SHRI GANESHAY NAMAHA

SHRI GANESHAY NAMAHA Er & Vr. KEDAR CHIKODI M.Val. in Plant & Machinery B.E.Civil, MRICS (London),FIV, MPVAI, FIIV, MCVSRTA, AMIE, MPEATA, MISSE, MICA. GOVT. APPROVED VALUER, CHARTERED ENGINEER & STRUCTURAL CONSULTANT SECRETARY INSTITUTION OF VALUERS, THANE

1. DEFINITION 2. USES 3. SCOPE 4. PURPOSES 5. MECHANICS OF THE METHOD 6. REQUIRED DOCUMENTS 7. CASE STUDY 8. CONCLUSION

RESIDUAL METHOD OF VALUATION Residual Method of Valuation is adopted for valuation of properties which have latent potential for development and for valuation of those properties whose net value can be increased by capital expenditure. Such properties which have the latent potential for development are called Development Properties and the Valuation for such properties is done based on Residual Method: or Development Method Residual method is adopted only in special cases of properties for specific purposes.

THIS METHOD IS USEFUL FOR THE FOLLOWING PURPOSES: A client who owns a development property like a large piece of urban land and wants to sell it. He would like to know the reserve price or the Percentage of ownership in the developed property after development. A Developer client would like to know whether the Property Development in a development property like a Land for developing an apartment complex is viable or not and at what cost he can purchase the land. Assessing the Present Value of a Development Property for Mortgage with Banks. Fixing of Reserve price of Development Properties for Sale/auction (Ex: Large parcels of Urban Lands within the city limits are in the outskirts which have a potential for change of use and alternate development potentials. In case of development projects where project appraisal is required for business decisions to find out the best development model among mutually exclusive development models to yield maximum returns. Assessment of Transferable Development Rights(TDR) provided by the local bodies in major cities.

THE MOST INCREASED SCOPE FOR THIS RESIDUAL METHOD OF VALUATION IS AMONG PROPERTY DEVELOPERS Nowadays, many property developers have entered the market due to steep increase in demand for houses and commercial space. Residential layouts are being developed in every town and city to meet the ever increasing housing demand. Even large corporate and realty companies from overseas are entering the Indian Realty sector in the country with large investments. Large townships are being developed in:- 1. Metros Cities 2. Tier II Cities 3. Tier III Cities.

PURPOSE OF RESIDUAL METHOD OF VALUATION Top Companies require efficient project appraisals for their investments and future projects. Residual Method of Valuation is an effective tool which provides the right value for the stake holders to make prudent & critical economic decisions. The projects developed by developers are for sale of built/ developed space like dwelling units and commercial spaces in majority of cases and for rentals as company investment portfolios like shopping malls etc., these developers require an efficient Project Appraisal of their proposed projects to enable them take a prudent and profitable financial decision.

RESIDUAL METHOD IS USED FOR THE FOLLOWING PURPOSES Investment Properties Development of Redevelopment Properties Sale Price of Developed Property Residual Value

DEVELOPMENT PROPERTIES Those properties, the value of which can be increased by a capital expenditure through development works are called Development Properties. Such properties which have the potential to be rebuilt into a more intensive form of development with or without change of use come under this class.

EXAMPLES : Large parcels of Vacant Land within cities in which residential apartments and commercial building developments etc. are possible and profitable. Properties Large parcels of Vacant Lands in the outskirts which have potential for plotted development. Properties which have not used the full FSI and have scope for further.

FACTORS AND INPUTS Different development Models available for the Property under consideration. The capital required to be infused in order to release the full potential of the property for different development models and cost of capital infused. Sale price of the Developed units - residential, commercial plots or built spaces or other types plotted and built spaces. Present value of the Future Sale Proceeds and development expenditure. Return on investment.

MECHANICS OF THE METHOD BASIC FORMULA: Value of the Property = (Sale price) Less (Cost + Profit for Development) R = S (C + P) Where R is the Residual Value of the Site S is the Sale Proceeds of sale from the developed Property C stands for Costs of Development P is the Profit required by the developer & R is the Residual Value of the Land

REQUIRED DOCUMENTS FOR VALUATION Valuer should obtain from the client certified copies of following documents in respect of the property and verify the same with the originals. i. For freehold properties :- sale/ Purchase deed, Sale Agreement, Conveyance Deed. ii. iii. iv. Approved plans, commencement certificate and completion plans with completion certificates as issued by authority. City survey plan. Property Register Card. v. Development Plan Records vi. vii. If property falls in Town Planning Scheme, remarks from Town planning office. In case of valuation for the purpose of Standard Rent, copy of petition filed in the court viii. In case of rented property, list of tenants with monthly rent. ix. Copy of property tax bill. x. Repair cess bill for cessed properties. xi. Insurance premium

EXAMPLES OF RESIDUAL METHOD OF LAND VALUATION FOR ESTIMATING THE LAND VALUE Purpose of Valuation - To estimate the Fair Market Value of the Property. Name of the Owner - M/S. KRISH ENTERPRISES Brief description of the property - Section No. 10/23, Mouje Katrap, S.No., H.No.25/1(p), Ambernath - Karjat Pipeline Road, Badlapur.

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VALUATION THE TOTAL AREA OF THE PLOT IS AS FOLLOWS :- Sr. No. Area Statement Area deductions / additions Area/ sq.mtrs 1 Area of Plot 500.00 sq.mtrs. 2 Area as per 7/12 extract 500.00 sq.mtrs. 3 FSI Permissible 1.00 4 Permissible Balcony 50.sq.mtrs. 5 Permissible TDR 80% of the plot area 400.sq.mtrs. 6 Permissible FSI (1 + 5) 950.00 sq.mtrs. 7 Total FSI including TDR 950.00 sq.mtrs.

CALCULATION OF SALEABLE AREA - SR. NO. DESCRIPTION AREA 1 Total F.S.I. available 950.00 sq.mtrs. 2 Carpet area @ 0.87 826.00 sq.mtrs 3 Add : Average Loading @40%( as per market practice) 330.00 sq.mtrs 4 Total Saleable area in Sq. mtr. 1156.00 sq.mtrs 5 Total Saleable area in Sq.Ft. 12443.00 sq. ft.

VALUATION BY RESIDUAL LAND METHOD SR. NO. DESCRIPTION 1 Total Value of Saleable area of 12443.00 sq.ft @ Rs. 3,200 per sq.ft 2 Cost of Construction for the said building @ Rs.1,000/- per sq. ft.(12443 * 1000) 3 Cost of TDR Purchased Rs. 6500 sqmts @ 400 sqmts (TDR Area) Amount (In Rs.) (Incoming) Rounded off to nearest thousand 3.98 Cr. Amount (In Rs. ) (Outgoings) Rounded off to nearest thousand 1.24 Cr 0.26 Cr 4 Architect s Charges @ 2.5% ( on 1.24 Cr) 3,11,075/- 6 Other administrative expenses (1/2 %) of Legal Expenses 5 Legal Expenses @ 1% ( on 1.24 Cr) 1,24,430/- 62,215/- 7 Contingency @ 4% on 1.24 Cr 4,97,720/

CONTINUE SR. NO. DESCRIPTION Amount (In Rs.) (Incoming) Rounded off to nearest thousand 8. Total before Finance Cost 1.61 Cr 9 Finance cost (Interest Expenses) @ 21% for 1 year of Rs. 16038440 Amount (In Rs. ) (Outgoings) Rounded off to nearest thousand 0.33 Cr. 10 Net Outgoings 1.94 Cr. 11 Assuming Developer s Profit from the final Outgoings @ 30% 0.58 Cr 12 Total Outgoings : 2.52 Cr

Total Value of Land Gross Turnover from the project minus Outgoings (Rs. 3.98 Cr. Rs. 2.52 Cr. ) Rs. 1.45 Cr. Completion period for development project is estimated as two years, therefore, present value of Rs. 1,45,89,134/- is deferred for two years @ 10%, accordingly, differed value works out to: Present Value (P.V.) = 1/(1+ R)^(n) = 0.82645 Where as R = Rate n = Number of years Rs. 1,45,89,134/- * 0.82645 = 1,20,57,190/- Hence Total Value of Land works out to: Rs. 1,20,57,190/- say Rs. 1.20 Cr.

Purpose of Valuation - To estimate the Fair Market Value of the Property for the purpose of Sale. Name of the Owner BANK OF INDIA. Brief description of the property - Land bearing CTS No. 55, Village : Ambivali, Opp. Bhavani Prasad, Bhavani Mata Road, Ramesh Nagar, Behind Malacolm Baug, Andheri (W)

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VALUATION THE TOTAL AREA OF THE PLOT IS AS FOLLOWS :- Sr. No. Area Statement Area deductions / additions Area/ sq.mtrs 1 Area of Plot 8518.00 sq.mtrs 2 Area as per Conveyance 7823.56 sq.mtrs 3 Deductions for a) Set Back Area b) Reservation for School & Play ground 4 Total area after all deductions (2 3) 366.23 sq.mtrs 4065.00 sq.mtrs 4431.23 sq.mtrs 3392.33 sq.mtrs 5 Deduction for 15% R.G. 508.85 sq.mtrs 6 Net area plot 2883.48 sq.mtrs 7 FSI Permissible 1.00

Sr. No. Area Statement Area deductions / additions Area/ sq.mtrs 8 Permissible FSI 2883.48 sq.mtrs 9 Addition for a)set back area CONTINUE 366.23 sq.mtrs b)school reservation (on handing 2306.78 sq.mtrs school plot) c) Slum 20% Slum TDR to be 576.696 sq.mtrs purchased from Market 10 Total FSI including TDR ( 8 + 9) 6133.18 sq.mtrs Balance TDR gain from project 1758.22 sq.mtrs

CALCULATION OF SALEABLE AREA - SR. NO. DESCRIPTION AREA 1 Total F.S.I. available 6133.18 sq.mtrs.. 2 Add. : Fungible FSI 35% as per amended D.C. Rules 2146.61 sq.mtrs. as on 06.01.2012 3 Total FSI 8279.79 sq.mtrs. 4 Carpet area @ 0.87 7203.41 sq.mtrs 5 Add : Average Loading @50%( as per market 3601.70 sq.mtrs practice) 6 Total Saleable area in Sq. mtr. 10805.11 sq.mtrs 7 Total Saleable area in Sq.Ft. 116,263 sq. ft.

VALUATION BY RESIDUAL LAND METHOD SR. NO. DESCRIPTION 1 Total Value of Saleable area of 116,263 sq. ft. @ Rs.14,000/- per sq. ft. minus 15% since the property is surrounded by slum area : 11900/-(say Rs. 12,000/- per sq.ft. (rate includes car parking area) 2 Cost of Construction for the said building @ Rs.2,000/- per sq. ft. for 7203.41 sq. mtrs x 10.76 x 1.3 (to convert from actual built-up which includes basic area + parking & podium etc ) =1,00,761.30 sq. ft. area * Rs. 2,000/- 3 Cost of 35% FSI to be purchased from BMC- 2146.61 sq. mtrs x Rs. 67000/-(Govt. Ready Reckoner ) x 60% 4 20% slum TDR to compulsorily purchased from market 576.696 sq.mtrs x Rs. 25,000/- per sq.mtr Amount (In Rs.) (Incoming) Rounded off to nearest thousand 139.51 Cr Amount (In Rs. ) (Outgoings) Rounded off to nearest thousand 20.15 Cr 8.62 Cr. 1.44 Cr. 5 Architect s Charges @ 2.5% of Rs. 20.15 Cr 0.50 Cr

CONTINUE SR. NO. DESCRIPTION Amount (In Rs.) (Incoming) Rounded off to nearest thousand Amount (In Rs. ) (Outgoings) Rounded off to nearest thousand 6 Legal Expenses @ 1% Rs. 20.15 Cr 0.2 Cr 7 Other administrative expenses @ 2.5% Rs. 20.15 Cr 0.5 Cr 8 Contingency @ 4% on Rs. 20.15 Cr 0.8 Cr 9 Interest Expenses @ 21% for a holding period of 6 Cr. approx. 1year months Rs. 20.15 Cr 10 Net Outgoings 38.21 Cr. 11 Assuming Developer s Profit from the final Outgoings @ 30% 12 Total Outgoings : 11.46 Cr. 49.67 Cr.

Total Value of Land Gross Turnover from the project minus Outgoings Rs. 139.51 Cr Rs. 49.67 Cr Add : Scrap value of existing two buildings Balance TDR which can be sold in open market : 1758.22 sq.mtrs x Rs. 22,000/- per sq.mtr CONTINUE Rs. 89.84 Cr. Rs. 0.50 Cr Rs. 3.86 Cr Rs. 94.2 Cr Completion period for development project is estimated as two years, therefore, present value of Rs. 94.2 Cr. is deferred for two years @ 10%, accordingly, differed value works out to: Present Value (P.V.) = 1/(1+ R)^(n) = 0.82645 Where as R = Rate n = Number of years Rs. 94.2 Cr./- * 0.82645 = 77.85 Cr Hence Total Value of Land works out to: Rs. 77.85 Cr.

Purpose of Valuation - To estimate the Fair Market Value of the Property for Society to negotiate with the developer for compensation & corpus. Brief description of the property The Property is situated in Town Planning Scheme of Suburb of Mumbai. The

VALUATION Sr. No. Area Statement Area deductions / additions Area/sq.mtrs 1 Area of Plot 1,150.00 sq.mtrs 2 Total area of existing building 1,025 sq.mtrs of carpet area & 1,140 sq.mtrs of built up area. 3 FSI Consumed 0.99 4 Total area of T.D.R Permissible 100% of net plot area ------- 1,150 sq.mtrs.

Sr. No. Area Statement Area deductions / additions 1 Total permissible built up area as per F.S.I. Add 100% permissible T.D.R. Total permissible built up area including T.D.R------------------------------------(C) 2 Built up area for rehabilitation of existing occupants------------------(d) 1,150 sq.mtrs 1,150 sq.mtrs CONTINUE Area/sq.mtrs 2,300 sq.mtrs 1,140 sq.mts. 3 Balance area towards free sale-----(c D) 1,160 sq.mtrs 4 Total area of T.D.R Permissible 100% of net plot area ------ 5 Area of 35% fungible F.S.I. for free sale component----1160 sq.mts. * 0.35 6 Area of 35% fungible F.S.I. for rehab component----1140 sq.mts. * 0.35 1,150 sq.mtrs. 406 sq.mtr 399 sq.mtr

EXPENDITURE Sr. No. Description Amount (Rs.) 1 Cost Towards TDR (Since ample TDR is available rate of TDR is less than the market rate ) 1150 sq.mts * 25000/- R.) -------(B) 2 Fungible F.S.I Cost [(406sq.mts + 399sq.mts) * 75500 * 0.60] -------(C) 3 Premium towards staircase/lift area to be paid to Govt. 230sq.mts * 75500*.25)-------(D) [A] Total amount-----(b + C + D) 2.87 Cr 3.64 Cr 0.43 Cr. 6.94 Cr. [I]

EXPENDITURE [B] COST OF CONSTRUCTION : Built up area 2300 sq.mts. + Fungible for rehab 35% of 1140sq.mts. 399 sq.mts. + Fungible for free sale 35% of 1160 sq.mts 406 sq.mts. + Staircase and lift area 10% of 2300 sq.mts. 230 sq.mts. + Stilt area (5.5% approx. of 2300 sq.mts) 125 sq.mts. Total built up area Estimated cost of construction 3460 sq.mts. * Rs. 25000/- 3460 sq.mts. Rs. 8.65 Cr [II]

[C] Cost Towards Transit Accommodation To Existing Occupants: Cost towards transit accommodation to existing occupants for 24 months is estimated @ 650/- per sq.ft of carpet area per month. 1,025sq.mts * 650/- * 24 Rs. 1.6 Cr [III] [D] Other Expenses : Such as payments to be made to Govt. under various heads like scrutiny fee, development charges, premium, etc @ 6500/- per sq.mts 2,300 sq.mts * 6,500/- Rs. 1.49 Cr [IV] [E] Other expenses/ out of pocket expenses : Out of pocket expenses @ 6500/- per sq.mts 2,300 sq.mts * 6,500/- Rs. 1.49 Cr [V]

[F] Architect fees, Structural Engineer, Registered site Supervisor,Legal Charges & Contingency Charges: Payment towards professional fees @ 8% on the cost of construction 8% of 8,65,00,000/- Rs. 0.69 Cr [VI] DESCRIPTION Total of [I]+[II]+[III]+[IV]+[V]+[VI] Total Cost of Project before Interest Interest on block up capital @ 21% per annum for 1 years 20,86 Cr Addition/ Subtraction 6.94 Cr 8.65 Cr 1.6 Cr 1.49 Cr 1.49 Cr 0.69 Cr Amount (Rs.) 20.86 Cr [1] 4.3 Cr [2] Total Project cost ([1] + [2]) 25.24 Cr [3]

DESCRIPTION Assuming Developer s Profit from the final Outgoings @ 30% Total Outgoings ([3] + [4]) Addition/ Subtraction CONTINUE Amount (Rs.) 7.57 Cr [4] 32.81 Cr CALCULATION OF SALEABLE AREA SR. NO. DESCRIPTION 1 Area available to developer for sale in open market. 1160sq.mts + (1160sq.mts * 0.35 fungible) Prevailing rate of ownership flats in buildings is estimated @ 3,00,000/- per sq.ft * 1566 1566 sq.mts Amount (Rs.) 46.98 Cr.

Value of Land Total value of land Gross Turnover from the project Minus Total Outgoings (Rs. 46.98 Cr Rs. 32.81 Cr) Rs. 14.17 Cr Completion period for development project is estimated as two years, therefore, present value of Rs. 14.24 Cr. is deferred for two years @ 10%, accordingly, differed value works out to: Present Value (P.V.) = 1/(1+ R)^(n) = 0.82645 Where as R = Rate, n = Number of years Rs. 14.17 Cr./- * 0.82645 = 11.71 Cr Hence Total Value of Land works out to: Rs. 11.71 Cr.

CONCLUSION : This method is widely used wherein there is a scarcity of land, high demand for housing, Metros, Tier 1 & Tier 2 cities also where F.S.I is 1 or more than 1. Also the said method is combination of Market Approach & Cost Approach. (ie. Total Price of Flats sold is taken as per prevailing market rate & then we deduct Cost of the project as explained above, the residue left is the value of the land). Hence as the name resembles Valuation of Land by Residual Land Method.

REFERENCES : - 1. One day Seminar On Recent Trends In Asset Valuation & Its Management held in Mysore. 2. In Wonderland OF Valuation Practice Mr. BHARAT C. SHAH. 3. Valuation Principles and Procedures. Mr. ASHOK NAIN 4. Valuation Of Plant & Machinery Mr. KIRIT BUDHBHATTI 5. Real Estate Valuation in Practice Mr.KIRIT BUDHBHATTI 6. Theory & Practice Mr. Roshan Namavati