Rules for the Valuation of Properties According ECO/805/2003 (VII)

Valuation Rules According ECO/805/2003 (VII)

General Warnings

According Spanish ECO/805/2003, we find a ‘warning case’ whenever we have doubts about any of the data used in the calculation of the technical values. At a minimum, we should consider the following cases:

• when there is a discrepancy between the physical reality of the property and its description in the Property Registry or the Cadastre, if such discrepancy does not lead to doubt about the identification and do not affect the calculated values
• when the property is not in accordance with the applicable urban planning, unless some conditioning have been stated or it was not possible to verify the system of protection of the architectural heritage
• when the valued property is subject to expropriation or was constructed on the basis of a license or an administrative authorization containing conditions, which if not met, may result in changes to the certified value
• when the valuation has been calculated using different methods than those stated in Spanish Order ECO/805/2003
• when the maximum legal value was calculated in absence of some of the required documents
• when the valuation was calculated in absence of the necessary documents to calculate cash flows
• in rural properties, when the valuation was calculated in absence of the cadastral documentation or the documents describing the operating system
• in the valuation of buildings under construction or rehabilitation for the finished building hypothesis, when the valuation was calculated in absence of a complete set of the Construction Documents already endorsed by the Architects’ Association, or the final certification of the performed work, or the Building Contract, or the Schedule of Construction Costs
• in buildings whose main use is housing, when the valuation was calculated in absence of the document attesting the expedition of the decennial insurance for property damage
• in buildings in horizontal property regime or building elements different than houses or garages, when the valuation was calculated in absence of the statutes of the homeowners, an equivalent document or a Certificate by the community manager, certifying the limitations of use or other circumstances able to affect the value
• when the Cadastral Reference does not exist or can not be known by the means provided in the revised text of the Law on Real Estate Cadastre, or through the Virtual Office of the Cadastre
• in properties located abroad, when the valuation was calculated in the absence of all the documentation that, in accordance with the rules applicable in the country where the property is located, may have some influence on the value of the property.

Rules for the Valuation of Properties According ECO/805/2003 (VI)

Valuation Rules According ECO/805/2003 (VI)

Documents Required for the Valuation of Properties

The calculation of the value requires to previously have all the documents necessary for the complete identification of the property. Among those documents, the following ones should always be included:

• the Registry Certificate attesting both title and charges associated with the property, or any legal equivalent in alternative media
• the Cadastral Document, with all descriptive and graphic information associated with the property, as obtained directly from the Electronic Site of the Cadastre (www1.sedecatastro.gob.es).

Both documents must have been issued within three months prior to the valuation date.

Documentation for Valuations in the Mortgage Market

In the valuation of properties intended to serve as mortgage warranty for loans that are or will be part of the portfolio of mortgage securities issued by institutions, developers and builders, the Registry Certificate can be replaced by any of the following documents:

• original or copy of a Registry Note (‘Nota Simple’, in Spanish), issued within three months prior to the valuation date, at least expressive of ownership, the complete description of the property, the real rights and the limitations of domain
• photocopy of the Registry Book of the property
• photocopy of the Title Deeds
• any document equivalent to the above ones, issued by the Property Registry by the use of telematic procedures.

Documentation for Valuations Outside the Mortgage Market

When the purpose of the valuation is the coverage of the technical provisions of insurance companies, the determination of the assets of the institutions of collective real estate investment, or the determination of the real estate assets owned by pension funds, the inclusion of the Cadastral Document will only be necessary in the following cases:

• prior valuations
• regular valuations of real estate in which changes have occurred that affect the description.

Documentation for the Valuation of Assets of Institutions of Collective Investment

If the purpose of the valuation is to determine the assets of the institutions of real estate collective investment, the Registry Certificate is only required in previous periodic valuations of the properties under construction; in other cases, the Registry Certificate may be replaced by any of the documents considered as valid in the mortgage market.

Rules for the Valuation of Properties According ECO/805/2003 (V)

Valuation Rules According ECO/805/2003 (V)

Statement of the Values. Checks. Land Area. Mortgage Value. Intermediate Valuation.

When valuing a Real Estate in Spain, the values should be stated in a report and, where appropriate, a Certificate of Valuation.

Minimum Checks

The valuation of a property requires to perform all necessary checks to know the characteristics and the actual condition. Among the checks that should be performed, the following ones should always be included:

• physical identification of the property, through its location and visual inspection, checking if its floor area and other characteristics match the description
• identifying all visible servitudes
• conservation status or condition
• occupancy status
• use or exploitation intended for the property
• public protection regime, if it’s about housing
• architectural heritage protection regime
• agreement of the property with all applicable urban planning regulations
• where applicable, availability of right to the valued urban use.

Land Area

In order to calculate the value of a land or a country estate, the area to consider should be checked by the appraiser. If this testing is not feasible, the appraiser should use the lowest value between the Registry Area and the Cadastral Area.

Definition of Mortgage Value (VH)

The Mortgage Value or VH (‘Valor Hipotecario’, in Spanish) is defined as the value of the property as determined by a prudent valuation, taking into account all market conditions, the use at the time of the valuation and any possible alternative uses.

Definition of Intermediate Valuation

The Intermediate Valuation of a construction work is any of the valuations that are issued after the initial valuation and during the construction or rehabilitation process of a building or an element of a building. The Intermediate Valuation reflects the progress of the works and the percentage of work performed, but its issue does not involve the updating of the values ​​contained in the initial valuation.

Time Planning in Feasibility Studies

The Time Schedule in the Feasibility Study

Time Frame Estimation for Real Estate Projects

The Work Program is a scheme that assigns each activity a start date and a completion date. Due to the scarcity of data that is usually inherent in the initial phase of the building project, it is usual that the time schedule is not very detailed, consisting rather in a preliminary plan that will have to be part of the Feasibility Study. The time schedule is performed through four interactive processes:

• definition of activities, which requires the breakdown of the tasks associated with each phase of the real estate project to a level which allows the estimation of the time frame
• arrangement of activities, establishing the sequence based on the dependence between them
• estimation of the time frames, which will depend on the magnitude of the resources used in the performance of each activity
• calculation of the program, usually by applying the Critical Path Method.

Estimation of Time Frames

The PERT (Program Evaluation and Review Technique) prescribes the estimation of three possible durations for each activity:

• the most probable duration
• the pessimistic duration, estimated by considering very unfavorable conditions
• the optimistic duration, estimated by considering very favorable conditions.

The use of these three estimates allows the calculation of a weighted average duration which is the one considered in the study.

Calculation of the Program

The Critical Path Method, commonly used in the timing of projects, consists of following, within the network of activities, all possible paths, adding durations and lags. Thus, it’s possible to estimate the earlier and the later date for the start and the completion of each activity and the entire project. The result of subtracting from the earliest dates the latest ones is called “clearance”. The "total clearance" is the time that an activity can be delayed without affecting the time frame of the project. The Critical Path is the one that provides zero clearance for all activities, so a delay in any of them involves an inevitable delay in the completion date of the project.

Definition of the Final Product in a Feasibility Study

Product Definition in the Feasibility Study

Probabilistic Approach. Selling Prices.

The Feasibility Study of a building project is based on estimates (mainly about time and costs) and assumptions (e.g., evolution of the market). As a result, it can only be considered by way of approximation, subject to an inevitable error margin. Real estate developments are always developed in an environment of uncertainty, so it is necessary to apply a probabilistic approach that considers all risks associated with the project. This approach makes the results provided by the Feasibility Study to be more comprehensive and reliable, but also less precise. The fundamental equation that should condition the Feasibility Study expresses performance as a result of subtracting cost of sales. Performance is deemed acceptable by applying profitability criteria, among which is the comparison with other investments that provide returns with an equivalent risk.

Definition of the Real Estate Product

In real estate developments, product definition is progressive, so from an initial description, the implementation of the successive phases of the project will provide the definitive features and functions. The Feasibility Study must contain an initial definition of the real estate product, which can be complex to the extent that it may be a product composed of multiple partial products. The initial definition process is subjected to conditions, among which are the following:

• contract terms
• the state of offer and demand in the real estate market
• the legal and technical regulations that may result applicable
• economic and financial demands.

Selling Prices in the Feasibility Study

In the initial product definition provisional sales prices should be set. The establishment of the selling prices of the real estate products is a business task that should be based on two essential requirements:

• final prices should be competitive, based on the market situation and based on the marketing strategy
• the income should always cover the estimated costs, within a certain margin of error, considering direct costs plus an appropriate share of indirect costs.

The marketing strategy should be structured in a set of techniques to promote, sell and distribute the final products. Its suitability can allow sales prices slide upward within the range set by the real estate market.

Phases of a Feasibility Study

Phases of a Feasibility Study for a Building Development

Initial Definition, Preliminary Planning and Profit Analysis

Real estate developments are structured in phases that define the life cycle of the building project. Along the life cycle, costs and resources increase progressively until they reach a maximum level and then decrease. Also, the more you advance in the cycle, the probability of success increases and the risks decrease. In large investment projects, the Feasibility Study should be the first phase of the cycle. The approval and acceptance of the Feasibility Study by all parties involved in the development is a prerequisite for the start of any subsequent phases.

Phases of the Feasibility Study

The purpose of the Feasibility Study is to determine the project's profitability and its comparison with other investments with lower risk. Such determination is made by applying certain criteria to monetary flows, which are calculated on the basis of a preliminary planning which, in turn, requires the availability of descriptive data about the final product sought by the building project, structured in an initial definition. Thus, the draft of a feasibility study may be structured into the following phases:

• initial definition of the final product pursued by the building project
• preliminary planning of the project
• profitability analysis.

The Preliminary Planning Phase

The preliminary planning phase includes the following processes:

• time schedule, with the result of a work program
• economic planning, with the results of the budget and the curves of revenues and expenses
• financial planning, which determines project flows from a funding scenario.

In turn, the time schedule of the project includes the following processes:

• defining activities
• estimating a time schedule for every activity
• determining an appropriate order for the implementation of all activities
• calculating the program.

And the economic planning includes the following processes:

• planning of resources
• estimation of costs
• layout of the costs curve.

The Profitability Analysis Phase

The phase of analysis of the building project's profitability includes the following processes:

• applying profitability criteria on the flows obtained in the planning phase
• evaluation of risks impacting on the profitability of the project.

Regularization of Illegal Buildings in Andalusia

Architect Daniel Trujillano
http://www.arquitectotrujillano.com/legalization/home.html
Legalization of Buildings in Andalusia