HOW TO VALUE A BUILDING PARTLY ON RENT?

KNOWLEDGE BANK FROM B KANAGA SABAPATHY

LET KNOWLEDGE SPREAD

Message from B. K. sir 10/04.2023

Question :

Mr. ‘A’ owns shops of 420 sq.ft. each in GF, FF and SF of a commercial building with UDS of 387 sq.ft. GF & FF is rented out and SF is vacant .The FMV arrived at by land and building method is Rs, 29.50 lakhs whereas the FMV by rent capitalisation method is Rs. 53 lakhs. The building is 25 years old. Which value should I certify?. Can I include both the values in my report?. The purpose of valuation is to assess the FMV for collateral security for bank.

My opinion :

1. In this case, the difference is huge. It is about 80%. Analyse the reasons why there is huge difference.

2. There may be many reasons why the value by rent capitalisation method is more when compared to the value arrived at by land & building method.

i) The age of the building may be more and hence the depreciation value is more. When the building is old, the value by rent capitalisation method may not be realistic.

ii) The rent details given to you may not be genuine.

iii) The demand for the shops may be more because of locational advantage.

iv) The rental value may be more in spite of poor condition of the building.

v) The actual FSI may be more when compared to the permissible FSI.

3. Record both the values. Certify the value which is appropriate to you. Apply “4 way test” before signing the report.

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With best wishes,

B. KANAGA SABAPATHY
[email protected]
www.bkanagasabapathy.com

About the Author:-

Mr. B. Kanaga Sabapathy born in 1951, is a Civil Engineer who belongs to the 1972 batch of Regional Engineering College, Tiruchirappalli in Tamilnadu.
He is a Registered valuer of the Central Board of Direct Taxes, a Professional Engineer and also a Chartered engineer. Valuation is his main profession..
He was the National Vice-President of the Institution of Valuers (India) for 11 terms.
He is a regular contributor of articles in the Indian Valuer Journal from the year 1985. His articles especially his regular column “Questions & Opinions” are very popular among the practising valuers in India.
His book “Guidelines on Valuation for Banks” (2002) is used to be referred by many banks. The valuation formats designed by him were accepted and adopted as the formats by many banks in the country.
His son K. Arun and daughter B.K. Aruna are also approved valuers and they also contribute articles to the Indian valuer journal.
His guru: Mr. C.H. Gopinatha Rao, Chennai.
His mentor: Mr. R.K. Gandhi, Mumbai.
His role model: Mr. S. Rajaratnam, Chennai.
His best students: Thousands of valuers in the country