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THE PUBLIC ORGANIZATION
«PAN UKRAINIAN ASSOCIATION OF VALUATION SPECIALISTS»

QUESTIONS AND ANSWERS

This section of the site contains the most frequently asked questions that every appraiser periodically encounters in daily communication with their clients, colleagues and partners, as well as representatives of the state regulator and other regulatory authorities.

 

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An appraiser approached the public organization «Pan-Ukrainian Association of Valuation Specialists» with the following questions: (1) What regulatory document provides for the procedure for carrying out a personal inspection of property, and the stage at which it can be carried out? (2) Can an appraiser who has conducted a personal inspection of the property and familiarized himself with the object of appraisal, having carried out a photo-video fixation of the property and personal presence during the inspection, subsequently concluding an appraisal contract, use the specified photo and video materials when drawing up an appraisal report?

 

We believe that the answer provided by the Association will be informatively useful for appraisers when conducting an independent valuation…

 

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Appraisers turn to the public organization «Pan-Ukrainian Association of Valuation Specialists» with questions on determining the value of property, in particular food products, the service life of which is limited.

 

As a result, when the term of storage of such property approaches the final term of its use, the depreciation of this property occurs. Such property is sold at a discount from the initial price. The question is how to formalize this discount, depending on the time elapsed since its manufacture, for each type of property that has a limited shelf life.

 

As an answer to such questions, a variant of determining the value of property when its storage period approaches the critical one is proposed. This value is determined through the price of property that has a sufficient period of use and is effective (efficient) in the market.

 

The result of this article is to provide practical advice to appraisers on how to determine the value of property to be disposed of when the property has a limited shelf life and must be removed at the end of the storage period. Because the time from the moment the property is made is approaching the critical time, that is, the time when the time comes after which this property is subject to disposal and can no longer be used for its intended purpose, it is quite natural that the value of such property is no longer the same as property, for which this critical period will come much later...

 

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To date, appraisers often face the task of determining the market value of large arrays of equipment available at enterprises. Moreover, such a mass valuation is carried out, as a rule, under conditions of a rather limited period of time (and sometimes initial data), however, it requires a sufficiently high level of reliability and accuracy.

 

Taking into account the complexity of the situation with the methodological support of this issue, which has developed at the moment, the specialists of the public organization «Pan-Ukrainian Association of Valuation Specialists», based on personal experience and available statistical market data, conducted their own study to determine the most, in our opinion, the most universal model for calculating the accumulated depreciation of value equipment in its mass evaluation, based on the use of the following empirical formula…

 

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Since in 2015 a military tax in the amount of 1.5% of the income received by an individual should be paid from an expanded tax base, which also included heritage and gift objects, should notaries, when concluding contracts of inheritance (donation) of property (property rights) demand report on an independent valuation of the value of property (property rights) that is inherited (donated)?

 

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To answer this question, it is necessary to remember that the so-called «rule of five» works in statistical measurements. The essence of the rule of thumb of five is as follows. If any random sample from the population contains five or more values, then the median of the population values with a probability of 0.93 is between the largest and smallest values of this random sample.

 

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After the adoption on 20.10.2014 of the Law of Ukraine №1709-VII «On Amendments to Certain Legislative Acts of Ukraine Regarding Certain Issues of Inheritance», which (except for paragraphs 3 and 4 of Section I, which are already in force) comes into force on 01.01.2016, the question arises – Is a valuation of property (cash, property, property or non-property rights) that is inherited by the heir necessary, and if necessary, when should it (valuation) be done?

 

Please note that paragraphs 3 and 4 of Section I of the Law of Ukraine «On Amendments to Certain Legislative Acts of Ukraine Concerning Certain Issues of Inheritance» provide that in case of inheritance (donation), property valuation is not mandatory when concluding inheritance (donation) transactions, in contrast to conclusion of other transactions for the alienation of property, when property valuation is mandatory.

 

It is safe to say that this is not the case...

 

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Using a certain mathematical apparatus, we will show that in specific cases, when the cash flow changes from period to period according to a certain rule, the direct capitalization formula is a direct result of discounting cash flows, and the direct (linear) capitalization method itself is just a partial case (several simplified) discounted cash flow method (capitalization method at the rate of return on capital)...

 

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The cost of such a complex has certainly changed over the past three years, since today the domestic real estate market has developed a situation where the market value determined in the past, in UAH or dollar equivalents, practically cannot be equal (coincide) with the current market value valuation date or any other date if there is a significant time difference between these two dates – for example, a year or more...

 

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The discount on bargaining in its economic essence is a kind of indicator of the state of the market for similar (similar) property. The presence or absence of such a discount, as well as its absolute value, make it possible to optimize the actions of the parties when buying or selling property in specific economic conditions, taking into account the type of property being alienated, its value, predicted market trends, as well as the size and activity of the market itself in a particular period of time within a particular region. That is why many practicing appraisers very often have a question about the correctness of determining and further justifying the absolute value of the discount on trading...

 

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In practice, very often there are situations when property is sold (alienated) under conditions of accelerated sale. In the accelerated sale of property, there is a discrepancy between the typical exposure times for this type of property and the actual possible exposure times under the conditions of an accelerated sale. As a rule, the allotted exposure time for most objects under the conditions of an accelerated sale is not enough, since the sale period itself is rather limited in time. To implement an accelerated sale of an object, it must be sold (alienated) at a discount. It is here that the question arises of what kind of discount to the market value should be applied in order to correctly determine the cost of the accelerated sale of a particular property?

 

To answer this question, let us first consider the balance equation for the value of any property under the conditions of an accelerated sale...

 

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It is widely known that the area of almost any real estate object significantly affects the cost of a single indicator (square meter, hundred part, hectare, etc.) of such real estate. So, for example, for objects with small areas, as a rule, the cost of a single indicator will be higher than for objects with a large area. Of course, this statement will be true only if the functional (target) purpose of the compared objects is completely similar (the same).

 

That is why, practicing real estate appraisers very often face the question of possible ways to correctly determine the adjustment for the scale (for the difference in areas) of analogous objects and the object of assessment within the framework of a comparative methodological approach…

 

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Decree of the Cabinet of Ministers of August 21, 2014 №358 «On the assessment for tax purposes and the calculation and payment of other mandatory payments levied in accordance with the law» established that the estimated value for tax purposes and the calculation and payment of other mandatory payments levied in accordance with legislation (hereinafter referred to as taxation) is the market value calculated in accordance with national standards and other regulatory legal acts on property valuation and property rights. Thus, after the enactment of Resolution №358, everywhere in the acts of the Cabinet of Ministers of Ukraine, ministries and other central executive authorities that do not contradict this resolution, the estimated value should be understood precisely as the market value.

 

According to this Decree, the market value of property is calculated by the subjects of valuation activities that meet the requirements established by the Law of Ukraine «On the valuation of property, property rights and professional valuation activities in Ukraine», as well as the subjects of valuation activities in the field of land valuation, which meet the requirements established by the Law of Ukraine «On the evaluation of land».

 

The question arises: is it enough for notaries, when collecting the state fee or when checking the amount of taxes calculated on the basis of the estimated (market) value, to require the submission of only a property valuation report, which is made by the subject of appraisal activity, who has a valid certificate of the subject of appraisal activity, and the appraiser, does the signatory of the report have the right to carry out practical evaluation activities in the available specialties?...

 

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Very often appraisers in their practice are faced with a situation where, within the framework of the income methodological approach, they have to carry out discounting not once a year (usually at the end of the year), but for shorter periods of time (as a rule, at the end of a quarter, month or even a day). It is not uncommon for situations where the discounting period itself is not equal to an integer number of years. That is why the question arises, how to correctly calculate the discount factor in a situation where the discounting period in practice is not equal to an integer number of years, or future (projected) incomes are generated more than once a year?

 

The simplest of all possible discounting methods is the option when future (projected) cash flows are received once a year (at the end of each forecast year). In this case, the discount factor will look like this...

 

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Determining the market value of the appraisal object, which is real estate, within the framework of a comparative methodological approach, as a rule, is based on the cost of supplying 1 sq.m of similar real estate (land improvements) in the area where the appraisal object is located. At the same time, the cost of offering analogous objects, as a rule, automatically includes both the cost of land plots within which such real estate is located, and the cost of all land improvements that are part of analogous objects.

 

In other words, the presented values of the offer of analogue objects reflect the advantages of the location of the relevant property (the market value of land plots), and also characterize the measure of how much effort, capital and entrepreneurial initiative applied to the land increased the value of such property as a whole (the market value of land improvements). How to correctly determine the cost of land improvement proposals without taking into account the cost of the land component?...

 

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In the case of a stable hryvnia exchange rate against the so-called «hard» currencies (for example, the dollar or the euro), the price of real estate in hryvnia is determined through its price in foreign currency by simple arithmetic multiplication by the exchange rate of this currency against the hryvnia. But what about a situation where the hryvnia exchange rate against other currencies, such as USD, experiences significant changes over a fairly limited period of time? How does the value of real estate change in dollar and hryvnia equivalents?

 

This issue is absolutely relevant, taking into account the rather sharp and rapid changes in the exchange rate of UAH against other foreign currencies (dollar, euro, etc.) that took place during 2008 and 2014 (first from 5 UAH/USD to 8 UAH/USD – an increase of 60%, and then from 8 UAH/USD to 12 UAH/USD – an increase of 50%, respectively, to the previous rate).

 

How does the value of real estate change in dollar and hryvnia equivalents in such a situation? Obviously, the technical conversion of the «old» price in dollars (that is, the one that was formed in the currency before the sharp change in the exchange rate) into the «new» UAH prices by simple arithmetic multiplication by the «new» UAH exchange rate against the dollar is a deliberately false way.

 

In turn, numerous statistical studies of the real estate market demonstrate the following interesting dynamics of price behavior in the market in a rapidly growing exchange rate (in particular, the USD)...

 

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This issue is quite relevant for many practicing appraisers, since the National Standard №1 «General principles for the valuation of property and property rights», approved by the Resolution of the Cabinet of Ministers of Ukraine dated September 10, 2003 under №1440, provides that in the property valuation report and in the of the object of appraisal, the appraiser must reflect the fact of inclusion or non-inclusion in the market value of the amount of value added tax. Appraisal procedures related to the determination of the market value are carried out taking into account the inclusion or non-inclusion of the amount of value added tax in it. At the same time, the condition for determining the market value, including the amount of value added tax, is indicated in the contract for property valuation (clause 17 of National Standard №1).

 

In addition, paragraph 34 of the National Standard №1 determines that the object of assessment, in the case of its pledge, is valued at market value without including the amount of value added tax...

 

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