RECENT TRENDS AND CHALLENGES - PowerPoint Presentation

Slide1

RECENT TRENDS AND CHALLENGESIN THE FIELD OF VALUATION

Organised byCentre for Valuation StudiesInstitution of Science and Technology for Advanced Studies & Research,Vallabh Vidyanagar 14th December, 2013

BY

JIGESH J. MEHTA

B.E. (Civil), LL.B., M.S.(USA), F.I.V.

(Govt. Approved

Valuer

)

Office

:

A-302,

Tirupati

Plaza,

Near Collector’s Office,

Athwa

Gate,

Surat

- 395 001.

Tel. no. : +91-261-2472637Slide2

Any challenge implies an opportunity….Infact, a prospect is associated with every problem of valuation. Every challenging situation can usually be addressed primarily by the application of ten commandments of valuation. viz.

4 factors – legal, economic, social, physical/technical;4 ingredients – utility, scarcity, transferability, demand/supply;Value means Present Worth of Future Benefits, and In any valuation exercise of tangible assets what is valued is not the tangible thing but rights and interests arising out of ownership of tangible assets.Slide3

Non-availability of Approved Subdivision PlansSlide4

O

P

E

N

S

P

A

C

E

(6M)

SUBPLOT no.8-A/1+2

paiki

auctioned by Dena Bank

SUBPLOT no.8-A/1

paiki west part (Mudra Texturisers Pvt. Ltd.)

SUBPLOT no.8-A/2

paiki

east part (

Mudra

Mark-Fin Pvt. Ltd.)

NSlide5

Combined Construction on two adjoining plots but only one offered as loan securityTwo brothers had purchased two adjoining plots. Instead of constructing duplex-type bungalow with two independent units, they had constructed only one(1) two-

storeyed building covering both plots in such a way that the ground floor was occupied by one brother and 1st floor was occupied by another brother. The brother occupying ground floor wanted loan facility against mortgage of his one plot. On inspection, it was found that 1st owner’s ground floor was on his plot but the 1st floor portion above it was under the possession of 2nd brother. We could not inspect 1st floor occupied by 2nd brother as relations between two brothers had strained and they were not on talking terms. After the loan officer was informed about his fact, the bank decided to reject this property as security.Slide6

Areas of common use such Roads, COP and loading/unloading transferred in favour of some specific plotholder

(s) in a layoutSlide7
Slide8

Amalgamation

PlanSSlide9

5 shops on an upper floor of commercial building developed on 2060.50 sq. m. land area out of the overall plot area of 4331.77 sq. m. including a twin-theatre

Age of Building ~ 25 years; Future Life ~ 30 yearsLeasehold land for 60 year period from 1971Due to non-availability of lease deed for land, it could not be verified whether there is provision (or not) for further extension of lease on the expiry of lease period in year 2031.Non-transfer clause of leasehold rights in land mentioned in sale deeds for shops for transfer of superstructure only

Parent lease deed for land does not allow the leaseholder/developer of this building to transfer or assign leasehold rights in land and therefore, the developer of the land have the responsibility to pay the lease rent during the period of lease

Prima facie, this appears to be a case of defective title. Careful study of the sale deeds hints that these shops are virtually transferred on sublease (

atleast

for unexpired lease period ~ 18 years as on date of valuation) without any ground rent, at 100% premium.

Market Value basis will hold good only if advocate’s title report confirms that the

shopholders

in this building are entitled to leasehold rights for undivided land corresponding to the shops by virtue of their possession/occupation because

what is being valued is the “

shopholders

’ interests in the shops”

and NOT the shop itself.

ELSE, the lender Bank will be not be able extend charge to the undivided land area as only the superstructure will be mortgaged

It is noteworthy that out of the prevailing composite rate of Rs.5500-6000 per sq. ft. ASSUMING THAT GROUND LEASE IS FURTHER RENEWABLE AFTER EXPIRY OF PRESENT LEASE TERM (considering lease in perpetuity equivalent to freehold land), the construction component would not exceed 20-25% while the remaining 75-80% is attributable to the FSI value for corresponding undivided land.

What would happen if the building is wholly destroyed or becomes permanently unfit for use due to fire or flood or earthquake or other such irresistible force duering

loan period? Insurance is taken only for construction but if the developer does not agree to give land for re-construction, a dead-lock will be created and one does not know the final outcome if the matter is taken to court as the developers will argue that only construction was sold and that the land right was never transferred. This interpretation could be very harmful. Once this submission is clearly made by the developer, any challenge to counter him in court of law would be a tedious matter.

Share

of Undivided Land Area Not Transferred

alongwith

built-up unitsSlide10

Basements approved for Household Storage

Garment Showroom on Lower Ground floorExisting area (including excess area than that shown in plan) and change of use from household store to commercial use are regularized by payment of impact fees.

The moot question is whether the sale / transfer of basement (approved as household store) to someone other than shareholder/member of the society be considered

void

ab

-initio

in view of the decision in the case of

Nahalchand

vs.

Panchali

Society ?

There are two school of thoughts proposing different approach to this kind of problem: (

i) that opine that it is case of clear title irrespective of whether the corresponding undivided land area is transferred or not, while (ii) that consider it is a case of defective title because FSI of basement is exempted and the land area ought to have been conveyed fully to the members on the upper floors.Slide11

Unauthorised Construction that can be Regularised

1. Area of the property (actual) :GF : (14’ x 45’’) = 630 sq. ft.FF : (17’ x 48’) = 816 sq. ft.SF : (17’ x 48’) = 816 sq. ft.St cabin :

(7’ x 14’) = 98 sq. ft.

Total Built-up Area = 2,360 sq. ft.

2. Area of property (permitted as per approved plan/building byelaws).

Ground floor (approved)

=

420

sq. ft.

First floor (

regularisable

)

= 420

sq. ft.Second floor (

regularisable) = 420

sq. ft.

Approved Built-up Area = 1260

sq. ft.

Reference is drawn on the case of

Dr. Shankarappa

vs. The Commissioner-Bangalore City Corporation decided by the

National Consumer Disputes Redressal Commission, New Delhi decided on 22 March-2006.When there is a provision for regularization of construction by the local authority under any Government notification, the deviation even if it is unauthorized, shall be regularized by taking penalty.Slide12

Valuation for flat on Hire-Purchase Agreement for Capital Gains TaxFlats in a residential colony of Gujarat Housing Board were allotted on Hire Purchase basis in the year allotted in 1970 with a monthly instalment of Rs.86 payable till September-1990. If any

flatholder intended to sell his flat prior to September 1990, he would have to pay all outstanding dues / instalments to the Gujarat Housing Board or handover the possession back to Gujarat Housing Board.The entire scheme was purchased by a developer in the year 2012-13 and we are required to give valuation report as on 1-04-1981 for capital gains tax purpose.Market Value as on 1-04-1981 (if all instalments cleared)= 388 sq. ft. @ Rs.80 per sq. ft. = Rs.31,040Present Value as on 1-04-1981 (considering outstanding instalments payable)= Rs.31040 - outstanding liability as on 1st April 1981= Rs.31040 - present value of outstanding liability of 114 monthly instalments of Rs.86 payable till September 1990

= Rs.31040 - (Monthly Instalment x Month’s Purchase)

= Rs.31040 - Rs.86 x

{1 - [1/(1+R/m)

m.n

]

} where n = 9.5 years, R = 8%,

(

R/m) m = 12 instalments per year

= Rs.31040 - (Rs.86 x 79.20)

= Rs.31040 -

Rs.6813 = Rs.24,227As per the amendment made in the provisions of Capital Gains Tax, the above value of the property is to be enhanced by 8.52 times to give effect of Cost Index for the Assessment Year 2013-14 (i.e. Financial Year 2012-13).

Hence, Indexed Cost of Acquisition as on date of sale= Rs.24,227 x 852 = Rs.2,06,414

100

Slide13

Properties under Coastal Regulation Zone (CRZ)

Part Plan of Draft Town Planning SchemeSlide14

Survey noDocumented Area

Effect under proposed Draft T.P.Scheme(sq. m.)Final Plot no.Area Deduction (sq. m.)Net Area (sq.m

.)

30

13861 (Old tenure, N.A.)

3

611

13,250

32

4654 (Old tenure, N.A.)

5/1

920

3,734

38

40165 (

Old tenure)

Subject to verification of N.A. permission granted by Collector u/s 65B of Bombay Land Revenue Code (for industrial use)

8/1 + 8/2

14,055

26,110

41

paiki

13658 (New Tenure)

Pending premium for conversion to old tenure and subsequently N.A. permission

18

paiki

3,902

9,756

72,338 sq. m.

(-) 19,488 sq. m.

52,850 sq. m.

APPROACH TO VALUATION (NOTIFIED INDUSTRIAL AREA)

Land Value

(

i

) Net Area of land = 52850 sq. m. – 8528 sq. m. under erosion in river from R.S. no.38

= 44322 sq. m. @ Rs.15000 per sq. m. = Rs.66,48,30,000

(ii)

Add

, Area under erosion in river = 8528 sq. m. @ Rs.5000 per sq. m. = Rs.4,26,40,000

(iii)

Less

, outstanding liability of premium payable for tenure conversion of R.S. no.41

paiki

= 13658 sq. m. @ 80% of Rs.6450 per sq. m. guideline rate

=

Rs.7,04,75,280

TOTAL VALUE OF FREEHOLDER’S INTEREST IN LAND

= Rs.63,69,94,720Slide15

Open Plot under CRZ in Residential Zone

No.Parameteri.Average Annual Income (Rs. per annum)

Rs.33,60,000

ii.

Less, outgoings for municipal taxes, maintenance of lawns, etc. (approximate) per annum

Rs.3,00,000

iii.

Net Annual Income

(Rs. per annum)

Rs.30,60,000

iv.

Capitalisation Rate

13%

v.

Net Capitalised Value

= Net

Annual

Income / Capitalization

Rate

Rs.23,538,461Slide16

Bombay Stamp Duty Act-1958Case study of basement put for sale by owner Bank

Demand and marketability is poor due to lack of ventilation below ground level and seepage from walls.Utility is very limited (only as godown, dormitory or more effectively for two-wheeler parking through mechanised lift of the owner of two level commercial parking operated by the developer of this building).

The guideline composite rate prescribed in the

Jantri

(

w.e.f

. 18-04-2011) for commercial basement in new building at this location is 80% Rs.89125 per sq. m. = Rs.71300 per sq. m. (i.e. Rs.6626.40 per sq. ft.). Depreciation is allowed @ 1.2% per year, i.e. 1.2% x 25 years x Rs.6626.40 per sq. ft. = Rs.1988 per sq. ft. Thus, the present rate after depreciation ~ Rs.(6646.40 – 1988) = Rs.4658.40 per sq. ft. carpet area is much higher than the prevailing market rate. However, as per the provisions of

Jantri

, the conveyance deed for this property will have to be executed paying a stamp duty on

Jantri

rate

eventhough

the auction value may be lesser. Alternatively, the seller Bank should get

prevaluation

/ adjudication done under section 31 of the Bombay Stamp Duty Act.Slide17

SECTION 50 C of the Income Tax ActProspects under Capital Gains Tax

Bombay Stamp Duty Act-1958, Section 31 (Adjudication as to Proper Stamps)Section 50 C(2) of I.T. Act – Reference to Valuation OfficerSection 16A(4) of W.T. Act - Valuation Officer to serve a notice Section 16A(5) of W.T. Act -

Valuation Officer to

consider objections

and

evidences

Valuer’s

Role

To prepare reasoned submission

supported by accepted principles of valuation and court judgements mainly on the following two aspects :

Sale Instances relied upon must be comparable

Rented properties must be valued by rent capitalisation

methodBharat Bijlee Ltd. vs. State of Maharashtra, 2003Slide18

Prospects under Wealth Tax ActExemptions are covered under Section 2(ea) and Section 5(A) Any house that the assessee may occupy for the purpose of business or profession carried on by him.

(B) Any residential property that has been let out for a minimum period of three hundred days in the previous year.(C) Any property in the nature of commercial establishments or complexes.(D) Urban Land such as land on which construction of a building is not permissible under any law for the time being in force or the land occupied by any building constructed with the approval of the appropriate authority or any unused land held by assessee for industrial purposes for a period of two years from the date of acquisition by him.According SECTION 5(VI), one house or part of a house or a plot of land (not exceeding 500 sq. m.) belonging to an individual or H.U.F. is exempted.Concessional valuation for a house can be worked out by applying provisions of Schedule-III of Wealth Tax Act.Slide19

OTHER AVENUES IN VALUATIONIn addition to the routine valuations for banks, taxation, stamp-duty and visa purpose, the following avenues may be explored by valuers.1. Asset Listing Verification & Valuation for Municipal Corporation Assets (MODEL NATIONAL MUNICIPAL ASSET VALUATION METHODOLOGY MANUAL published by Ministry of Urban Development, January 2009) for financial statements2. Valuation for Dispute Resolution –

a. Expert Witnessb. Mesne Profitc. Arbitration/ Small Causes Court3. Fixation of Royalty i.e. Rent – normally in High Court4. Technical Due-Diligence of Project – FSI/ Approval Status, etc5. RE Project Feasibility reports6. Valuation for REITs - Recent draft SEBI Regulation7. Lender’s Engineer – Surveillance Report8. Valuation of Pre-Leased properties – Concept of Investment Value based on Investor ROI9. Land Acquisition Cases10. IFRS/ Purchase Price Allocation/ Impairment11. Certification for work done and balance work of the developer in order to determine the Value-Added Tax (VAT) payable by a developer to the State Government(refer Supreme Court decision on 26-September 2013 in M/s. L & T vs. State of Karnataka which states that the activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government).Slide20

Thank You