Scope of the Valuation Methods in Spain (II)

Scope of the Different Methods for the Valuation of Properties in Spain (II)

Spanish Order ECO/805/2003

The rules established by Spanish Order ECO/805/2003 for the valuation of  real estate apply whenever the appraised value is used for any of the following purposes:

• mortgage warranties for loans that are or will be an integral part of the portfolio issued by the kind of entities described in the R. D. 685/1982, developing aspects of the Law 2/1981, about regulation of the Mortgage Market in Spain
• determination of a fair value for the purposes of the registration and second valuation standard in the Accountability Plan of insurance and reinsurance companies (R.D. 1317/2008), and determination of the valuation of assets for the purposes of the Law 20/2015, about management and supervision of insurance and reinsurance companies in Spain
• valuation of the assets of the real estate collective investment institutions regulated by the Spanish Royal Decree 1309/2005, approving the Regulation of the Law 35/2003, about Collective Investment Institutions in Spain
• valuation of the property assets of Pension Funds (R.D. 304/2004, approving the Pension Fund Regulation in Spain).

If the purpose of the valuation is among those listed above, the assessment can be made by the following technical methods:

• Method of the Cost: for the valuation of all types of buildings and building elements, whether in project phase, under construction, already finished or during a rehabilitation process
• Method of Comparison: for the valuation of all types of properties, provided that the requirements set out in Article 21 are met
• Method of Income Update: for the valuation of all kinds of properties susceptible to produce income, provided the requirements set out in Article 25 are met
• Residual Dynamic Method: for the valuation of urban or developable land, built or not, and of buildings in design phase, construction phase or during a rehabilitation process, no matter if the works are paralyzed
• Residual Static Method: for the valuation of plots and buildings during a rehabilitation process where the construction or rehabilitation works are entitled to begin within a period not exceeding one year, and also built plots.

Scope of the Valuation Methods in Spain (I)

Scope of the Different Methods for the Valuation of Properties in Spain (I)

R. D. 1020/1993 and R. D. 1492/2011

The primary purpose of the Spanish Royal Decree 1020/1993, about Valuation Rules and Value Frame for Land and Construction, is the determination of the Cadastral Value of urban properties, whose data constitute the Spanish Urban Real Estate Cadastre. Moreover, the Spanish Law 58/2003, about General Taxes, states that the value of the real estate affected by tax obligations can be checked by the Administration using the values ​​established by the Real Estate Cadastre, by applying the multiplier coefficients determined by competent tax authorities, as established by regulation. For all the above, the technical standards of valuation expressed in Royal Decree 1020/1993 apply for the following purposes:

• determination of the Cadastral Value of any urban real estate
• determination of the tax base in the tax about Property Transfer and Documented Legal Acts
• liquidation of the taxable events of the tax about Successions and Donations.

Spanish Royal Decree 1492/2011

The Spanish Royal Decree 1492/2011, about the Valuation Rules of the Spanish Land Act, applies to the valuation of land, facilities, buildings and constructions, and of rights made in connection therewith, whenever the final purpose is one of the following:

• checking the sharing of benefits and burdens, or other operations required by the implementation of the territorial and urban planning in which the valuation delimits the financial content of powers or duties associated with the right to property, in the absence of agreement among all affected subjects
• determination of fair compensations in expropriations, regardless of the purpose and the laws governing the process
• determination of the amount payable to the owner in cases of forced sale or substitution
• determination of the financial guarantee of a Public Administration.

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.

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.

Rules for the Valuation of Properties According ECO/805/2003

Valuation Rules According ECO/805/2003

Spanish Order ECO/805/2003. Purpose, Scope and Principles.

The Order ECO/805/2003 establishes the rules for the calculation of the value of real property in Spanish territory, and for the preparation of reports and certificates for the formalization of the valuation. The purpose of these rules is enhancing the technical and formal quality or the valuation reports, in order to better protect the interests of third parties. The order establishes a single structure with a minimum number of points that the valuer must complete.

Purpose of the Order ECO/805/2003

One of the objectives of the Order ECO/805/2003 is the regulation of the legal regime applicable to the calculation of the value of real estate in Spain, and the preparation of reports and certificates for its formalization.

Scope of the Order ECO/805/2003

The Order ECO/805/2003 applies if the purpose of the valuation is any of the following:

• mortgage warranty of loans that are or will be part of the coverage in mortgage titles
• coverage of the technical provisions of insurance companies
• determining the assets of collective investment real estate entities
• determination of the real estate assets of pension funds.

Valuation Principles

When a valuation company or valuation service acts for any of the purposes that make up the scope of the Order ECO/805/2003, it must fulfill the following principles:

• principle of anticipation: if the property is in economic exploitation, its value is based on the expectations of the income it will likely provide in the future
• principle of purpose: the purpose of the valuation determines the method and the techniques
• principle of highest and best use: if the property is liable to be dedicated to different uses, its value shall be the result of destining it to the best one in economic terms
• principle of probability: if there are several reasonable scenarios, the most likely must be selected
• principle of proportionality: the valuation reports should be developed with appropriate amplitude according to the importance, the use and uniqueness in the market
• principle of caution: if there are several equally likely scenarios, the one which provides lower value must be selected
• substitution principle: the value of a property is equivalent to the value of other similar assets that could replace it
• principle of temporality: the property value varies over time
• transparency principle: each valuation report must contain all the information necessary for easy understanding, and must describe the assumptions and documents used
• principle of residual value: the value attributable to each of the production factors of a property is the difference between the total value and the value that can be attributed to the rest of the factors.

Architect Daniel Trujillano
http://www.arquitectotrujillano.com/valuation/home.html
Valuation Reports for Real Estate in Spain

Value Module M, Coefficient RM and Amendment of the Statement of Values

Module M, Coefficient RM and Statement of Values

Cadastral Value, Market Value and Individualized Value

Spanish Law 39/1998, regulating local treasuries, states that the Cadastral Value of the real property must be determined by reference to its Market Value. In order to give effect to that reference, the Cadastral Valuation procedure uses two main tools:

• value Module M, which aims to capture the variations in the Market Value of the urban real estate, according to market analysis made by the General Directorate of Spanish Cadastre, by fixing the value of the real estate product and by serving as a basis for the values of the land and the construction
• coefficient of Market Relationship (RM), which acts on the individualized valuation of the goods resulting from the Statement of Values, in order to ensure uniform reference to Market Values.

A change in the value of the module M does not alter the relationship between Cadastral Values and Market Values.

Individualized Value Resulting from the Statement of Values

The individualized value resulting from the Statement of Values is obtained by adding the value of the land in the plot and the replacement value of the building. Both values and their sum must be corrected in accordance with the provisions of the Valuation Technical Regulations. If the building is completed, the result must also receive the application of a coefficient relating the costs and benefits of the development.

Application of the Coefficient RM

The application of the coefficient of Market Relationship (RM) requires that the Statement of Values affects all the urban properties of the municipality. The coefficient is applicable to the individualized values resulting from the amendment procedures of the Statement.

Amendment of the Statement of Values

The amendment of a Statement of Values requires to adopt:

• the criteria and guidelines for the National Coordination of Values under which the Statement of Values was approved
• the homogeneous economic areas, modules, bands of coefficients and weightings contained in the Statement of Values
• the conversion factors that may be applicable to the Cadastral Values resulting from the Statement of Values.

The amendment process requires all the documents needed to define the scope of the amendment. It must state the new values for the streets or street sections. Where appropriate, it must establish the new delimitation of urban land. Every amendment to a State of Values should be justified by analysis and conclusions contained in market studies on the affected territory.

Architect Daniel Trujillano
http://www.arquitectotrujillano.com/valuation/home.html
Valuation Reports for Properties in Spain

Coordination in the Cadastral Valuation of the Urban Real Estate in Spain

Coordination in the Cadastral Valuation of Properties in Spain

Homogeneous Economic Areas. Statements of Values. Property Market Research.

In Spain, Technical Territorial Boards of Urban Real Estate Coordination should, in their geographical coverage, make a delineation of homogeneous economic areas of land and buildings. For this, they must apply the Territorial Managers within their scope, to perform previous studies, which should include:

• data identifying the areas, and blueprint pointing the perimeter
• construction costs associated to the most common building types
• selling price associated to those building types
• estimation of values for the land
• economic data bearing on Real Estate activity.

When the previous studies are ready, Technical Territorial Boards must propose coordinated sets of values, which must include MBR modules and Bands of Coefficients, or VU modules for homogeneous economic areas of land and MBC modules for the areas of buildings. Coordinated Values Proposals should be submitted to the High Commission of Urban Real Estate Coordination, which must establish national-level criteria, definitely assigning MBR, VU and MBC modules to each municipality.

Statements of Values

Statements of Values are administrative documents that list the values of land and buildings, and the correction coefficients to be applied in each territorial scope. The statements are made by Territorial Managers of the Centre for Cadastral Management and Tax Cooperation, taking into account urban planning and cadastral valuation regulations, and also studies and analysis of the Property Market. Each Statement of Values should include the following separate documents:

• analysis and findings of Market Research, and results obtained by applying them to a significant number of properties, in order to verify the relationship between cadastral values and market values
• catalogs of buildings and urban construction.

Urban Real Estate Market Research

The Center of Cadastral Management and Tax Cooperation should establish the criteria and the minimum content for the Real Estate Studies which should serve as a basis for drafting Statements of Values. In general, the territorial scope of those studies should be municipal, but it can also be supra-municipal if it's convenient upon the circumstances. Conducting Market Studies has the following purposes:

• investigating economic data associated to urban real estate market
• collecting and analysing such data
• drawing some conclusions about the market status.

Daniel Trujillano, Architect

http://www.arquitectotrujillano.com/valuation/home.html 

Property Valuation Reports in Spain

Schedule of Cadastral Values for Land and Buildings in Spain (I)

Schedule of Values for Land and Buildings in Spain (I)

Massive Valuations of Land and Buildings. Modulation. Impact Values.

Conducting massive valuations requires a mechanical procedure which can be easily adapted to computer software means. In Spain, this procedure starts with the definition of homogeneous economic areas considering land and buildings. Each area is assigned with:

• a Basic Impact Module for the land (MBR)
• coefficients for each building use
• a Basic Building Module (MBC)
• in areas where the land is valued by Unit Value, a range of Unit Values (VU).

Homogeneous economic areas, in both land and buildings, delimit geographical areas where the Real Estate Market has some similarity in characteristics, which allows the modulation of its behaviour. Normally, each city has a single homogeneous economic area, but a city can be composed of several areas if it has different geographic locations associated to different average market values.

Modulation of Values

The calculation of the Sale Value of the real estate product (VV) should consider the following factors:

• the Impact Value of the land (VR), in euros per square meter of Gross Floor Area
• the Construction Value (VC), in euros per square meter of Gross Floor Area
• the Location Factor (FL), which evaluates differences in value associated to similar property products because of their location, constructive features and local social-economic circumstances affecting the real estate industry.

The Basic Impact Module of the land associated to different homogeneous economic areas (MBRi) is obtained from Module M and a land value, Fs. In 2013, the General Directorate of Cadastre assigned impact values ranging from 37.80 euros per square meter, for MBR-7, to 1,700.00 euros per square meter, for MBR-1.

Impact Values of the Land

After completing the identification of each homogeneous economic area of the land, the Basic Impact Value in each polygon (VRB) is obtained from the MBRi assigned to the area. Every Statement of Values should include Impact Values in Polygon (VRB) and in Street (VRC), and also Unit Values (VU) for areas where the land can not be valuated by Impact Value.

Daniel Trujillano, Architect

http://www.arquitectotrujillano.com/valuation/home.html 

Property Valuation Reports in Spain