VALUATION BY REFERENCE TO PROFITS

 

                   In certain type of property the capitalize value primarily depends on the profits resulting from the volume of trade or business e. g hotels, public places cinemas house, etc. In such cases , an estimate is made of the gross profit and from this profit , usual working expenses of the trade are deducted . The net profit is then treated as the gross income from which the net income is worked out and it is multiplied by Y.P to obtain the capitalized value of the property.

This method is generally used where there is some degree of monopoly attached to a property. Such a monopoly may be either factual or legal . An instance of a factual monopoly may be taken of a decent restaurant situated on the top of the hill in a commanding position where there is no other property to offer competition. For a legal monopoly , there exists some legal restraint to prevent competition to the property user from the users of other properties. Such a situation arises when a license is required to run a particular type of business . The topic of valuation of licensed premises  is discussed at length in  chapter 8  of the book.

          Thus , when the element of monopoly is attached to the property, it is quite clear that the comparative method of valuation cannot be adopted as there could not be true comparison to a property that enjoys such a monopoly . In such cases it will be reasonable to assume that the values of such properties will be related to the profit which can be made from their use.

          Extreme care should taken to interpret the data available for the computation of net profit from the use of a property.

          Following points should be noted in this connection:

• If the business is in existences and if it is run in a normal way with good accounts , the study of the accounts will assist in arriving at the reasonable annual earning capacity of the property.
• If the business is mismanaged , the accounts may reflect low returns and it would give very low net profit . The level of the net profit will have to be raised to arrive at the normal market value.
• If the business is run by a super-efficient trader, the resulting net profit would be exceptional and in such cases , a large share of the profits will have to be allotted to the super-efficient trader for his skill and management. If this precaution is not taken, the value arrived at will not reflect the normal market value of the property.
• It also sometimes happens that the accounts maintained may not give the true reflection of trade transactions either because they have been badly maintained due to inefficient or ignorance or because the trader man has chosen not to put all the item through his books of accounts.

This method is sometimes referred to as the accounts method and in practice, it is regularly used for rating purposes.