and

competence appropriate to the type and scale o valuation and mustdisclose any actor which could compromise an objective assessment.

All Qualied Valuers and their representative proessional or technical

organisations are required to adhere to the TEGoVA Code o Ethics and

Conduct.

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1. Introduction

For a client to be able to rely on a valuation, it must be proessionally prepared by a

suitably skilled, competent, experienced and objective valuer.

2. Scope

This Standard considers who should take responsibility or a valuation, requiring that theValuation Report be approved by a Qualied Valuer who bears responsibility or it. Allvaluers contributing to a report must have sucient expertise and work to proessionalstandards and, where considering valuation issues, should meet the expectations o this

Standard.

3. General

3.1 A valuation should be prepared by a Qualied Valuer and meet therequirements o a proessional service. Such a person will commonly be an individualbut, on occasions and in some countries, a valuation may be made by a company witha legal personality in which case the relevant work should be undertaken by suitably

qualied individuals retained by that company.

3.2 The valuer must be able to show proessional skill, knowledge and competenceappropriate to the type and scale o valuation and must disclose any actor which couldcompromise an objective assessment.

3.3 The terms and conditions or the valuers instruction should be agreed beoreundertaking the valuation and set out clearly in writing beore the valuation is reportedsee EVS4 or urther guidance.

3.4 Valuations which are to be in the public domain or which will be relied onby third parties are requently subject to statute or regulation. There are oten specicrequirements that a valuer must meet in order to be deemed suitable to provide atruly objective and independent view. However, there are no specic criteria or mostvaluations, and the onus is on valuers to ensure that they are aware o potential conictso interest.

4. The Qualied Valuer

4.1 Denition - A Qualied Valuer (including valuers working or valuation

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EVS3 - The Qualied Valuer 45

companies) who is responsible or preparing and supervising valuations, bearingliability or them as included in nancial statements and or other authorised purposes,shall be a person o good reputation, who can demonstrate:

i either: a university degree, post graduate diploma; or other recognised academic

or vocational certication relevant to asset valuation that meets TEGoVAMinimum Educational Requirements MER; and having at least two yearsproessional experience in property valuation and having maintained andenhanced his proessional knowledge through a relevant programme ocontinuing education; or

longtermrelevantexperience;or

havingundertakenat leasttwentywrittenrealpropertyvalu