CASE STUDY

By:
Vineesh Vidyadharan
B. Tech (Civil); PGDBA (Hons); D. T. Arch:
D. Vasthu; AMIE; FIV; CE (I); MICI;
Cert (Concrete Tech) IIT (M), Exe. Cert (Project
Management) IIM (R); Cert (Hindusthani Classical)
Chartered Engineer (India)
Registered Valuer (IBBI)
IBBI/RV/02/2018/10437
Wealth Tax Valuer. Reg. No. Category
CCIT/CHN/Cat-II 1/2014-15
Case Study

Case Study 1: (On Cost Approach)

A person constructs a warehouse of 3 mtr height of 500 Sqmtr built area in 1975. Calculate
the replacement cost of building in 1995, if the rate of construction in 1975 is @ Rs 350/m 2
and @ Rs. 3570/m2 in 1995. Total life of the building is 40 yr. Assume 10% Salvage

Solution:

i. Acquisition cost of building built in 1975 i.e 500 x 350 = Rs. 1,75,000/-
ii. Present replacement cost of the bldg. in 1995 i.e 500 x 3570 = Rs. 17,85,000/- (ii)
iii. Depreciation cost of the building is Rs. 17,85,000 x 20/40 x 0.90 = Rs. 8,03,250/- (iii)
Hence Net replacement cost of the warehouse is (ii-iii) = Rs. 9,81,750/-

MCQ’s
i) What is the present replacement cost of warehouse in 1995?
a. 17,85,000/- b. 18,85,000/- c. 19,85,000/- d. 20,85,000/-

ii) Which method of depreciation is used in this case

a. WDV method b. Straight line method c. Linear method d. Sinking fund
method

iii) What is the net replacement value of Warehouse

a. 8,81,750/- b. 9,81,700/- c. 10,81,750/- d. 17,85,000/-

iv) What is the depreciation cost of the bldg. in the above case
a. 8,81,750/- b. 9,81,700/- c. 8,03,250/- d. 17,85,000/-

v) What is the historic cost of the building

a. 1,75,000/- b. 9,81,750/- c. 8,03,250/- d. 17,85,000/-

Case study 2: (Cost approach)

Mr. “A” has purchased an old house for Rs. 20,00,000/-. The brokerage paid is 1.50% &
Stamp duty charges is 5%. After purchase he has done repair work immediately once for Rs
1 lakh and second time for Rs. 2.50 lakh. He wants to sell property for Rs. 50,00,000/-. And
he sold that house to Mr. “B” after one year of purchase for sale price for Rs. 43,00,000/- by
negotiation. Mr. “B” has paid 1% brokerage charges and stamp duty charges @ 5%.

Solution:

I) Total acquisition cost for purchase of house for Mr. “A”

a. Purchase price for Mr. “A” is Rs. 20,00,000/-
b. Brokerage charges @ 1.5% Rs. 30,000/-
c. Stamp duty charges @ 5% Rs. 1,00,000/-
Total Acquisition cost is Rs. 21,30,000/-
Add Repairs cost
a. First time repair cost Rs. 1,00,000/-
b. Second time repair cost Rs. 2,50,000/-
Total investment cost Rs. 24,80,000/- (I)
II) Total purchase cost for Mr. “B”
a. Re sale price Rs 43,00,000/- (II)
b. Brokerage charges @ 1% Rs. 43,000/-
c. Stamp duty charges @ 5% Rs. 2,15,000/-
Therefore total purchase price for “B” is Rs. 45,58,000/- (III)
Hence gain amount for Mr “A” from this sale is (II-I) Rs. 18,20,000/-

MCQ’s
i) What is the acquisition cost for Mr. “A”
a. 20,00,000/- b. 21,30,000/- c. 24,80,000/- d. 20,78,000/-

ii) What is the gain amount for Mr. “A” from this re sale?
a. 20,00,000/- b. 27,00,000/- c. 24,80,000/- d. 18,20,000/-

iii) What is the amount spent by Mr. “A” for cost to cure?
a. 4,80,000/- b. 2,13,000/- c. 3,50,000/- d. 2,50,000/-

iv) What type of obsolescence is rectified in this case?

a. Functional obsolescence b. Economic obsolescence
c. Technological obsolescence d. None of the above

v) In this case, the “cost to cure” obsolescence is viable?

a. Yes b. No c. May be d. May not be

vi) What is the original cost for Mr. “B” in this case?
a. 20,00,000/- b. 21,30,000/- c. 43,00,000/- d. 45,58,000/-

Case Study 3: (On Cost approach)

A Land area is 400 sq.m. with two storied building with total built up area of 400 sq.m. The
roofing is changed to R.C.C 20 years back and the age of the flooring is 40 years. The total life
of the building is 80 years and the building is well maintained. The present market value of
land is Rs 15,000 per sq.m. and the prevailing building rate of construction near the town is
20,000 per sq.m. The developer’s profit is 15% of the cost and 1% towards submission
charges and on 15% for functional obsolescence.

Data :

Area of the land = 400 sq.m.

Builtup area of GF & FF = 400 sq.m.
Age of the flooring (building) = 40 years
Total life of the building = 80 years
Present market rate of land = Rs. 15,000/sq.m.
Prevailing building construction = Rs. 20,000/sq.m.
rate
Developer’s cost (Profit) = 15%
Submission charge = 1%

1. Calculate the functional obsolescence at 15% on the replacement rate?

Solution:
Prevailing building rate = Rs. 20,000/sq.m.
Less developers cost + = 0.16 x 20,000
submission charge (15 + 1 = 16%) = (-) 3,200
Net building rate 20,000 - 3,200 = Rs. 16,800/-
Total built up area of building = 400 sq.m.
Building value - 400 x 16,800 = Rs. 67,20,000
Functional obsolescence = 15% on replacement rate
Functional obsolescence value = 0.15 x 67,20,000
= Rs. 10,08,000/-

2. What is the physical obsolescence with 10% salvage value?

Built up area = 400 m2

Replacement rate = Rs. 20,000/m2
Replacement value 400 x 200 = Rs. 80,00,000
Age (flooring) = 40 years
Life = 80 years

Depreciation cost = 40
𝑥 0.90 𝑥 80,00,000
80
= Rs. 36,00,000/-
 Physical obsolescence = Rs. 36,00,000/-
NOTE: The age of Flooring is 40 years means, it is presumed that the building is 40 years old
3. What is the total depreciated value of the building?

Present replacement value = Rs. 80,00,000/-

Physical Depreciation cost = Rs. 36,00,000/-
Technical Depreciation cost = Rs. 10,08,000/-
(Due to Functional obsolescence)
Total Depreciation Cost = Rs. 46,08,000/-
Net Depreciated value of the bldg = Rs. 33,92,000/-
4. What is the total value of the property?
Land extent = 400 sq.m.
Market value of land = Rs. 15,000/- Sq. m
Value of land - 400 x 15,000 = Rs. 60,00,000 /-
Add depreciated value of building = Rs. 33,92,000/-
Total value of the property = Rs.93,92,000/-
Say Rs. 93,92,000/-

5. What is the physical depreciation with 10% salvage, after allowing 15% for
functional obsolescence with 1% cost.
Net building rate is 20,000-3200 = Rs. 16,800/-
Hence total replacement value is 400 x 16,800 = Rs. 67,20,000/-
Physical Depreciation after allowing functional obsolescebce is
40
i.e 67,20,000 x 80 x 0.90 = Rs. 30,24,000/-

MCQ’s:
i. What is the functional obsolescence at 15% on the replacement rate?

a. 10,08,000/- b. 33,92,000/- c. 36,00,000/- d. 46,08,000/-

ii. What is the physical obsolescence with 10% salvage value?

a. 10,08,000/- b. 33,92,000/- c. 36,00,000/- d. 46,08,000/-

iii. What is the net depreciated value of the building?

a. 40,00,000/- b. 33,92,000/- c. 36,00,000/- d. 46,08,000/-

iv. What is the total value of the property?

a. 60,00,000/- b. 80,00,000/- c. 33,92,000/- d. 93,92,000/-

v. What is the physical depreciation with 10% salvage, after allowing 15% for functional
obsolescence with 1% cost.

a. 10,08,000/- b. 30,24,000/- c. 36,00,000/- d. 46,08,000/-

Case Study 4: (Cost approach)

An Ancient Architectural Palatial bungalow of 80 year old is located on a commercial street
in a metro city is converted into Govt. Museum after making full renovation & retrofitting
of the palace by investing the cost of Rs. 120 lakh. The palace is restrengthened & fully
renovated to serve the purpose of Museum. The building is in normal condition.

MCQ’s
i. This type of building is treated as
a. Monument b. Heritage bldg. c. Historic bldg. d. Ancient building
ii. What is the type of obsolescence due to its locational aspect in this case?
a. Technological b. Functional c. Economical d. Physical

iii. What type of obsolescence is rectified by Govt. in this case?

a. Technological b. Functional c. Economical d. Physical

iv. Does the obsolescence rectified by Govt. is

a. Curable b. Cost to cure is reasonable c. less cost to cure d. Over cost to cure

v. Instead of converting into museum, what alternate usage could have beneficial to the govt. to
economically achieve the highest & best use of the building?
a. Star Hotel b. Guest House c. Library d. Govt. Office

vi. Suppose if this bldg. is converted into star hotel, then which obsolescence would have been
successfully over come through monitory benefit to govt.
a. Technological b. Functional c. Economical d. Physical

Case study 5: (On Cost Approach)

A building of 30 year with three storyed total built up area of 2500 Sqmtr and sits on land of
4000 Sqmtr. The building is of 20” load bearing wall in GF and 15” wall in upper floor,
ornate doom in the centre and all floor height 14’ has determined that it would cost Rs. 4.0
Crore located on the main road. In order to build such structure now land locality is selling
@ Rs. 2000/- per Sqmtr has been severnt recent sale in the area. Balance expected life is 30
yr. The department take up an exercise to value its assets and inventory and requires a
value estimated?

MCQ’s & Solution:

i. Which approach and method of valuation would be best used to value the property?
a. Market approach – Hedonic b. Market approach –Sales comparison
c. Cost approach – Reproduction d. Cost approach – Replacement cost

ii. Which approach used to asses the value of land and what is the estimated value of land?
a. Market approach – Sales comparison – Rs. 80 lakh
b. Market approach – Indirect comparison – Rs. 80 lakh
c. Income approach – Rental method – Rs. 80 lakh
d. Income approach – Profit method – Rs. 80 lakh
Ans: Land value is 400 x 2000 = Rs. 80,00,000/-

iii. What is to be deductible to determine the depreciation replacement cost of bldg.

a. Functional obsolescence b. Physical obsolescence
c. Economic & Physical obsolescence d. Economic, Functional & Physical obsolescence

iv. What is the amount of Functional obsolescence, if estimated @ 15% on current cost value
lost?
a. 30 lakh b. 60 lakh c. 80 lakh d. 55 lakh
Ans: Bldg. cost is Rs. 400 lakh x 0.15 = Rs. 60 Lakh
v. What is the Physical obsolescence @ 10% salvage value
a. 60 lakh b. 80 lakh c. 120 lakh d. 180 lakh
Ans: Bldg. cost Rs. 4,00,00,000 x 30/60 x 0.90 = Rs. 1,80,00,000/-

vi. What is the present market value of the property?

Land value Rs. 80,00,000/- (i)
Net value of the bldg. is 4,00,00,000 – (60,00,000 + 1,80,00,000) = Rs. 1,60,00,000/- (ii)
Hence total value of the Property (i+ii) = Rs. 2,40,00,000/-
a. Rs. 180 lakh b. Rs. 240 lakh c. Rs. 400 lakh d. Rs. 460 lakh

Case Study 6: (Lease rent case – Ignoring rack rent)

A person has granted a lease of a shop premises to Lessee at rent of 1,50,000/- per annum on
fully insuring and repairing lease basis. The lease has today 5 years to run. The leasehold
yield on shop property in this location is at 5% and the rate of interest adopted for working
out sinking fund is 2.5%. What is the value for freeholders interest, by ignoring the current
full gross rent of Rs. 2,50,000/- PA
Solution:
Value for freeholder’s interest
1
Calculate YP for 5 yr @ 5 % & 2½ % on dual rate basis, 𝑌𝑃 = 𝑅+𝑠
𝑟
Where, S = (1+𝑟)𝑛 −1
0.025
= (1+0.025)5−1
S = 0.19025
1
𝑌𝑃 = 𝑅+𝑠
1
= 0.05+0.19025
YP = 4.1623
Value for Freeholder’s interest is,
Capitalized Value = Rent x YP
= 1,50,000 x 4.1623
=Rs. 6,24,345/-
Say Rs. 6,24,000/-

MCQ’s
i) What is the outgoing amount for freeholder?
a. 15,000 b. 25,000 c. Nil d. 30,000

ii) What is the rack rent of the property per annum?

a. 1,50,000 b. 2,50,000 c. 4,00,000 d. 3,60,000

iii) What is the value for Freeholder’s interest?

a. 6,24,000 b. 6,51,000 c. 5,24,000 d. 7,24,000

iv) What is the accumulative rate of interest?

a. 2.5% b. 5.0% c. 4.0% d. 6.5%
(NOTE: Sinking fund is calculated on accumulative or redemption rate of interest)

Case study 7: (Lease rent cases – Considering rack rent)

A person has leases his premises for 24 years for a negotiated lease net rent of Rs. 3,000/-
PM. The rack rent in the market is Rs. 4500/- PM and expects 9 % rate of interest. What is
the value for freeholder, if income cases after expiry lease. (Assume redemption rate 3.5%)

Solution:

Rack rent i.e 4500 x 12 = Rs. 54,000/- PA

Negotiated rent i.e 3000 x 12 = Rs. 36,000/- PA
Profit rent = Rs. 18,000/- PA
a. Term value:
Freeholder’s interest with 9% & 3.50%
1
YP dual rate for 24 years 𝑌𝑃 = 𝑅+𝑆
𝑟
Where 𝑆 = ((1+𝑟)𝑛−1)
0.035
=( )
(1 + 0.035)24 − 1

1 1
= 0.09+0.0272 = 0.1172
YP = 8.532
Hence freeholder’s interest is 36,000 x 8.532 = Rs. 3,07,152/- (a)
b. Reversion value for rack rent
1
54,000 x (1+0.08)24
54,000 x 0.1577 = Rs. 8516/- (b)
Hence value freeholder’s interest is (a+b) Rs. 3,15,667/-
Say Rs. 3,15,000/-
(NOTE: For reversion 1% less rate of interest is considered)

MCQ’s
i. Which method/approach is suitable to assess value in this case
a. Cost approach b. Income approach c. Market approach d. Benefit approach

ii. What is the amount of out going for owner in this case
a. 300 b. 450 c. 540 d. Nill

iii. If the lease period increases then the value for freeholder
a. Increases b. Decreases c. No change d. Slight changes

iv. What is the total value for freeholder’s interest in this case?
a. 3,07,000 b. 3,15,000 c. 3,65,000 d. 4,07,000

v. What is the amount of profit rent in this case?

a. 18,000 b. 24,000 c. 36,000 d. 54,000
Case study 8: (Lease rent case)
A person has leased his premises for 21 years for net rack rent of Rs. 3,500/- PM to a
company and he is ready to accept less negotiated rent instead of market rent by accepting a
premium of Rs. 1,40,585/-, then what rent should be reserved in the lease? The expected rate
of interest is 9.50% & redemption rate is 3.50%.

Solution:

Net rent of the property, i.e 3500 x 12 = Rs. 42,000/- PA

Premium paid to freeholder Rs. 1,40,585/-
Interest on Rs 1/- for 1 yr @ 9.50% i.e 0.095
ASF to produce Rs 1/- in 21 years @ 3.50%
𝑟 0.035
= =
(1 + 𝑟)𝑛 − 1 (1 + 0.035)21 − 1
S = 0.0330365
Annuity which Rs. 1/- was purchase @ 9.50% & 3.50%
= 0.095 + 0.0330365
= 0.1280365
Reduction to rent, i.e Rs. 1,40,585 x 0.1280365 = Rs. 18,000/- P A
Therefore so profit rent is Rs. 18,000/- PA OR Rs. 1,500/- PM
Hence Negotiated rent required for lease is 42,000-18,000 = Rs. 24,000/- PA
OR Rs. 2,000/- PM
So, concession rent to be revised is Rs. 2,000/- PM

MCQ’s
i. What is the profit rent in this case?
a. 1,500 b. 2,000 c. 2,500 d. 3,000

ii. What is outgoing amount to be paid by owner?

a. 2,000 b. 3,500 c. Nil d. 4,500

iii. What is the concession rent per month can be fairly fixed?
a. 1,500 b. 2,000 c. 3,500 d. 4,000

iv. Is this amount of premium received is reasonable for achieved negotiated rent?
a. Yes b. No c. May be d. May not be

v. What is the annuity of Rs. 1 achieved in this case

a. 0. 0.0330365 b. 0.1280365 c. 0.1380165 d. 0.095

Case study 9: (On license rented property)

A residential apartment building in high class locality was licensed in Aug. 2015 for 3 years.
The area of apartment is 2500 Sft and license compensation was fixed @ Rs. 2,00,000/- per
month and deposit paid as Rs. 25 Lakh. Society maintenance charges Rs. 15,000/- per month
to be paid by licensor. Workout the sale value of apartment building in Aug. 2016, if
prevailing market rate in the locality is Rs. 25,000/- Sft. Assume 8% capitalization rate and
yield @ 4% for licensed property.

Solution:-

The prospective purchaser has two benefits in 2016

(i) Income for further 2 years
(ii) Reversionary value of apartment after 2 years
i. Gross annual income, i.e. 2,00,000 x 12 = Rs. 24,00,000/-
Deduct Society maintenance charges 15000 x 12 = Rs. 1,80,000/-
Net annual income = Rs. 22,20,000/-
NOTE: The rent act is not applicable for licensed property, since the premises will revert back to
licensor (owner). This is more benefit to licensor as if it is freehold property.

Capitalizing net yield @ 4% for 2 years, the value of apartment

1
1−
(1+0.04)2
i.e. 22,20,000 x 0.04
i.e. 22,20,000 x 1.887 = Rs. 41,89,140/- …… (a)
Value of apartment with vacant possession
i.e. 2500 x 25,000 = Rs. 6,25,00,000/-
ii. So, present value of property receivable after 2 years assuming @ 8% yield
i.e. 6,25,00,000 x 0.8573 = Rs. 5,35,81,250/- ……… (b)
Hence total sale value of property (a+b)
i.e. 41,89,140/- + Rs. 5,35,81,250/-
= Rs. 5,77,70,390/-
Say Rs. 5,77,70,000/-
NOTE: Here the yield for rental income is @ 4% for licensed premises, but the reversion rate is
adopted @ 8% as capitalization rate, since it is not investment for revenue income, but the amount
for getting back capital value. Hence it is selected as remunerative rate for investment.
MCQ’s
i. Since the rent act is not applicable in this case, because it is a _____
a. lease rented property b. license rented property
c. ordinary rented property d. none of the above

ii. What is the yield rate adopted to assess the capitalized value of rental income in this case?
a. 4% b.6% c. 8% d. 12%

iii. Why the yield rate for rental income is adopted as low as 4% in this case, since it is a ____
a. lease rented property b. license rented property
c. ordinary rented property d. none of the above

iv. What is the capitalized value from the net yield of the apartment in this case?
a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000

v. What is the reversionary value of the apartment in this case?

a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000
vi. What is the sale value of the apartment in 2016?
a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000

Case Study 10: (On Sub lease case)

Mr. Bheem leased out a plot of land to Mr. Raju having 30 years unexpired. He is receiving
the ground rent @ Rs. 24,000 per annum (net). Mr. Raju has subleased the property at a
rent of Rs. 45,000/- per annum (net). The yield for the term period is 10 percent and for
reversion is 12 percent. Mr. Bheem will have the benefit of the improved rent after expiry of
the lease period for another 30 years.
Solution:
I. Value for Head Lessee Mr. Raju’s Interest:
Rent reserved under Sub lease Rs. 45,000/-
Ground rent paid to lessor Rs. 24,000/-
Hence Profit rent: Rs. 21,000/- PA
Calculate YP Single rate for 30 years @ 10%
1 − 𝑃𝑉
𝑌𝑃 =
𝑅
1
1−( )
(1 + 0.10)30
=
0.10
1 − 0.0573
=
0.10
YP= 9.427
Hence value for Head lessee’s (Mr. Raju) interest is 21,000 x 9.427
= Rs. 1,97,967/-
Say Rs. 1,98,000/-
II. Value for Lessor’s (Mr. Bheem) interest after expiry of lease period for 30 years
a. Term Value:
Ground rent fixed Rs. 24,000/- PA
Capitalized value of ground rent income for 30 year @ 10%
YP for 30 yr @ 10% on single rate, YP = 9.427
Hence capitalize value of ground rent is 24,000 x 9.427
= Rs. 2,26,248/- (a)
b. Reversion Value:
Improved rent for further 30 years Rs. 45,000/-
Calculate YP for 30 yr @ 12% on Single rate basis
1
1−( )
(1 + 0.12)30
𝑌𝑃 =
0.12

1 − 0.03338
=
0.12

YP = 8.055
Value for Mr. Bheem with improved rent for further 30 yrs
i.e 45,000 x 8.055
= Rs. 3,62,475/-
Hence present reversion value for Mr. Bheem deferred for 30 yr @ 10%
1
i.e 3,62,475 x (1+0.10)30
i.e 3,62,475 x 0.057308
= Rs. 20,772/- (b)
Therefore Total value for lessor, for Mr. Bheem’s interest (a+b) i.e Rs. 2,47,020/-
Say Rs. 2,47,000/-
MCQ’s:
i. What is the improved rent in this case?
a. 45,000 b.24,000 c. 21,000 d. 1,73,000

ii. What is the profit rent in this case?

a. 45,000 b.24,000 c. 21,000 d. 69,000

iii. What is the type of lease in this case?

a. Ground lease b. Sublease
c. Occupational lease d. Both a & b

iv. What is the market value of the sublease hold interest of the property?
a. 45,000 b.24,000 c. 21,000 d. 1,98,000

v. What is the total value for Lessor Mr. Bheem with improved rent?
a. 1,98,000 b. 3,62,000 c. 2,47,000 d. 3,47,000

vi. Whether Head lessee is benefited in this case?

a. Yes b. No
c. May be d. Not at all

Case study 11: (Premature Lease rent case)

A person has to lease the shop of 14 years ago, of total 21 year lease period on payment of
premium and rent was equivalent to a net rent of Rs. 3,500/- PM. The net rack rent of the
property is Rs. 6,000/- PM. Now he wishes to cancel the existing lease and want to take new
lease for 21 yr at the existing rental. What would be a fair premium or Salami for him to
pay? Assume required interest on capital @ 9% and redemption rate @ 3%

Solution:

Net rack rent is Rs. 6,000/- PM

Less: Reserved lease rent Rs. 3,500/- PM
Hence Profit rent Rs. 2,500/- PM
OR 2500 x 12 = Rs. 30,000/- PA
Multiplying by years purchase at 9% & 3% for 14 year
1
𝑌𝑃 =
𝑅+𝑆
𝑟
where, 𝑆 = (1+𝑟)𝑛−1
0.03
S = (1+0.03)14−1
1 1
𝑌𝑃 = =
0.09 + 0.05852 0.14852

YP = 6.7328
1
Present value of Rs. 1 @ 9% for 7 yr = (1+0.09)7
= 0.54703
YP dual rate @ 9% & 3% for 14 yr deferred to 7 yr
i.e 6.7328 x 0.54703 = 3.683
So, Premium to be paid is 30,000 x 3.683 = Rs.1,10,490/-
Say Rs. 1,10,500/-

MCQ’s
i. What is the profit rent per month in this case
a. 2500 b. 3500 c. 5000 d. 6000

ii. What is the unexpired period of lease in this case

a. 7 yr b. 14 yr c. 21 yr d. 28 yr

iii. What is the reasonable premium to be paid

a. 1,00,500 b. 1,05,500 c. 1,10,500 d. 1,15,500

iv. This type of lease is called as renewal

a. Premature b. Post closure c. Subsistence lease d. Forceable lease

v. What is the deferred YP achieved in this case

a. 3.683 b. 4.683 c. 5.7328 d. 6.7328

Case Study 12: (Virtual lease rent case)

A Tenant has taken a house for 20 year lease for lease rent of Rs. 5000/- PM and has paid a
premium of Rs. 3,00,000/- for lease. And lessee has agreed all repairs @ 10 %. What is the
virtual rent for tenant? Assume rate of interest 9% and redemption rate @ 3%.

Solution:

I. Annual Equivalent (A.E) of the premium

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 (𝑣)
AE = 𝑌𝑒𝑎𝑟𝑠 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒(𝑌𝑃)
1
Calculate YP dual rate @ 9% & 3% for 20 year, 𝑌𝑃 = (𝑅+𝑆)
𝑟
where, 𝑆 = (((1+𝑟)𝑛−1))
0.03
=( )
(1 + 0.03)20 − 1
0.03
= 0.8061 = 0.0372

1
So, 𝑌𝑃 = ((0.09+0.0372))

1
=( )
0.1272
= 7.8616
𝑉 3,00,000
Hence, 𝐴𝐸 = 𝑌𝑃 = 7.8616
= Rs. 38,160/- PA
Actual rent paid is Rs. 5,000/- PM
So rent reserved on lease is Rs. 60,000/- PA
Add equivalent rent for premium paid is Rs. 38,160/- PA
Total Rs. 98,160/- PA
Add 10% for repair & maintenance Rs. 6,000/-
Therefore Total rent including virtual rent is Rs. 1,04,160/- PA
Say Rs. 1,04,000/- PA

MCQ’s
i. What is the amount of virtual rent for premium paid for lease?
a. 38,160 b. 60,000 c. 98,000 d. 1,04,000

ii. What is the cost of repairs for Tenant?

a. 5,000 b. 3,160 c. 9,816 d. 6,000

iii. Does the premium paid by tenant is refundable

a. Yes b. No c. May be d. Yes by proper interest

iv. Does the tenant is benefited, if he pays more premium to negotiate concession in monthly rent
a. Yes b. No c. May be d. May not be

v. What is the total rent achieved in this case?

a. 38,160 b. 60,000 c. 98,000 d. 1,04,000

Case Study 13: (On present value case)

A Person is receiving a net rent income of Rs. 5,500 PM, from his property which is
receivable for a period of 10 years, but will not commence until 12 years have expired
interest on capital required is 11% PA and sinking fund can be invested at 3%n PA. What
is the present value for owner?

Solution:

Net annual income, i.e 5500 x 12 = 66,000 PA

Years Purchase (YP) with dual rate of 11% & 3% for 10 years
1
𝑌𝑃 = (𝑅+𝑆)
𝑟
where, 𝑆 = (((1+𝑟)𝑛−1))
0.03
= ((1+0.03)10 −1)
0.03
=
0.3439
= 0.08723
1
𝑌𝑃 = ( )
0.11 + 0.08723
1
=
0.19723
𝑌𝑃 = 5.07
1
PV of Rs. 1 @ 11% receivable for 12 years = (1+𝑟)𝑛
1
=
(1 + 0.11)12
1
=
3.494
= 0.2858
So, YP @ 11% & 3% for deferred 12 years
i.e 5.07 x 0.2858 = 1.449
Hence present value is, i.e 66,000 x 1.449
= Rs. 95,634/-
Present value for owner is Rs. 95,634/-
Say Rs. 95,000/-
MCQ’s:
i. What is the outgoing amount for owner
a. 550 b. 825 c. 1100 d. Nil

ii. What is the period of rental income?

a. 10 yr b. 12 yr c. 2 yr d. 22 yr

iii. What is the years purchase achieved for 10 yr

a. 1.449 b. 5.07 c. 6.07 d. 7.07

iv. What is the years purchase which is deferred for 12 years

a. 1.449 b. 2.449 c. 3.449 d. 5.07

v. What is the present value for owner?

a. 66,000 b. 95,000 c. 29,000 d. 98,000

Case Study 14: (On APA)

A Person has availed a loan of Rs. 5,00,000/- from bank and his last monthly interest debited
is Rs. 5,750/-. As per agreement he has to pay equated monthly installments of Rs. 12,500/-
per month.
How long will it take him to repay off his loan?

Solution:

(1 + 𝑅)𝑛 − 1
𝐴𝑃𝐴 =
𝑅
5750
Here, 𝑅 = 500000 = 0.0115
Principle amount, P = 12500 - 5750
P = 6750
So, n=?
(1 + 𝑅)𝑛 − 1
𝐴𝑃𝐴 = 𝑃 𝑥
𝑅
(1 + 0.0115)𝑛 − 1
500000 = 6750 𝑥
0.0115
500000
OR (( ) 𝑥 0.0115) + 1 = 1.0115𝑛
6750
𝑙𝑜𝑔1.851851852 0.26760624
𝑛= =( )
𝑙𝑜𝑔1.0115 4.965887107𝑥10−3
n = 53.888
Say 54 months
So, Person requires 54 months to clear loan.

MCQ’s:
i. Which formula is used to solve this case?
a. Future Value b. Present value
c. APA d. Sinking Fund

ii. What is the rate of interest per Annum is applicable in this case?
a. 11.50 % b. 12.50 % c. 13.50 % d. 13.80 %

iii. What is the principle amount to be paid every month in this case?
a. 5750 b. 6750 c. 12500 d. 1000

iv. What is the number of period of time required to repay the loan amount in this case?
a. 48 months b. 52 months c. 54 months d. 60 months

v. If the EMI amount increases the number of months required to repay the loan amount will
a. Increases b. Decreases c. No change d. May change
Special case studies
Case Study 15: (Special case study)
A plot of land is purchased by developer for 50 crore. He paid Rs. 8 crore & registered the
agreement and given balance amount by post dated cheque. Then he mortgage the land &
got Rs. 30 crore loan and money is used elsewhere. The post dated cheque was bounced.
Solution:

MCQ’s & Solution:

i. Land owner got court order & possession for land. the lender has approach for valuation which
was:
a. Cannot be determined b. 30 crore
c. 50 crore d. 8 crore
NOTE: Since the lender has financed the Developer based on agreement. And owner has got court
order for possession. Hence lender has to initiate legal action against developer, And no value for
project which is not implemented and funds misused.

ii. The value of the property for the developer on the above information is:
a. 42 core b. 8 crore c. 50 crore d. 30 crore

iii. The court takes 5 years to settle case If the land owner return back the amount of Rs. 8 crore
with 12% interest. What amount it will be?
a. 11.80 crore b. 12.80 crore c. 30 crore d. 13.50 crore
Solution: P X R X N i.e: 8 crore x 0.12 x 5 = 4.80 Crore, So total amount is Rs. 12.80 Crore

iv. If the above settlement is accepted the loss incurred by lender for 5 year @ 10% compound
interest years is:
a. 30 Crore b. 35 Crore c. 25 Crore d. 48.31 Crore
n 5
Solution: P(1+R) = 30(1+0.10) = Rs. 48.31 Crore.

Case Study 16: (On comparative sale basis)

In a development, all villas are of same in size, quantity, location, etc. The different sale
details of villas are available. The valuer has to consider that, to sell villa, takes one year
from deal, due to various factors/rules, etc.
The sale details are as follows:
Villa 6 – Sold with vacant possession(Sold one year back) – Rs. 64,00,000/- on Dt. 10/01/2019
Villa 9 – Sold/unoccupied possession– Rs. 72,00,000/- on Dt. 10/01/2020
Villa 5 – Rented – Sold on Dt. 11/12/2019, getting rent Rs. 50,000/- PM(Net)
Villa 7 – Ready to sell in vacant possession.

MCQ’s & Solution:

i. What is current YP?
a. 12 b. 8.33 c. 50,000 d. 7.2
Ans: Value = NI x YP
𝑉𝑎𝑙𝑢𝑒 72,00,000
So YP = =
𝑁𝐼 6,00,000
YP = 12

ii. What is the percentage increase in rent considering same YP?

a. 12.50% b. 12% c. 8% d. 5,33,333
Ans: Net Annual rent, a year ago is 64,00,000/12
Net Income = Rs. 5,33,333/-
Present rent is Rs. 50,000 x 12 = 6,00,000/- PA
6,00,000−5,33,333
So, percentage rise in rent is = 5,33,333
= 12.50%

iii. What is Gross rent of villa 7 should fetch same net rent if outgoing is 15%
a. Rs. 57,500/- PM b. Rs. 58,824/- PM c. Rs. 64,00,000/-PM d. Rs. 72,00,000/-PM
Ans: Gross with 15% outgoings to fetch same rent of Rs. 50,000 is
50,000
i.e = Rs. 58,824/- PM
0.85

iv. What will be the current expected net rent, if ROI is dropped to 3%?
a. Rs. 50,000/- PM b. Rs. 1,83,600/- PA c. Rs. 1,53,000/-PA d. Rs. 32,000/- PM
Ans: Reduced Net Income:
3
72,00,000 x 100 = Rs. 2,16,000/- PA
2,16,000
So, reduced net rent per month is = Rs. 18,000/- PM
12
Hence Net rent is Rs. 50,000 – Rs. 18,000 = Rs. 32,000/- PM

v. What is the value f villa 7, if it is sold now?

a. 64,00,000 b. 68,00,000 c. 72,00,000 d. 76,00,000

vi. What is the value of the villa, if it sold one year back?
a. 64,00,000 b. 68,00,000 c. 72,00,000 d. 76,00,000

vii. What would be the rent, if it fetches the villa 7 is given for rent?
a. 50,000 b. 55,000 c. 60,000 d. 66,000

Case Study 17: (On Synergic Value)

One person Mr. X is having a plot A of 1000.0 Sft facing to 80’ main road and 30’ cross road
and wants to purchase a plot B of 2000.0 Sft on cross road adjacent to his plot A. The
prevailing market value rate of plot B is @ Rs. 1000/- per Sft. And prevailing market rate
on 80’ main road plot is @ Rs. 3000/- per Sft. He offer rate of Rs. 1500/- per Sft for plot B.
After purchasing the plot B, he intended to sell this combined big plot of 3000.0 Sft in open
market. What is the Synergic value of the combined plot?
Solution:
Value of Plot “A” is 1000 x 3000 = Rs. 30,00,000/-
Value of Plot “B” is 2000 x 1600 = Rs. 32,00,000/-
Total combined value of Plot A & B for Mr. “X” is Rs. 62,00,000/- (i)
Sale value of combined plot sold in the market is 3000 x 3000 = Rs. 90,00,000/- (ii)
So, the synergic value achieved is (ii-i) is Rs. 28,00,000/-
NOTE: The synergic value is an additional element of value obtained in the market by
combination of two or more assets where its combined value is more than the sum of value
of two individual assets.

MCQ’s:
i. What is the market value of Plot “B”?
a. 20,00,000/- b. 28,00,000/- c. 30,00,000/- d. 32,00,000/-

ii. What is the purchase value of plot “B” by Mr. X?

a. 20,00,000/- b. 28,00,000/- c. 30,00,000/- d. 32,00,000/-

iii. What is the synergic value achieved in this case?

a. 20,00,000/- b. 28,00,000/- c. 30,00,000/- d. 32,00,000/-

iv. What is the acquisition cost of combined plot A & B for Owner X?
a. 20,00,000/- b. 30,00,000/- c. 62,00,000/- d. 90,00,000/-

v. What is the Total sale value obtained by Mr. X for combined plot in the market?
a. 20,00,000/- b. 30,00,000/- c. 60,00,000/- d. 90,00,000/-

vi. The Synergic value is available for?

a. Any buyer b. Special Buyer/Seller
c. Any Buyer/Seller d. Any Seller

Case Study 18: (On comparative Developmental method)

Mr. Sen have a plot of 3000 SQM facing to a 20m wide road. He intend the develop the plot.
The allowable FSI in the said location is 200%. There is an adjacent plot behind Mr. Sen
plot of 1500 SQM. If the area of development is more than 4000 SQM, the allowable FSI can
be increased by 100% of the allowable FSI. A plot in the locality with same feature been
sold at a rate of Rs. 30500/- per SQM. The adjacent plot owner is demanding a rate of Rs.
40500/- per SQM. The development cost of the plot is Rs. 2250/= per sft. inclusive of all
related cost. The developers profit is 15%.
MCQ’s & Solution:
i. What is sale price, if Mr. sen develop his property without purchasing adjacent property?
a. Land value is 3,000 x 30,500/2 = Rs. 4,57,50,000/-
b. Building cost is 3,000 x 2x 10.764 x 2250 = Rs. 14,53,14,000/-
c. Add 15% development profit (on a + b) i.e 15% x 19,10,64,000 is Rs. 2,86,59,600/-
 Total sale value is (a+b+c) Rs. 21,97,23,600/-
219723600
Hence Unit sale value of site is 3000𝑥2𝑥10.764 = Rs. 3,402/- per Sft

ii. What is the profit of the development to Mr. Sen, if the selling price is Rs. 4260/- per sft.
a. Total Sale values is 3,000 x 2 x 10.764 x 4260 = Rs. 27,51,27,840/-
b. Less cost of development i.e (4,57,50,000 +14,53,14,000) = Rs. 19,10,64,000/-
c. Add 15% development profit as above Rs. 2,86,59,600/-
d. Total investment cost Rs. 21,97,23,600/-
Hence Net profit is (a-d) is Rs. 5,54,04,240/-
Say Rs. 5,54,04,000/-

iii. What is the Land cost, if Mr. Sen purchase the adjacent land
Land value is 3,000 x 30,500 + 1,500 x 40,500 = Rs. 15,22,50,000/-
Total average land value is 15,22,50,000/4500 = Rs. 33,8333/- Sqmtr
Hence Net average land value is 33,833/3 = Rs. 11,277.78/- Sqmtr

iv. What s the sale price to Mr. Sen, if he purchases the adjacent plot and carry out development.
a. Land value is 4,500 x 3 x 11,277.78 = Rs. 15,22,50,000/-
b. Building cost is 4,500 x 3 x 10.764 x 2250 = Rs. 32,69,56,500/-
c. Add 15% developers profit on (a+b)(i.e 15% x 47,92,06,500/-) Rs. 7,18,80,975/-
Hence total cost after new development is (a+b+c) Rs. 55,10,87,475/-
55,10,87,475
Site Value is 4500𝑥3𝑥10.764 = Rs. 3792/- per Sft

v. Which method is adopted o assess land value in this case?

a. Cost Summation method b. Development method
c. Comparison method d. Income capitalisation method.

Case Study 19: (Industrial Lease Case)

ANB Ltd company has purchased 35yrs leasehold rights for 1,00,000 sqft land in an SEZ in
WB (West Bengal ). The lessee company built 35,000 sqft factory shed at Rs 800 /Sqft on the
said land, the Gilt Edged security yield is 7%, Industrial yield is 11.50% and freehold yield
is 9%. As on date of valuation the scheduled rate of SEZ is @ Rs. 200/Sqft?

Solution:

It is assumed that ANB Co. is lessee and has taken the land on 35 year lease.
1. Capital Value
The ANB Co. has taken the plot on lease and constructed a building therein.
Area of the building – 35000 Sft
Rate of construction – 800 per Sft
Capital Value – 35000 x 800 = Rs. 2,80,00,000/-
2. Net average return of the industry
It is assumed that net average return to industry means risk level for industrial investment which
is above risk free rate.
Net average return (risk level) for industry = Industrial yield –gilt edged security yield
= 11.5 % - 7% = 4.5%
Assuming the building constructed is an industrial building
Net average return (risk level) for industry = Rs. 2,80,00,000 x 4.5/100 = Rs. 12,60,000/- PA
11.50
Net annual return is 2,80,00,000 x = Rs. 32,20,000/- PA
100

MCQ’s:

i. What is the capital value

a. 2,80,00,000/- b. 80,00,000/- c. 12,60,000/- d. 32,20,000/-

ii. What is the net average return to the industry?

a. 2,80,00,000/- b. 80,00,000/- c. 12,60,000/- d. 32,20,000/-

iii. What is the net annual return in this case?

a. 2,80,00,000 b. 80,00,000 c. 12,60,000 d. 32,20,000

iv. What is the type of lease in this case?

a. Building lease b. Occupation lease
c. Perpetual life d. Sandwitch lease.

v. What is risk free yield rate applicable in this case?

a. 2% b. 4.5% c. 7 % d. 9%

vi. What is the percentage of net annual yield to the industry?

a. 4.5% b. 7% c. 9% d. 11.5%

vii. What is the percentage of average net annual yield to the industry?
a. 2% b. 2.5% c. 4.5% d. 7%

Case Study 20: (On joint development case of Apartment)

A developer has agreed a project for joint development of owners plot having area of 4000
Sft with permitted FSI of 1.75. The cost of new construction is @ Rs. 2500/- per Sft. The sale
value of the Flat in that locality is @ Rs. 9000/- per Sft. The owners share is 40%. Assume
developers profit @ 20% and the total cost of all expenses is 25%

Solution:

Total plot Area: 4000 Sft

Total permissible built area: 4000 x 1.75 = 7000 Sft
Owner’s share is 40% is 2800 Sft & Developer’s share is 60% i.e 4200.0 Sft
Total sale price for developer’s share is
i.e 4200 Sft @ Rs. 9000/- = Rs. 3,78,00,000/-
Cost of construction is 7000 Sft x 2500 = Rs. 1,75,00,000/-
The cost of expenses 25% is Rs. 43,75,000/-
Total cost of project is Rs. 2,18,75,000/-
Developers profit (20% on Rs. 3,78,00,000/-) i.e Rs. 75,60,000/-
Surplus amount available for developer is
i.e 3,78,00,000 – (2,18,75,000 +75,60,000)
Rs. 3,78,00,000 – 2,94,35,000
Rs. 83,65,000/-
So the amount of goodwill is Rs. 83,65,000/-
Note: Here it is assumed that excess profit over normal profit is treated as Good will.

MCQ’s
i. Which method of valuation is used?
a. Hypothetical building scheme b. Cost approach method
c. Income Capitalisation method d. Profit method

ii. What is the Total capital cost of the project?

a. 1,75,00,000 b. 43,75,000 c. 75,60,000 d. 2,18,75,000

iii. What is the profit amount of developers share ?

a. 2,18,75,000 b. 3,78,00,000 c. 75,60,000 d. 1,68,35,000

iv. What is the amount of good will?

a. 43,75,000 b. 75,60,000 c. 83,65,000 d. 2,18,75,000

Case Study 21: (To find out rate of Interest of Purchase Case)
A person has purchased a property fetching a net income of Rs. 8,000/- PM for 26 years for
Rs. 10,00,000/- Assume the redemption rate as 4%. Then what is the rate of interest
achieved in purchase?

Solution:
Net annual income is 8000 x 12 = Rs. 96,000/- PA
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 10,00,000
𝑌𝑒𝑎𝑟𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 = =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 96,000
YP = 10.416666
Here, YP dual rate @ R and 4% on ASF for 26 years
1
𝑌𝑃 = 𝑅+𝑆
1
= 𝑟
(1 + 𝑟) 𝑛−1
𝑅+( )

1
=
0.04
𝑅 + ( + 0.04)26 − 1)
(1

1
10.416666 = 𝑅+0.0225673
i.e 10.416666 R + 0.235673 = 1
10.416666 = 1-0.235076
0.764924
OR 𝑅 = 10.416666
Say R = 7.34 %
Thus rate of interest on capital is 7.34%
MCQ’s:

i. What is the year purchase?

a. 7.34 b. 10.416 c. 4 d. 10.34

ii. What is the rate of return achieved?

a. 4 b. 7.34 c. 10.416 d. 10.34

iii. If the Income available is more for this purchase price then the rate of interest will be
a. Increases b. Decreases c. No change d. None of the above

iv. What is the method adopted in this case?

a. Income capitalization method b. Profit method
c. DCF method d. HABU

Case study 22: (Project Investment Scheme)

A Timber plantation trees will attain maturity after 45 years. The beginning cost of site
preparation & planting of trees and other miscellaneous expenses works out to Rs. 6,000/-
per Acre. The yearly maintenance charges are @Rs. 2,000/- per Acre. What would be the
cost of timber per Acre on maturity, if the rate of interest is 9%

Solution:

I. Cost of Plantation & Site preparation per Acre is Rs. 6,000/-

The amount of Rs. 1 for 45 year @ 9% i.e (1+R)n
i.e (1+0.09)45 = 48.327286
So, the amont is 6000 x 48.327286 = Rs. 2,89,963/- (a)

II. Cost of maintenance per Acre per year is Rs. 2,000/-

(1+𝑅)𝑛 −1
Amount of Rs. 1 per annum for 45 year @ 9% APA= 𝑅
(1+0.09)45 −1
= 0.09
= 525.858
Amount, APA i.e 2000 x 525.858 = Rs. 10,51,716 (b)
Hence total cost of timber on maturity is (a+b)
i.e Rs. 13,41,679/-
Say Rs. 13,41,000/-

MCQ’s:
i. What is this type of timber plantation project?
a. Investment project b. Social project c. Agricultural project d. Recurring type

ii. What is the initial investment of the project per acre?

a. 2000 b. 3000 c. 5000 d. 6000

iii. What is the annual maintenance cost of the project per acre?
a. 2000 b. 3000 c. 5000 d. 6000

iv. What is the future value of investment amount of project

a. 1,89,963 b. 2,89,963 c. 3,89,763 d. 10,51,716

v. What is the accumulated amount for maintenance cost of the project?

a. 2,89,963 b.3,89,963 c. 10,51,716 d. 13,41,000

vi. What is the total cost of timber project on maturity?

a. 2,89,963 b. 10,51,716 c. 13,41,000 d. 14,41,000

Case Study 23: (On Mortgage Finance)

A person offered the property to purchase with a vendor from first mortgage of 45% of
purchase price at rate of interest of 13%. And second mortgage of 20% of purchase price is
obtained at rate of interest of 18%. The property is fetching a net income of Rs. 78,000/- per
Annum and the purchaser requires a 12% return on equity. So, what is the value of the
property?

Solution:

Data: Mortgage Share, M1: 45% & M2: 20%

Equity Share is E: 35% & Yield, Y: 12%
Annual debt service factor is f1: 13% & f2: 18%

Apply Basic Finance weighted capitalization formula, R = (M x f) + (E x y)

Since in this case, the purchaser obtained two finance from two mortgagors.
Hence apply formula, R = (M1 x f1) + (M2 x f2) + (E x y)
R = (0.45 x 0.13) + (0.20 x 0.18) + (0.35 x 0.12)
= (0.0585+0.036) + 0.042
= 0.0945 + 0.042
R = 0.1365
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
So, value of the property is i.e = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
78000
= 0.1365
= Rs. 5,71,428/-
Say Rs. 5,71,000/-

MCQ’s:

i. What is the basic weightage capitalization technique is used to analyse

a. Repayment of mortgage loan b. Investors return on equity
c. Mortgage equity analysis d. Mortgage capital & equity capital

ii. The basic weighed capitalization technique is applicable to properties fetching

a. Long term income b. Short term income
c. Terminal income d. Steady growth income

iii. The annual debt service factor (f) is applicable to

a. Equity b. Mortgage c. Both a & b d. Capitalization rate

iv. The value of investment property purchased by investors are influenced mainly by
a. Availability of funds b. Purchasing power of investors
c. Rate of interest in the market d. Prevailing conditions in the mortgage
market

v. what is the overall capitalization rate achieved in this case is

a. 13.65% b. 12% c. 13% d. 18%

vi. What is the value of the property in this case?

a. 12,85,000 b. 13,85,000 c. 5,71,000 d. 15,85,000

Case Study 24: (An Insurance case study)

An industrial building has a worth of Rs. 80 lakh (Total Reinstatement value) and insured
under fire policy. The building is 30 years old and the salvage is 10%. The total economic
life is 60 years. What is the compensation should be given on full (Reinstatement) value
policy and as under standard fire policy, assuming that there is a total loss at the end of the
year. The cost of new asset is estimated @ Rs. 85 lakh.

Solution:

Depreciation cost i.e 80,00,000 x 30/60 x 0.90 = Rs. 36,00,000/-

Hence depreciated value of building is Rs. 44,00,000/-
A. In case of Full value policy (Reinstatement policy)
The compensation for total damage on average clause is
i.e 80/85 x 100 = 94.11%
i.e 80 x 0.9411 = Rs. 75.28 lakh
B. In case of standard fire policy, the compensation will be
i.e 44/85 x 100 = 51.76%
Hence compensation payable on average clause is
i.e 44 x 0.5176 = Rs. 22.77 lakh

MCQ’s:

i. In above case, the compensation is estimated on pro rata basis, since the insured asset is
a. Over insured b. Under insured
c. Neither over insured nor under insured d. Same value insured

ii. What is insurance claim amount for compensation under full value (Reinstatement) policy?
a. 75.28 lakh b. 80 lakh c. 85 lakh d. 44 lakh.
iii. What is the insurance claim amount for compensation under standard fire policy?
a. 75.28 lakh b. 80 lakh c. 44 lakh d. 22.77 lakh

iv. The more percentage deduction on average basis for compensation is allowed in which type of
policy?
a. Full value policy b. Agreed value policy
c. Standard fire policy d. None of the above

v. Which type of policy is beneficial to the insured industrialist in this case?

a. Full value policy b. Standard fire policy
c. Agreed value policy d. None of the above
Big Case study: (6 mcq’s each 2 marks = 12 marks)

Case study 1: (Cost approach)

A person has constructed two storyed residential house of each floor 1200 Sft built area in 1980 for
Rs. 8,20,000/-. The plot area is 2000 Sft. The prevailing land rate in the locality is @ Rs. 3500/- per
Sft and replacement cost of construction is @Rs. 2500/- per Sft in 2020. The bldg. is 2.75 mtr height
and foundation height is now 0.60 mtr below the ground level, after the formation of new road.
What is the value of the property for owner? Assume 10% salvage value and @ 0.50% PA for
obsolescence. The balance life of the building is 20 year.

Solution:

Total market value of the property:

i. Present value of the land
i.e 2000 x 3500 = Rs. 70,00,000/- (i)
ii. Present replacement cost of building
i.e 2 x 1200 x 2500 = Rs. 60,00,000/-
Deductions:
a. Physical Depreciation cost
60,00,000 x 40/60 x 0.90 = Rs. 36,00,000/- (a)
b. Obsolescence (Technical Depreciation) cost
60,00,000 x 0.50/100 x 40 = Rs. 12,00,000/- (b)
Total depreciation cost is (a+b) Rs. 48,00,000/-
Hence net replacement cost of bldg. is Rs. 12,00,000/- (ii)
Total market value of the property is (i+ii) Rs. 82,00,000/-

MCQ’s:
i. What is the type of obsolescence occurred in this case
a. Economic obsolescence b. Functional obsolescence
c. Technological obsolescence d. Physical obsolescence

ii. Does this building can be renovated for bringing it to modern standards and to meet present day
requirements?
a. Yes b. No c. May be d. With heavy cost

iii. What is the total amount of depreciation cost of the building in this case?
a. 36,00,000 b. 18,00,000 c. 48,00,000 d. 58,00,000

iv. What is the depreciated replacement value of the building?

a. 12,00,000 b. 7,00,000 c. 8,00,000 d. 9,00,000

v. What is the total market value of the property?

a. 60,00,000 b. 70,00,000 c. 1,30,00,000 d. 82,00,000

vi. What is the acquisition cost of building?

a. 6,00,000 b. 7,20,000 c. 8,20,000 d. 9,20,000
vii. What is the method of depreciation adopted?
a. Straight line method b. Linear method
c. Sinking fund method d. WDV method

viii. What is the physical depreciation cost of the building in this case?
a. 36,00,000 b. 18,00,000 c. 54,00,000 d. 58,00,000

Case study 2: (on cost approach)

A 40 yr old residential house in the outskirts of the city having 3.50 mtr height and 35 cm thick
walls, red oxide flooring was occupied by owner. Now the owner wants to shift near to midpoint of
city and offered for rent. But there are no tenants ready to occupy this old house. And house roof
was replaced by new RCC 20 years back. The land rate in the prevailing locality is @ Rs. 3000/- per
Sft and present rate of construction cost is @ Rs. 2,000/- per Sft. The site area is 4000 Sft and total
built area is 2000 Sft. The total useful life of the building is 80 years. Assume 10 % salvage value and
15% as functional obsolescence cost on total replacement cost. Assess the value of the property.
Solution:

1. Replacement value of land

i.e 4000 x 3000 = Rs. 120,00,000/-
2. Replacement cost of the building
i.e 2000 x 2000 = Rs. 40,00,000/-
3. Physical depreciated cost of 40 yr old building:
i.e 40,00,000 x 40/80 x 0.90 = Rs. 18,00,000/-
4. Functional depreciation cost i.e 40,00,000 x 0.15 = Rs. 6,00,000/-
Total depreciation is Rs. 24,00,000/-
5. Hence net replacement value of the building is
i.e 40,00,000 – 24,00,000 = Rs. 16,00,000/-
6. Total market value of the property is
1,20,00,000 + 16,00,000 = Rs. 1,36,00,000/-

MCQ’s
i) What is the type of obsolescence in this case
a. Technological obsolescence b. Functional obsolescence
c. Economic obsolescence d. All the above

ii) Is this obsolescence is curable in this case?

a. Yes b. No c. May be d. May not be

iii) what is the present replacement cost of the building

a. 40,00,000 b. 24,00,000 c. 18,00,000 d. 16,00,000

iv) What is the net replacement value of the building

a. 40,00,000 b. 24,00,000 c. 18,00,000 d. 16,00,000

v) What is the total depreciation cost of the building

a. 18,00,000 b. 6,00,000 c. 24,00,000 d. 16,00,000

vi) What is the present market value of the property?

a. 1,60,00,000 b. 1,36,00,000 c. 1,44,00,000 d. 1,38,00,000
Case Study 3: (On Cost approach – Sinking fund method)
Mr. “X” having a plot of 150.0 Sqmtr. he has constructed a building of GF & FF with 100.0
Sqmtr each. Age of the bldg. is 40 years. It has got another life period of 35 years. The
prevalent land rate is Rs. 40,000/- per Sqmtr and present replacement cost of construction
of bldg. is Rs. 30,000/- per Sqmtr. The market yield rate is 9% and redemption rate is
3.50%. The bldg. was assessed for a rent of Rs. 1,00,000/- per month. The owner has got on
offer for sale of the bldg. for Rs. 1,10,00,000/-
Solution:
1. a. value of the land is i.e 150 x 40000 = Rs. 60,00,000/-
b. Present replacement cost of bldg. is 2 x 100 x 3000 = Rs. 60,00,000/-
2. Net present value by straight line method, if salvage is 10%
c. So, Depreciation cost of bldg. is 60,00,000 x 40/75 x 0.90 = Rs. 28,80,000/-
d. Hence Net depreciated value of bldg. is Rs. 31,20,000/-
e. So, net present value of the property is (a+d) = Rs. 91,20,000/-
3. Net present value by sinking fund method:
a. Amount of Rs. 1/- PA in 40 yr @ 3.50% is 84.55
(1+𝑅)𝑛 −1 (1+0.035)40 −1 2.95925
APA = = =
𝑅 0.035 0.035
b. Annual sinking fund for redemption of Rs. 1/- @ 3.50 in 75 yr
𝑟 0.035 0.035
𝑆 = (1+𝑟)𝑛−1 = (1+0.035)75−1 = 12.1985 = 0.002869
So, percentage depreciation = 100 x S x A
i.e 100 x 0.002869 x 84.55
24.257% Say 24.26%
c. Hence Depreciation by Sinking fund method is
24.26
i.e 60,00,000 x 100
= Rs. 14,55,600/-
So, net depreciation value of the bldg. is Rs. 45,44,400/-
Hence Total value of the property is Rs. 1,05,44,4000/-
4. Rental value of the property by Income approach method:
Income from the property is Rs. 1,00,000/- PM
Hence net rental income is Rs. 12,00,000,/- PA
(NOTE: It is presumed as net rent)
1
YP Dual rate @ 9% & 3.50% for 35 yr is 𝑌𝑃 = 𝑅+𝑆 is 9.52
Hence capitalised value is Rs. 12,00,000 x 9.52 = Rs. 1,14,24,000/-
MCQ’s:
i. What is the value of land?
a. 60,00,000 b. 50,00,000 c. 55,00,000 d. 65,00,000

ii. What is the value of the property by adopting straight line method of Depreciation?
a. 1,10,00,000 b. 91,20,000 c. 1,05,44,000 d. 1,14,24,000
iii. What is the net present value f the property by adopting sinking fund Depreciation?
a. 1,10,00,000 b. 91,20,000 c. 1,05,44,000 d. 1,14,24,000

iv. What is the value of the property by rent capitalisation method?

a. 1,10,00,000 b. 91,20,000 c. 1,05,44,000 d. 1,14,24,000

v. What is the proposed price recommended?

a. 1,10,00,000 b. 91,20,000 c. 1,05,44,000 d. 1,14,24,000

vi. What is the Insurable value for Reinstatement policy?

a. 1,10,00,000 b. 60,00,000 c. 91,20,000 d. 1,05,44,000

vii. Does the sale offer obtained to Mr. X is advisable in this case?
a. Yes b. No c. Not acceptable d. Reject
[NOTE: Here the sale offer is almost near to rent capitalised value of the property]

Case Study 4: (On cost approach – Sinking Fund Depreciation Method)

A Person has purchased a piece of land measuring 400 Sqmtr and constructed a Bunglow of GF &
FF total built area of 350 Sqmtr for his own use some 30 years back. The future expected life of rge
building is 40 years. The owner row desires to sell his Bungalow and has got an offer of Rs. 65 lakh
with vacant possession OR in the alternative has been offered a gross years rent of Rs. 2,40,000/-for
the bungalow and the plot together. There is good demand for such property in the locality. The
value of land in the locality for similar plots is @ Rs. 9,000/- per sqmtr, present replacement cost of
such bungalow is @ Rs. 20,000/- per Sqmtr. Assume rate of interest and sinking fund both @ 5%.
Total outgoings 15% of gross rent. And years purchase @ 3% in perpetuity. Assess the value of the
property

Solution:
a. Value of land is 400 x 9000 = Rs. 36,00,000/- (A)
b. Present replacement cost of Bungalow is 350 x 2000 = Rs. 70,00,000/-
c. Depreciation by Sinking fund method
Amount of Rs. 1/- PA in 30 year @ 5% is Rs. 66.439
(1+𝑅)𝑛 −1 (1+0.05)30 −1 3.3219
𝐴𝑃𝐴 = 𝑅
= 0.05
= 0.05
Annual Sinking fund for redemption of Rs. 1/- @5% in 70 year
𝑟 0.05 0.05
i.e 𝑆 = ((1+𝑟)𝑛 ) = ((1+0.05)70 ) = = 0.0017
−1 −1 29.4264
Depreciation: Percentage Depreciation = 100 x S x A
Percentage Depreciation = 100 x 0.0017 x 66.439
= 11.29%
Total Depreciation (By Sinking fund method) i.e 11.29 % of RC
11.29 𝑥 7000000
= 100
= Rs. 7,90,300/-
Net present value = Replacement cost – Depreciation cost
Hence net present value of Bungalow is
i.e 7000000 – 790300
= Rs. 62,09,700/- (B)
I. Value of Property by cost approach method
Hence total value of the property for sale is (A+B) is Rs. 98,09,700/-
Say Rs. 98,09,000/-
II. Value of the property by Income approach method
Years Purchase @ 3% in perpetuity = 100/3 = 33.33%
Gross income from the property is Rs. 2,40,000/- PA
Deduct 15% outgoings Rs. 36,000/-
The net income is Rs. 2,04,000/- PA
Hence the value of the property is NI x YP
= 2,04,000 x 33.33
= Rs. 67,99,320/-
Say Rs. 67,99,000/-
MCQ’s:
i. What is the percentage depreciation of the Bungalow?
a. 42.86 % b. 38.27 % c. 11.29 % d. 15.30 %

ii. What method of depreciation considered in this case?

a. Straight line method b. Linear Method
c. WDV method d. Sinking fund method

iii. What is the depreciation cost of the bungalow?

a. 82530 b. 26,99,900 c. 7,90,300 d. 10,71,000

iv. What is the depreciated replacement cost of bungalow?

a. 62,09,700 b. 43,00,100 c. 59,29,000 d. 70,00,000

v. What is the insurable value for reinstatement policy?

a. 62,09,700 b. 43,00,100 c. 59,29,000 d. 70,00,000

vi. What is the value of the bungalow property by cost approach?

a. 67,99,000 b. 98,09,000 c. 65,00,000 d. 10,60,000

vii. What is the value of the bungalow property by Income approach?

a. 67,99,000 b. 98,09,000 c. 65,00,000 d. 1,06,000

Case study 5: (Lease rent case)

A shop building of 10,000 Sft is rented monthly @ Rs. 20/- per Sft for a company for a lease period
of 20 years on repairs & insurance basis. The freeholders expected rate of return is 9% and gilt edge
security is 6%. And prevailing market rate of interest is 8%. And monthly rack rent in the market is
@Rs. 25/- per Sft for shops in that locality. What is the value of freeholder’s interest?

Solution:

Lease rent is 10,000 x 20 x 12 = Rs. 24,00,000/- PA

Rack rent (market rent) 10,000 x 25 x 12 = Rs. 30,00,000/- PA
I. Value for Lessor’s Interest:
Calculate YP single rate, @ R = 9%
1−𝑃𝑉
𝑌𝑃 = ( )
𝑅
1
1−(1+0.09)20
=( 0.09
)
= 9.128

a. Term: Rental value is 24,00,000 x 9.128

= Rs. 2,19,07,200/- (a)
1
b. Reversion: Rack Rent is 30,00,000 x ((1+0.08)20 )
i.e 30,00,000 x 0.21455
= Rs. 6,43,650/- (b)
Hence total value for lessor’s interest is (a+b) Rs. 2,25,50,850/-
Say Rs. 2,25,50,000/-
II. Value of the shop, if rented for Rack rent
calculate YP single rate, @R = 8%
1
1−
(1 + 0.08)20
𝑌𝑃 =
0.08

YP = 9.818

Hence rental value if the property is freehold,

i.e 30,00,000 x 9.818
= Rs. 2,94,54,000/-

MCQ’s
i) Which method is suitable to assess the value in this case
a. Cost approach b. Market approach c. Income approach d. Residual method

ii) What is the amount of outgoing for owner

a. 20,000 b. 25,000 c. Nill d. 50,000

iii) What is value for Freeholder’s interest in this case

a. 2,25,50,000 b. 2,94,54,000 c. 2,40,00,000 d. 3,00,00,000

iv. What is the value for owner, if it is rented for prevailing market rent
a. 2,55,50,000 b. 2,94,54,000 c. 2,40,00,000 d. 3,00,00,000

v. If the expected rate of interest increases the years purchase

a. Increases b. Decreases c. No change d. Neither increases nor decreases

vi. What is the prevailing market rent per month in this case
a. 2,00,000 b. 2,50,000 c. 3,00,000 d. 3,50,000

Case study 6: (lease rent case)

A ware house on coast area of Goa is leased for 50 yrs @ 2000 per annum and initial premium of Rs.
25 lakh. The rack rent is Rs. 1,20,000 per annum. The freehold return of similar property nearby is
10% and long term lease returns is 15%. Find out value for freeholder’s interest.
Solution:

I. Value for Freeholder’s (Lessor’s) interest:

a. Term value:
Rent received i.e 2,000/- PA for 50 yr @ 15% (in perpetuity)
Rental value, i.r 2,000 x 100/15 = Rs. 13,333/- (a)
b. Reversion:
Reversion of rack rent for 50 yr @ 10% (Calculate YP single rate)
1 − 1/(1 + 𝑅)𝑛
𝑌𝑃 = ( )
𝑅
1
1−
(1 + 0.09)50
=( )
0.09

YP= 9.616%
So, Total reversion value , i.e 1,20,000 x 9.616 = Rs. 11,53,920/-
Present value of revision for 50 yr @ 9%
1
i.e 11,53,920 x ((1+0.09)50 )
= 11,53,920 x 0.13448
= Rs. 15,517/- (b)
Hence total value for Freeholder’s interest is (a+b)
i.e Rs. 28,850/-

II. Freehold Market Value (If it is free from lease):

a. Capitalised value for rack rent available in the market for 50 years at 15%, (YP in perpetuity)
i.e 1,20,000 x 100/15 = 7,99,200/-

MCQ’s
i. What is the outgoing amount for freeholder?
a. 1500 b. 2000 c. Nil d. 3500

ii. What is the Years Purchase during term?

a. 10 b. 8.33 c. 7.14 d. 6.66

iii. What is years purchase during reversion?

a. 10 b. 8.33 c. 7.14 d. 6.66

iv. What is the prevailing market rent for such ware houses in the locality?
a. 2,000 b. 1,20,000 c. 1,22,000 d. 1,18,000

v. What is the value of freeholders interest in this case

a. Rs. 13,333/- b. Rs. 15,517/- c. Rs. 28,850/- d. Rs. 30,850/-

vi. What is market value of the property if it is free from lease?

a. 11,53,920 b. 7,99,200 c. 8,99,200 d. 28,850

Case Study 7: (On Building lease case)

Mr “A” has land of 2000 Sqmtr given to “B” for lease for 30 years for lease rent Rs. 3000/- PM. “B”
has constructed bldg. and given rent to “C” for 30000 PM on full repair basis at 6%. The current
land rate is @ Rs. 2000/- per Sqmtr. Assume 2.50% as accumulative rate of interest.
Solution:
I. Value for Lessor’s “A” interest
a. Term value: Lease rent for ground Rs. 3000 x 12 = Rs. 36,000/- PA
Value for Lessor “A”, YP @ 6% Single rate for 30 year
1
1−( )
(1 + 0.06)30
𝑌𝑃 =
0.06
1−0.1741
= 0.06
= 13.76%
so value for lessor Mr. “A” is 36,000 x 13.76
= Rs. 4,95,360/- (a)
b. Reversionary value of land
Value of land 2000 x 2000 = Rs. 40,00,000/-
1
Reversionary value 40,00,000 x ((1+0.06)30 )
40,00,000 x 0.17411 = Rs. 69,644/- (b)
Hence Total value for Lessor Mr. “A” interest is (a+b) is Rs. 5,65,004/-
Say Rs. 5,65,000/-
II. Value for Head lessee’s (Mr. B) is
Lease rent is 30,000 PM x 12 = Rs. 3,60,000/-
Deduct Ground rent = Rs. 36,000/-
Hence net rent for Mr. “B” = Rs. 3,24,000/-
1
Calculate YP @ 6% & 2.50% dual rate for 30 year 𝑌𝑃 = (𝑅+𝑆)
i.e 3,24,000 x 12.08 = Rs. 39,13,920

MCQ’s:
i. What is the type of lease in this case?
a. Occupational lease b. Building Lease
c. Perpetual lease d. Sandwitch lease

ii. What is the amount of outgoing to Mr. “B”

a. 2700 b. 3000
c. 5700 d. Nil

iii. What is the net profit per month for Mr. “B”?
a. 3,000 b. 27,000 c. 30,000 d. 33,000

iv. What is the value for lessor or Mr. “A”

a. 4,95,360 b. 69,644 c. 5,65,000 d. 3,24,000

v. What is the value for Mr. “B”?

a. 4,95,000 b. 5,65,000
c. 39,13,000 d. 44,58,000

vi. If the lease continued for another 30year who will be more benefited
a. Lessor b. Lessee
c. Both a & b d. Tenant
Case Study 8: (On Sub lease case)
Mr. Rahul entered into 50 years lease. Before 30 years he paid rent of Rs. 3000/- month an d 10
years back he constructed a goodown and sublease to Mr. Arun @ Rs. 30,000/- PM exclusive rent.
The present rental value of the building is Rs. 1,20,000/- PM outgoing @ 25% of gross rent. Assume
rate of return 8% & accumulative rate of intercept as 3%.

Solution:
I. Value for Mr. Rahul, Head Lessee’s Interest:
Rent reserved under Sub lessee Rs. 30,000/- PA
Less Ground rent paid Rs. 3,000/- PA
Deduct expenses 25% Rs. 7,500/-
Profit rent Rs. 19,500/- PA
Calculate YP dual rate for 20 years @ 8% & 3%
1
𝑌𝑃 =
𝑅+𝑆
𝑟
𝑆=
(1 + 𝑟)𝑛 − 1
0.03
=
(1 + 0.03)20 − 1
0.03
=
0.80611
𝑆 = 0.03721
1
𝑌𝑃 =
0.08 + 0.03721
1
=
0.11721
YP = 8.531
Hence value for Mr. Rahul’s interest is i.e 19500 x 8.531
= Rs. 1,66,354/-
say Rs. 1,66,000/-
II. Value for Mr. Arun, Sub Lessee’s interest:
Full rental value Rs. 1,20,000/- PA
Less rent paid to Head lessee Rs. 30,000/-
Hence profit rent is Rs. 90,000/- PA
Calculate YP for 20 year @ 7% & 3% on dual rate
1
𝑌𝑃 =
0.07 + 0.03721
1
=
0.10721
𝑌𝑃 = 9.327
(Note: Considering 1% less for sub lessee’s interest)
Hence value for Arun’s interest is 90,000 x 9.327
= Rs. 8,39,430/-
Say Rs. 8,39,000/-

MCQ’s:
i. What is the total outgoing amount for Mr. Rahul?
a. 3000 b. 9500 c. 7500 d. 10500
ii. What is the net profit amount for Head lessee Mr. Rahul?
a. 27,000 b. 19,500 c. 30,000 d. 90,000

iii. What is the profit amount for Sub lessee Mr. Arun?
a. 30,000 b. 27,000 c. 19,500 d. 90,000

iv. What is the value for Head Lessee’s Mr. Rahul interest?
a. 1,66,000 b. 90,000 c. 1,20,000 d. 8,39,000

v. What is the value of lease hold interest for Mr. Arun?

a. 1,66,000 b. 90,000 c. 1,20,000 d. 8,39,000

vi. What is the terminable period of lease in this case?

a. 10yr b. 20 yr c. 25 yr d. 30 yr

vii. What is the market rent of the property?

a. 30,000 b. 60,000 c. 90,000 d. 1,20,000

Case Study 9: (On Marriage/Merger value & Special value)

A three storyed building located in a first class of an Indian city has a plinth area of 1000 Sft
in each floor. The first floor is occupied by a tenant paying a rent @Rs. 5000/- PM. Which is
protected by premises Tenancy Act. Tenant statutory contribution for the maintenance and
munciple tax is 15% of the rent reserved (Say). The rack rent of the property is Rs. 30/- per
Sft per month exclusive. Yield from similar vacant units is 3% and that with statutory
tenant is 10%. All other floors of the property are owner occupied. All the floors are
identical self compacted units. The outgoing is 30%. The fair rent has been fixed very
recently. Find out marriage value & Special value?
Solution:
Marriage value = Full value - LV - TV
i. Full value (Full rental value):
1000 x 3 x 30 = Rs. 9,00,000 x 12 = Rs. 10,80,000/- PA
Deduct 30% outgoings Rs. 3,24,000/-
Hence net market rent Rs. 7,56,000/- PA
Capitalization value of the property is 7,56,000 x 100/3 = Rs. 2,52,00,000/- (FV)
ii. Value for Land lord interest (LV):
a. Value for 1st floor rental portion
Net rent receivable 5000 x 12 = 60,000/- PA
Hence net rent available is Rs. 60,000/- PA
Capitalised value of rent is 60,000 x 100/10 = Rs. 6,00,000/- (a)
b. Value of owner occupied portion
2 x 1000 x 30 = Rs. 60,000 x 12 = Rs. 7,20,000/-
Deduct 30% outgoings Rs. 2,16,000/-
Hence net yield is Rs. 5,04,000/-
Capitalised value of owners portion is 5,04,000 x 100/3 = Rs. 1,68,00,000/- (b)
Total value of land lords interest (a+b) Rs. 1,74,10,000/- (LV)
iii. Value of Tenants interest (TV):
NOTE: Value on occupancy right basis:
Prevalent market rate for full occupancy right is considered at 20% less than ownership rate i.e
30 x 0.80 = @ Rs. 24/- per Sft.
Landlord’s share is estimated at 40% and hence Tenants share is considered as 60%.
So merger value is merger of both Owner’s ownership right and tenants occupancy right is called
as merger value or marriage value.
Hence tenants occupancy right is Rental value is, i.e
0.60 x 3000 x 24 = Rs. 43,200/- PM x 12
Rs. 5,18,400/- PA
Deduct 15% outgoing = Rs. 77,760/-
Hence net rent = Rs. 4,40,640/-
Value of tenant interest is 4,40,640 x 100/10 = Rs. 44,06,400/- (TV)
Marriage value = FV - LV – TV
= 2,52,00,000 – (1,74,00,000 +44,06,600)
So, Marriage/Merger value is =Rs. 33,93,600/-
[NOTE: This marriage value is equally shared between land lord & Tenant]
So, Special value for Tenant is Rs. 44,06,400 + ½ x 33,93,600
So, Special value is = Rs. 61,03,200/-
Special value for sitting tent is say Rs. 61,03,000/-

MCQ’s:
i. What is the rental value of the first floor per year annum?
a. 3,60,000 b. 5,80,000 c. 1,20,000 d. 60,000

ii. What is the market value of the first floor without any tenant?
a. 60,00,000 b. 90,00,000 c. 1,20,00,000 d. 1,50,00,000
Ans: Market rent is 1000 x 30 x 12 = Rs. 3,60,000/-
So, market value in vacant position is 3,60,000 x 100/3 = Rs. 1,20,00,000/-

iii. Which method do you adopt to estimate the value of the property?
a. Summation method b. Income capitalisation method
c. Profit method d. IRR method

iv. What is he land lord’s net income from first floor?

a. 3,60,000 b. 48,300 c. 1,42,200 d. 60,000

v. What is the market value of land lord share of interest?

a. 2,52,00,000 b. 6,00,000 c. 1,68,00,000 d. 1,74,10,000

vi. What is the special value of the first floor for the sitting tenant?
a. 12,01,200 b. 61,03,000 c. 4,83,000 d. 1,20,00,000
vii. What is the full value of the property in the market?
a. 1,68,00,000 b. 1,73,10,000 c. 61,48,200 d. 2,52,00,000

viii. What is the marriage value achieved in this case?

a. 33,93,600 b. 44,06,400 c. 61,03,000 d. 6,00,000

Case Study 10: (On Marriage/Merger Value)

“A” is the freeholder; market rent (FRV) is Rs. 1,00,000/- per annum (net) for each floor in
a two storey residential building owned by “A”. “B” took GF on a lease 15 years back at Rs.
40,000/- per annum (net). “C” took on a lease 20 years back at Rs. 30,000/- per annum (net).
Both leases are of 60 years duration. All rents are exclusive rents. Assume rate of interest @
7.50% & redemption rate @ 2.50% for Tenants. And freeholders expected return is 10% &
reversion @ 7%. To find the marriage value in the property.
“A” is Freeholder
“B” is Lessee of Ground floor for 45 years unexpired for Rs. 40,000/- per annum (net)
“C” is Lessee of first floor for 40 years unexpired for Rs. 30,000/- annum (net)
Market rent (FRV) = Rs. 1,00,000/- per annum (net) for each floor.
Is there a marriage value in the property?
Solution:
Condition for Marriage Value:
I. A’s interest + B’s interest + C’s interest < Vacant freehold’s interest
i. B’s interest:
Full rental value = Rs. 1,00,000/-
Rent paid by B = Rs. 40,000/-
Profit rent = Rs. 60,000/-
YP 45 years 7.50% & 2.50% = 11.459
Value = Rs. 6,87,540/-
ii. C’s interest:
Full rental value = Rs. 1,00,000/-
Rent paid by C = Rs. 30,000/-
Profit rent = Rs. 70,000/-
YP 45 years 7.50% & 2.50% = 11.131
Value = Rs. 7,79,170/-
Adding interest of B & C(i+ii)= Rs. 14,66,710/-
II. A’s interest:
i. Ground floor
Term value:
Rent reserved = Rs. 40,000/-
YP 45 years 10% = Rs. 9,863/-
Value: = Rs. 3,94,520/-
Reversion value:
Full rental value = Rs. 1,00,000/-
YP 7% in perpetuity deferred 45 years = 0.68019
Value = Rs. 68,000/-
Therefore term + reversion = Rs. 4,62,539/- (i)
ii. First floor
Term:
Rent reserved = Rs. 30,000/-
YP 40 years 10% = Rs. 9,779/-
Value: = Rs. 2,93,370/-
Reversion:
Full rental value = Rs. 1,00,000/-
YP 7% in perpetuity deferred 40 years = 0.95401
Value = Rs. 95,401/-
Therefore term + reversion = Rs. 3,88,771/- (ii)
Therefore total value of A’s interest is (i+ii) = Rs. 8,51,310/-
Evaluation of Marriage value:
Total value of A’s interest is Rs. 8,51,310/-
If values of the interests of A, B & C are aggregated then the total value works out to
Rs. 35,20,670/-
If however the property is vacated by B & C then the open market value of the property with
vacant possession under “A” can be obtained as follows.
Full rental value = Rs. 2,00,000/-
YP 7% in perpetuity is 14,286
a. So, Value (FRV) is = Rs. 28,57,200/- (a)
Now let us find what the marriage value is and share of each one in it.
Test for Marriage value:
A’s interest = Rs. 8,51,310/-
B’s interest = Rs. 6,87,540/-
C’s interest = Rs. 7,79,170/-
Therefore A+B+C = Rs. 23,18,020/- (i)
Now vacant possession value (FRV) is Rs. 28,57,200/- (ii)
Therefore marriage value is (i-ii) = Rs. 5,39,180/-
rd
Each stake holder has a share of 1/3 in total marriage value is Rs. 1,79,726/-
MCQ’s:
i. Which method is adopted to assess marriage value?
a. Profit method b. Rent capitalisation method
c. DCF method d. IRR method

ii. What is the rack rent available in market in this case?

a. 30,000 b. 40,000 c. 1,00,000 d. 1,10,000

iii. What is the amount of outgoing for land lord?

a. 3,000 b. 4,000 c. 10,000 d. Nil
iv. What s the total rental income for land lord?
a. 30,000 b. 40,000 c. 70,000 d. 1,00,000

v. What is the value for Tenants B’s interest?

a. 8,51,310 b. 6,87,540 c. 7,79,170 d. 23,18,020

vi. What is the value for Tenant C’s interest?

a. 8,51,310 b. 6,87,540 c. 7,79,170 d. 23,18,020

vii. What is the value for land lord A’s interest?

a. 8,51,310 b. 6,87,540 c. 7,79,170 d. 23,18,020

viii. What is the full rental value in this case?

a. 8,51,310 b. 6,87,540 c.23,18,020 d. 28,57,200

ix. What is the total marriage value assessed in this case?

a. 8,51,310 b. 6,87,540 c. 5,39,180 d. 23,18,020

GOODWILL:
The goodwill is the amount of excess profit over normal profit.
Goodwill is an intangible asset which places an enterprise at an advantageous position, due to
which the enterprise is able to earn higher profits without putting extra efforts. It is so because the
efforts made in the past, put the enterprise in an advantageous position.
So it is the benefit and advantage of the good name, reputation and connections of a business.
It is one thing which distinguishes an old established business from a new business at its first
start.

Case Study 11: (On Joint development of Nursing Home by Profit method)
A Blue Heaven Nursing home is built on a 2 acres of land with 6 storey building. It has got
100 beds facility along with facilities like OT, X ray, USG, MRI Scanning Testing and other
services. Last 3 yrs accounts projected and actual indicate the receipt of bed charges OT
charges at Rs 9.00Crore Outgoings of Food and Maintenance are Rs. 30Lakh, 5.10Crore,
2.40Crore respectively, Total amount of Tenant capital 5.22Crore and return on tenant
capital is 10% and Landlord share is 40%, Rate of Capitalisation of Land lord and Tenant
share are 40% and 10% Respectively. Assess the value of the Hospital (Nursing Home)
Solution:
1. Total Capital invested is Rs. 5,22,00,000/-
2. Gross profit from the Hospital in 3 year Rs. 9,00,00,000/-
Deduct Expenses incurred
(Rs. 30,00,000 +3,10,00,000 + 2,40,00,000) Rs. 5,80,00,000/-
Hence Net profit of the Hospital Rs. 3,20,00,000/-
Average Net profit per year (NOI) is Rs. 1,06,66,667/-
3. Value for Hospital
Owner’s share 40%, so it is assumed that the tenants (developer) share 60%
Capitalization rate for tenant is 10% and that for owner is 40%
So Weighted cost of capital is, i.e 0.40 x 0.40 + 0.60 x 0.10
=0.16 + 0.06
=0.22 OR 22%
Value of the hospital = NOI/cap rate (expressed in decimal)
= Rs. 1,06,66,667 x 100/22
=Rs. 1,06,66,667 x 4.54545
= Rs. 4,84,84,801/-
Hence Value of Hospital Rs. 4,84,84,000/-

4. Value of Goodwill
Net maintainable profit per year is Rs. 1,06,66,667/-
Assume total tenants capital invested is Rs. 5,22,00,000/-
Less return on Tenants capital @ 10% is Rs. 52,20,000/-
So, Divisible balance/Divisible income is Rs. 54,46,667/-
Less Tenants share @ 60% is Rs. 32,68,000/-
Hence rental value is Rs. 21,78,667/-
Capitalised value for owner @ 40%
(21,78,667 x 100/40) is Rs. 54,46,667/-

5. Goodwill:
Residual Profit is Rs. 32,68,000/-
Capitalize @ 10% is Rs. 3,26,80,000/-
So, value of Goodwill is Rs. 3,26,80,000/-

MCQ’s:
i. What is the total capital invested?
a. 5,22,00,000 b. 11,02,00,000 c. 5,80,00,000 d. 3,20,00,000

ii. What is the Net operating Income (Average net profit) of the Hospital per annum?
a. 1,06,66,667 b. 3,20,00,000 c. 5,80,00,000 d. 4,84,80,000

iii. Which method of valuation is used?

a. Income Capitalisation Method b. Profit Method
c. DCF Method d. Residual Method

iv. What is the value of the Hospital?

a. 4,84,84,000/- b. 54,46,000/- c. 3,26,80,000/- d. 3,20,00,000/-

v. What is the value for Land lord’s interest?

a. 4,84,84,000/- b. 54,46,000/- c. 3,26,80,000/- d. 3,20,00,000/-
vi. What is the total expenses incurred?
a. 5,22,00,000/- b. 5,80,00,000/- c. 1,06,66,000/- d. 3,20,00,000/-

vii. What is the value of Goodwill?

a. 4,84,84,000/- b. 54,46,000/- c. 3,26,80,000/- d. 3,20,00,000/-

viii. What is the investment amount of landlord?

a. 5,22,00,000/- b. 2,08,80,000/- c. 21,78,000/- d. Nil

Case Study 12: (On development method under Residual Technique)

A three storyed building of around 55 years is used for office premises in a prime locality
built on plot of 3500 Sft. Total rentable floor area of the building is 3800.0 Sqmtr rentable
rate is @ Rs. 35/- per Sft. The out houses yield a gross rent of Rs. 25,000 per annum. Open
car parking for 35 cars yields @ Rs. 250/- per month per car. The similar sale instances in
the locality are not available. The building is very old and proposed to rebuilt a new
multipurpose three storyed complex building @ estimated cost of Rs. 2800/- per Sft for
lettable space with new permissible FSI of 1.50 and car spacing in new complex would be for
30 cars for parking @ Rs. 500/- per month per car and new built area is made available for
letting @ new rent of @Rs. 60/- per Sft per month. The old building including out houses
are fully demolished. Assume cost of expenses is @ 20% on development cost and bank
finance charges @ 18% and developer’s profit @ 20%. And stamp duty registration charges
@ 10%. And rate of return expected @ 7.50%. Assess the value of land. The development
period is 2 years.
Solution:
NOTE: Assumptions made that the salvage value of old material will equal to the cost of
demolition of the existing building.
i. Calculation of capital value after new development:
Estimated new net rental income per annum
a. Rent from new building
i.e 3500 x 1.50 x 60 x 12 = Rs. 37,80,000/-
b. Car parking lot in BF for 30 x 500 x 12 = Rs. 1,80,000/-
Total rent = Rs. 39,60,000/-
Hence Estimated gross value on development @ 7.5% in perpetuity
i.e 39,60,000 x 100/7.50 = Rs. 5,28,00,000/- (I)
ii. Calculate the development costs:
a. Building construction cost on lettable area
3500 x 1.50 = 5250 Sqmntr @ 2800/- Rs. 1,47,00,000/-
b. Add cost of total expenses @ 20% Rs. 29,40,000/-
iii. Cost of Bank finance charges @ 18% on (i+ii) for half of 2 years
½ x ((1+0.18)2 – 1) x 1,76,40,000 = Rs. 34,60,968/-
iv. Develpers profit @ 20% on the sum of (i+ii+iii)
i.e 0.20 x 2,11,00,968 = Rs. 42,20,193/-
Total cost (i+ii+iii+iv) = Rs. 2,53,21,161/- (II)
Surplus for land (I-II) = Rs. 2,74,78,839/-
Land value:
i. Assumes land value as Rs. X
ii. Stamp duty charges for registration @ 10 % = Rs. 0.10 X
iii. Finance on land for 2 yr @ 18%
= ((1+0.18)2-1)) x 1.10 = Rs. 0.43164 X
iv. Developers profit @ 20% on Sum of (i+ii+iii)
= 0.20 x 1.53164 = Rs. 0.306328 ‘X’
Total is Rs. 1.837968 ‘X’ = Rs. 2,74,78,839/-
2,74,78,839
So, X = 1.837968
X= Rs. 1,49,50,662/-
So, the net value of land is, Say Rs. 1,49,50,000/-
Hence unit rate of land is Rs. 4,271/- per Sft
MCQ’s:
i. What is the method adopted to assess value of land in this case?
a. Cost Summation method b. Direct comparison method
c. Income Capitalisation method d. Development method

ii. What is the Technique adopted to assess the value of land?

a. HABU b. DCF c. Residual d. Weightage score

iii. What is the value of the property after development of new project?
a. 5,28,00,000 b. 2,53,21,000 c. 2,74,78,000 d. 1,49,50,000

iv. What is the value of development cost of the project?

a. 5,28,00,000 b. 2,53,21,000 c. 2,74,78,000 d. 1,49,50,000

v. What is the surplus value of land available in this case?

a. 5,28,00,000 b. 2,53,21,000 c. 2,74,78,000 d. 1,49,50,000

vi. What is the value of land achieved in this case?

a. 5,15,20,000 b. 1,17,86,400 c. 3,97,33,600 d. 1,49,50,000

vii. What is the cost of old building considered in this case?

a. 87,78,000 b. 1,06,40,000 c. 1,47,00,000 d. Nil

viii. If the project implementation period increases then the value?

a. Increases b. Decreases c. No change d. Change enormously

Case Study 13: (On premium for lease in case of surrender)

A Person is intended to obtain a lease of some business premises for another 25 years with same
existing lease rent of Rs. 2,50,000/- PA with 5 yearly reviews. The full rental value of premises in the
market is Rs. 3,00,000/- PA. Assume that the rate of taxation @ 30% to be paid by lessee, and that
the freeholder’s interest would be 8% and sinking fund @3%. Find out the reasonable premium to
be paid by lessee.
Solution:
1. Freeholder’s (landlord) point of view:
a. Present interest: Rent recieavable @ Rs. 3,00,000/- PA
YP in perpetuity @ 8% i.e 3,00,000 x 100/8
= 3,00,000 x 12.50 = Rs. 37,50,000/-
b. Proposed interest:
i. Rent receivable for 25 year @ 8% is Rs. 2,50,000/-
1−𝑃𝑉
YP in perpetuity @ 8% in single rate, 𝑌𝑃 = 𝑟
1
1−( )
(1+0.08)25
𝑌𝑃 = ( 0.008
)

YP = 10.674
So, term mount i.e 2,50,000 x 10.674 = Rs. 26,68,500/- (Term)
ii. Reversion after 25 year of FRV of Rs. 3,00,000/-
YP in perpetuity @ 8% deferred 25 year = 12.50 – 10.674 = 1.826
So, Reversion amount, i.e 3,00,000 x 1.826 = Rs. 5,47,800/- (Reversion)
iii. Premium is Rs. P say
Total proposed interest i.e Rs. (26,68,500 + 5,47,800 + P)
= Rs. 32,16,300 + P
Present interest = Proposed interest
Hence, 37,20,000 = 32,16,300+ P
P = 37,50,000- 32,16,300
= Rs. 5,33,700/-
the premium amount to be paid by lessee from the Freeholder’s lessor’s point of view is Rs. 5,33,700/-
2. Tenant’s (Lessee’s) point of view:
Present full rental value per annum is Rs. 3,00,000/-
Rent proposed to continue lease is Rs. 2,50,000/-
So, profit rent per annum is Rs. 50,000/-
YP of this future profit rent is to be calculated at the interest rate of 1% higher than that of freeholder’s
1
interest is @ 9% and sinking fund @ 3% and tax adjusted @ 30% for lessee, i.e 𝑌𝑃 = 1
𝑅+𝑆( )
1−𝑡
𝑟
Where, 𝑆 = (1+𝑟)𝑛 −1
0.03
= (1+0.03)25 −1
= 0.0274278
1
𝑌𝑃 =
1
0.09 + 0.0274278 (1 − 0.30)
1
𝑌𝑃 =
0.09 + 0.0391825
YP = 1/0.1291825
YP = 7.7409
So, Amount of premium to be paid from lessee’s point of view is
i.e 50,000 x 7.7409 = Rs. 3,87,045/-
The freeholder’s view the premium works out to Rs. 5,33,700/-
The average amount of premium is to be fixed by compromising between these two extremes and may be
reasonably fixed on average basis is Rs. 5,33,700 + 3,87,045 = Rs. 4,60,372/-
2
Say Rs. 4,60,000/-
MCQ’s
i. What is the future renewal period of lease?
a. 20 yr b. 25 yr c. 30 yr d. 15 yr

ii. What is the rack rent amount in the market?

a. 2,00,000 b. 2,50,000 c. 3,00,000 d. 3,50,000

iii. By premature surrender and by making new lease agreement the lessee is
a. more benefited b. less benefited c. not benefited d. no change

iv. What is the value for freeholder’s interest in this case?

a. 32,16,300 b. 37,50,000 c. 33,16,300 d. 34,16,000

v. What is the premium to be paid from freeholder’s point of view?

a. 5,33,700 b. 3,87,045 c. 4,60,372 d. 3,00,000

vi. What is the premium to be paid from lessee’s point of view?

a. 5,33,700 b. 3,87,045 c. 4,60,372 d. 3,00,000

vii. What is the final average premium fixed for lease tenant?
a. 5,33,700 b. 3,87,045 c. 4,60,372 d. 3,00,000

Case Study 14: (On Land Acquisition)

A person having plot of 2400 Sft in prime locality is leased for 30 years @ ground rent of Rs.
15,000/-PM. The lessee constructed two storyed building on the plot and getting exclusive
rent of Rs. 50,000/- PM. There is no renewal clause. The outgoing expense is 15%. The
building was acquired for Telephone exchange area after 10 years of lease. The total
compensation paid for the property is Rs. 1,20,00,000/- Apportion the compensation among
lessor and lessee. The rack rent in the market at the time of acquisition is Rs. 60,000/- PM.
The rate of return is 7% & redemption rate 3% for lessee. The expected life of building is
around 40 yr.
Solution:
I. Value for Lessor’s Interest:
Ground rent income is Rs. 15000 x 12 = Rs. 1,80,000/- PA
Capitalising the yield @ 6% for 20 years, YP single rate is 11.47.
a. Term value for Lessor right is 1,80,00,000 x 11.47 = Rs. 20,64,600/- (a)
[NOTE: Considering as 1% less rate of interest for lessor]

b. Reversion Value:
Market Rent income of Rs. 60,000/- + Rs. 15,000/- = Rs. 75,000/- PM in perpetuity after 20 years
of completion of lease for balance life period of 40 yr.
1
So, Reversion value @ 7% for 40 yr is 75,000 x 12 x 100/7 x (1+0.07)40
= 9,00,000 x 14.28 x 0.06678 = Rs. 8,58,256/- (b)
Hence total value of Lessor’s interest is (a+b) = Rs. 29,22,856/- (I)
II. Value of Lessee’s interest: (Rent income for 20 years)
Calculate YP dual rate for 20 year @ 7% & 3% is 9.327
Gross rent income is 50,000 x 12 = Rs. 6,00,000/-
Deduct 15% outgoings Rs. 90,000/-
Net income Rs. 5,10,000/-
Hence value for Lessee is 5,10,000 x 9.327 = Rs. 47,56,770/- (II)
c. Total value of both interest is (I+II) is Rs. 76,79,626/-
III. Apportion of Compensation:
Total compensation received is Rs. 1,20,00,000/-
This compensation is shared proportionately between Lessor & Lessee on the basis of the
proportion of their respective interest held by the parties in the leasehold property on pro-rate
basis.
i. Share of Lessor’s interest:
29,22,856
𝑥 1,20,00,000
76,79,626
Rs. 45,67,185/-
ii. Share of Lessee’s interest:
47,56,770
𝑥 1,20,00,000
76,79,626
Rs. 74,32,815/-
MCQ’s:
i. What is the method adopted to assess value in this case?
a. Income Capitalisation method b. Profit method
c. DCF method d. IRR method

ii. What is the value for Lessor’s interest?

a. 29,22,856 b. 47,56,770 c. 76,79,626 d. 1,20,00,000

iii. What is the value for Lessee’s interest?

a. 29,22,856 b. 47,56,770 c. 76,79,626 d. 1,20,00,000

iv. What is the total amount of compensation received?

a. 29,22,856 b. 47,56,770 c. 76,79,626 d. 1,20,00,000

v. What is the share of Lessor’s interest in total compensation?

a. 38.06 % b. 61.94 % c. 40 % d. 60 %

vi. What is the share of lessee’s interest in the total compensation?

a. 38.06 % b. 61.94 % c. 40 % d. 60 %
vii. What is share amount of compensation for lessor?
a. 45,67,185 b. 74,32,815 c. 29,22,856 d. 47,56,770

viii. What is the share amount of compensation for lessee?

a. 45,67,185 b. 74,32,815 c. 29,22,856 d. 47,56,770

ix. Does the compensation amount received is fair in this case?

a. Yes b. No c. Reasonable d. Not reasonable

x. If the unexpired lease period of lease is would be around 25 years, who could have been
benefited?
a. Lessor b. Lessee c. Both d. No one

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