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 (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 (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.

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

Valuation Rules According ECO/805/2003 (III)

Market Value and Replacement Value. Checked Area and Computable Area. Comparable Properties. Urban Levels.

The Spanish Order ECO/805/2003 defines the Market Value (VM) as the price at which the property could be sold on the date of the valuation. In determining the Market Value is necessary to consider:

• that there is no prior relationship between seller and buyer
• that neither the seller nor the buyer holds any personal or professional interest in the transaction, excluding those associated with the cause of the contract
• that the public offering to the market occurs through a proper marketing strategy and with no inside information
• that the price of the property is consistent with the public offer and reflects a reasonable estimate relating to market conditions existing at the date of the valuation
• that the price does not include any taxes or marketing expenses.

Definition of Replacement Value (VR)

The Replacement Value (VR) can be gross or net. The Gross Replacement Value (VRB) is the sum of all the investment costs required to build, on the date of valuation, another property with the same characteristics (capacity, use, quality, etc.) but using current technology and materials. The Net Replacement Value (VRN) is the result of deducting from VRB the physical and functional depreciation of the property on the date of the valuation.

Checked Area and Computable Area

The Checked Area is the floor area as measured by the valuer. The Computable Area is the floor area used in the valuation.

Comparable Properties

Comparable properties are those that are considered similar to the property that is being valued, or appropriate to apply the homogenization, because of its location, use, type, size, antiquity, condition or other relevant physical characteristic.

The Urban Levels of the Land

For the purposes of the valuation, Spanish Order ECO/805/2003 classifies the land into two levels:

• level II: non-developable land
• level I: developable and developed land.

Architect Daniel Trujillano

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

Valuation Reports for Properties in Spain

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 for Cadastral Valuations in Spain

Module M for Determining the Value of Properties in Spain

M, MBR and MBC Modules

The revised text of the Spanish Law of Cadastre (R.D.L. 1/2004) provides that the determination of the Cadastral Value should take into account the market circumstances and values, which cannot be exceeded. One of the instruments that allow the correlation between Cadastral Value and Market Value is the Value Module M. This module must collect the variations experimented over time by the Market Value of the urban real estate, according to the market analysis performed by the General Directorate of Cadastre.

Current Value of Module M

The value of the Module M that is considered current is still the one set by the Order EHA/1213/2005, which established 1,000 Euros per square meter.

Current Values of MBR and MBC Modules

The application of factors for the diversification of the land and the construction results in the MBR and MBC Modules. The Circular 01.04/14/P of the General Directorate of Cadastre established, for the year 2014, Impact Values ranging from 25 Euros per square meter, corresponding to the MBR-6 and MBR-7, to 3,886 Euros per square meter, corresponding to the MBR-1. The current values for the module MBC were determined in Circular 01.04/08, which assigned a construction value ranging between 400 Euros per square meter, corresponding to MBC-7, to 700 Euros per square meter, corresponding to MBC-1. The MBR and MBC Modules apply to Statement of Values affecting all the urban properties of the municipality, and also to any subsequent partial Statement.

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