DEPARTMENT OF QUANTITY SURVEYING

FACULTY OF ENVIRONMENTAL DESIGN

AHMADU BELLO UNIVERSITY, ZARIA

LECTURE NOTES ON QTYS309: DEVELOPMENT ECONOMICS

QTYS 309: Development Economics: Course Outline

1. Module 1: Value and Valuation
a. Concept of Value and Valuation; Definition, Characteristics, Types and Principles
of value
b. Valuation; Mathematics of valuations(valuation tables, concept of
yield/computation, concept of years purchases(types/applications)
c. Methods of valuation with practical applications to real estate and engineering
d. Valuation Report Writing; approaches and content of a valuation report
2. Module 2: Investment in Real Estate Properties
a. Concept of Investment
b. Relationship between Investment and other concepts (Personal Income, Personal
savings)
c. Investment Appraisal techniques: Net Present Value, Internal Rate of return,
Investment Ratios and Yield in investment
d. Nature and structure of Nigeria financial System(Financial markets, instruments,
and institutions)
e. Depreciation in real Estate; Nature of depreciation in real estate; physical
deterioration, obsolescence
3. Module 3: Land Development
a. Basic concepts of Land and Development
b. Land Tenure systems in Nigeria
c. Choice of site for Development: Factors affecting the value of land and landed
properties; Demand and supply in Property Market and land acquisition in Nigeria
4. Module 4: Tax System in Nigeria
a. Basic Concepts of Tax
b. Types of Taxes

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MODULE 1: VALUE AND VALUATION
VALUE CONCEPTS

The word value does not have a specific and restricted definition as it may mean different things
to different people. It is a subjective term that is interpreted by different people in different ways.
To some people, the estimation of the value of an object represents nothing more than the
valuer’s personal view point. For others, the value of an object is indicated by the price one can
get for that object either in cash or in the form of goods exchange. Others still define value as the
power of any object or thing to serve the need of man. Notwithstanding the various views of
value, however, any commodity is valuable in proportion to people’s estimate of its utility and
scarcity. Generally the word value has to do with the capacity to satisfy want(utility) and since
there are as many classes of wants , then there are as many kinds of value in common usage in
everyday business. Examples of these kinds of values are: ethic value, scientific value, political
value, fair market value, economic value, book value, religious value and salvage value

MAIN CONCEPTS OF VALUE

There are many different concepts of value that can serve as an underlying basis for property
valuation. Depending on the purpose of the valuation as well as the historical backgrounds of the
countries, concepts of value used in property valuation can differ from each other.

The two fundamental concepts used in property valuation are:

 Market value ( i.e exchange value)

 Worth( (i.e use value)

Most property valuations are design to determine market value, and usually in this case,
valuation input parameters are based on market derived information. For example if an
individual investor believes that most market participants overestimate the risks with sustainable
construction then the yield figure used within the calculation of worth is changed in order to
calculate the worth of a particular sustainable construction building based on that new
description.

Market Value

Market value has been variously described as the price which a property might be expected to
realize if sold in an open market by a willing seller. It is the best/highest price at which an
interest in a property might be expected to be sold by private treaty at a date of valuation
assuming a willing seller, a reasonable period within which to negotiate the sale taking into

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account the nature of the property and the state of the market. Values remain constant throughout
the period. Market Value:

Market Value could also be described as the highest price a willing buyer would pay to a willing
seller, when both are fully informed and acting in freedom, ―without duress or unusual
financing. Therefore, in a well-functioning market we can take market value as representing true
value. Market value is also the present value of the property‖, and thus the following relationship
hold:

Market value = True value = Present value

The theory of market value leads to the conclusion that all valuations require reference to market
transactions that reflect supply and demand conditions as well as buyers‘and sellers‘ expectations
of future benefits of ownership.

The internationally accepted definition of market value the international valuation standards
defines ‘Market Value” as follows:

Market value is the estimated amount for which a property should exchange on the date of
valuation between a willing buyer and a willing seller in an arm’s length transaction after
property marketing wherein the parties had each acted knowledgeably, prudently and without
compulsion.

The federal mortgage association and the federal home loan mortgage corporation of America is
of the view that market value is the most probable price which a property should bring. The
interesting thing about this definition is that it recognises that that market value falls within a
range and that the indicated value is an estimate which should not necessarily beat the highest
portion of that range.

The RICS defines market value as the best price at which a property might reasonably be
expected to be sold at the date of valuation either by private treaty, public auction or tender as
may be appropriate assuming:

 a willing seller
 a reasonable period within which to negotiate the sale taking into account the nature of
the property and the state of the market

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  values remain static during the period
 the property would be freely exposed to the market
 no account is to be taken of an additional bid by a special purchaser

From the above definition, there are three principal levels of value under the general heading
‘open market value’ and these are:

 The realizable value of the property as a whole with no unreasonable time limit imposed
for sale.
 The total realizable value of the property when sold either as a whole or piecemeal but
again assuming that there is no unreasonable time limit.
 The total realizable value of the property on the date of valuation taking into account the
state of the market prevailing at the time and assuming that there is no unreasonable
period within which to negotiate the sale.

Therefore, based on the definitions above it becomes imperative to distinguish market value from
price and worth. Price is the observable exchange amount paid for a particular property, whereas
market value is the estimation of the most likely price achievable if the property where to be sold
in an open market.

Worth on the other hand is defined as the value of a property to a particular investor, or class of
investigators for identified objectives. It is the maximum capital sum an individual is prepared to
pay/accept for an asset.

Other types of value include the following:

(a) Reservation Price or investment value: this is the maximum price a buyer would pay or
minimum price a seller would accept on a property of interest. Investment value is
unique.
(b) Investment value is unique to potential buyer or seller. It can also differ between users of
real estate based on differences in tastes and preferences, risk perceptions, wealth, and tax
circumstances
(c) Exchange value: This is the most probable price that the property is ―realistically likely
to sell at in the open market. Arriving at market value using this technique usually
appeals to appraisers.
(d) Liquidation Value: This is the price that a property is likely to sell for if sold in less than
normal market condition, such as under ―distress auction for a limited time‖. It is a quick

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 sale scenario, requiring tapping into thinner markets of ready buyers, which tends to
result in lower prices
(e) Going concern value or Use value: Going concern value represents the value of the
property in association with the existing businesses operating on the property. The
concept recognizes that it is sometime difficult to separate real estate value from the
value generated by its occupants. This is common for properties, such as hotels, hospitals,
and some industrial properties. It is common that part of the value of a property may be
derived from sources other than the original use to its highest and best use‖. The current
use thus provides a value estimate for a given user.
(f) Equilibrium value: This is usually applied when issue of efficient pricing is involved, that
recognizes all available information. Market value could represent the equilibrium value;
however real estate markets may not be perfectly efficient in the sense that ―market
value may not fully and immediately reflect all the publicly available information.
(g) Highest and best use: This concept describes the value on a property as value due from
the expected use of it and its future income.It is defined by the American Institute as the
reasonably probable and legal use of vacant land or improved property, which is
physically possible, appropriately supported, financially feasible, and that results in the
highest value as of the date of the appraisal. Determination of highest and best use
ultimately depends upon the judgment and skills of the analyst who must determine what
this site could be best used for if vacant.

Characteristics of Value

Real property has significance only as it satisfies man’s needs and desires and it is these
collective desires for real property that gives rise to value. The measure of property value is a
function of the degree of utility and scarcity relative to comparable utilities. Thus, for property to
have value, it must have some attributes or pre-requisites.

1.) Utility:

This is the pre-requisite for determining the value of real property. It is the significance or
advantages the purchaser or buyer of a property derives from it. It can be defined as the power of
a good to render a service or satisfy a need. Where utility is present but demand or scarcity is
absent, market value will not exist. For instance, water and air possess utility for both are
essential to life. But they are not scarce and thus their value is not measurable in terms of naira,
for each is abundant and free to all.

2.) Scarcity:

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There must be an element of scarcity in supply in order for a property to command value
regardless of its utility. Otherwise it becomes a free good. Air for example is very useful but
because it is free in supply it has no economic value. However, for a diver in a deep sea, it has
economic value because it is scarce and down there the diver requires it to stay alive.

3.) Demand:

This is an economic concept that implies not only the presence of a “need”, but the existence of
power to satisfy that need. Wishful thinking or necessity alone, no matter how strong, does not
constitute demand. To bring about demand, purchasing power must be available to satisfy the
need or to back up the wishes or desire.

4.) Future satisfaction:

This refers to expected flow of returns or satisfaction from the acquisition of the property. Eg the
expected returns of rents that will accrue if the property is let out or sold.

5.) Transferability:

Transferability here does not only refer to the physical movement of properties but rather the
ability to possess and control all rights that constitute ownerships in a form of bundle of rights
which permits the possessor to

 Use the property

 Sell it
 Lease or let the property
 Mortgage the property
 Give the property away as a gift
 Grant easements or even refrain from any of these rights

Transferability is a legal term that even if the characteristics of utility, scarcity and demand are
present, a good or service which cannot be transferred in whole or in part will not command
good market value. The moon for instance, has utility; it is scarce (there is only one) and there
possibly might be a demand for it if ownership and use of it could be controlled. The lack of
transferability, however, keeps the moon marketwise, a free good. By transferability it is not
meant necessarily physical mobility but rather the possession and control of all the rights that
constitute ownership of property.

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 6.) Capable of ownership

Apart from being brought into use, real properties and estates must belong to someone either by
building through purchase or long lease.

7.) It must be desired and this desire must be backed up by effective purchasing power

8.) The property or object must be located in an environment of law and order so that when
people invest in it they will not sense a risk of loss because of legal or political
uncertainty.

PRINCIPLES OF VALUE

There are various principles which are basic and affect real estate property. Some of these
principles are briefly outlined below:

a. Principles of demand and supply:

As the demand for a particular property increases relative to supply, the value increases. The
interaction of demand and supply is the major determinant of market value of properties.

b. Principles of change

Under the principles of change, real estate market is considered to be dynamic in nature and is
therefore constantly changing. The forces of these changes affect specific properties in the
neighbourhood, nation etc. This change also affects wants and needs of the buyers and sellers as
well as demand and supply and hence has effect on value.

c. Principles of highest and best Use:

That properties would be put to the highest use possible that could be accorded to the property in
question.

d. Principle of anticipation:

Value is usually created by anticipated future benefit of ownership and therefore realistic
projection of future benefit is essential to accurately appraise value.

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 e. Principles of Conformity:

Highest values are usually realized in properties that show reasonable degree of sociological,
economical, and architectural similarities.

RELATIONSHIP BETWEEN VALUE AND OTHER CONCEPTS

(i) Value and price

(ii) Value and cost

(iii) Value and income

i. VALUE AND PRICE

The value of an interest in property can be expressed in terms of how much money or how much
of other goods could be exchanged for it. The importance or ability or power of an interest to
satisfy need is thus reflected in the prices paid for that interest. However, because the property
market is not well organized the prices paid for interest in property do not always reflect their
value at specific times, but under perfect competition i.e. when all forces which have a bearing in
the market come into full play, price could coincide with value.

ii. VALUE AND COST

In determining the value of an interest in property it is important to consider the gross amount
required to bring it forth. Cost is this amount required to bring a service or commodity into a
state which makes it desirable to a consumer. In a Development economics perspective, cost is
not just the direct amount which a commodity commanded to get to a desirable state. It includes
all other associated expenditure required to achieve the objective of bringing the commodity
forth. Such expenditures include taxes, labour, transport, opportunity, operation, etc depending
on the commodity or service in question. The value of a commodity/service is highly dependent
on the cost of producing it. There is a direct relationship between value and cost under normal
circumstances.

iii. VALUE AND INCOME

If the future scheme of income is predictable with accuracy and if a sufficient market exists,
there will be little difficulty in determining value. Valuations are affected by different opinion
among valuers regarding the future trend, efficiency of the property market, variations in
availability and cost of money etc.

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REAL ESTATE VALUE:

FACTORS INFLUENCING REAL ESTATE VALUE

The market value of real estate is maintained, modified and/or destroyed by the interplay of four
forces which motivate the activities of human beings. These forces set the pattern for the
variation in the real property market. Each force is dynamic and when combined, they in no
small measure affect the volatile market. The forces include the following:
(a) Physical and natural forces
(b) Economic changes
(c) Political and Government actions
(d) Social ideals and standards

(a) PHYSICAL AND NATURAL FORCES

These forces can be created by either man or nature amongst others. For example, change may
occur to land and buildings due to human activities such as vandalism, accidental damage, fire
hostilities etc. Furthermore, a property value may be affected by both existing and proposed
development within an area. Example of such developments that may reduce or increase the
value of surrounding property include the building of crematorium, sewage treatment works and
electric substations; provision of social amenities like good schools, clinics, market, good source
of water etc. Variation in property values may be an offshoot of natural consequences such as the
nature of soil and adverse weather conditions creating such problems as flooding and damage
due to lighting. In addition, diminishing in value may be as result of deterioration in the
structural fitness, functional soundness and economic usefulness of a building. In another note,
if the productivity of a property is impeded by locational disabilities and lack of basic amenities
like water and electricity, the value of the property will take a downward plunge. And, in some
measures, soil infertility and certain physical thresholds like marshlands, valleys and mountains
in particular may take considerable toll on the values of surrounding properties.

(b) ECONOMIC CHANGES

These forces involve changes in the structure of the economy and the organisation
of business. For example, if there is adequate amount of money in circulation and

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availability of credit facilities, people will become more disposed to take advantage of it for the
purchase or development of real property, therefore, the property values will be high.
Speculation of a high rise in price of property and future demand can trigger off a corresponding
rise in values. On the other hand, inflationary trends will pose a problem with any type of
investment, resulting in substantial reduction in real value. This development has made landlords
to see a lot of wisdom in making provision for regular rent reviews whengranting a lease in the
present as a shield against an abandonment of some specific economic activity which has
become uneconomic but which hitherto formed the mainstay of the area’s livelihood, e.g. coal
mining.

(c) POLITICAL AND GOVERNMENT ACTIONS

Government policies such as granting of loans and subsidies to the agricultural sector encourage
investment in this sector, thus giving impetus to high values of agricultural properties. In
juxtaposition, the statutory intervention in the housing market has resulted in the general
unattractiveness of residential investment property, hence low property values. The same goes to
policies concerning expansion of old towns, improvement and alteration of communications and
decentralisation of offices to less buoyant areas. Moreover, government agencies or bodies in
charge of acquiring, developing, managing, selling or leasing completed properties can create
far-reaching effects on property values in these locations. Added to this are legislations
regulating rent, taxing property values, governing allocation of land. Last, but not the least, is
political disturbances which could even take the form of war. When and where these cases occur
the value of property in the areas of immigration will rise as demand for property will outstrip
supply. On the other hand value of properties in the vacated areas will significantly drop.

(d) SOCIAL IDEALS AND STANDARDS

Population size and structure is very important in the real property market. Invariably a high
population means high demand for land and landed property. Also, if a greater proportion of the
population consists of people in the “dependent” class, this will seriously affect demand and
supply of property and, hence it values.

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Man’s social instinct relating to taste and needs can also affect the value of property. For
example, if a property has an obsolete architectural design or if its purpose no longer satisfies
demand or is unable to respond to changes, the value of the property will fall substantially. This
can be seen in the fact that in recent years there have been high demand for offices with
sufficient floor loading capacity, and many offices which have failed to meet this requirement
have suffered depreciation in their values. Equally, social upheaval such as high cost of living
in a neighbouring region or country results in high demand for property and consequent increase
in values.

Factors likely to affect property values include the following:

i. Accessibility: Properties located in areas where they are easily accessed have higher
values than those in areas difficult to access
ii. Adjoining properties: This has to do with the effect of other properties surrounding an
estate or a landed property.
iii. Facilities: properties located in areas where all necessary facilities are available command
higher values than one which is in an area that has inadequate facilities
iv. Location: Location has great influence on the value of properties. Properties located in
areas where there is the provision of social amenities, infrastructure facilities, and
adequate convenience tend to have higher values
v. Utility: The various uses to which a property can be put into also significantly affects its
value
vi. Durability: Properties to good attributes usually have higher values
vii. Scarcity: Properties that are highly scarce command higher values than those that are
freely available.
viii. Complementarity: Properties which have close substitutes have lower values than those
without substitutes.

VALUATION APPLICATIONS

The following are the major areas in which a valuer has to apply his professional ideas to
appraise the value of his client’s property in the value. These areas are:

(a) Determination of earnings and rentals

(b) Investment decisions

(c) Business and finance

(d) Taxation

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 (e) Insurance

(f) Accounting

(g) Litigation purposes

a) Determination of Earnings and Rentals: More often than not, a valuer has to be called
upon to determine what should be the fair rental for a property or capital value for the
sellers and the buyer. The need may arise when a tenant surrenders an existing lease in
consideration of securing a longer interest or where he makes some capital payments on
entry of a lease for a reduction in rent (i.e. premium) or where there is a rent review as
stipulated in the rent revision clause or deed of grant it may also arise where there is a
merger of interests in the same property or where there is a merger of two developed sites
in separate ownership but whose sizes are so small that it may not be possible to develop
either of them in isolation (marriage valuation).
b) Investment Decisions: The investment environment is a precarious environment with so
many pitfalls to trap the careless. These pitfalls are risks and uncertainties inherent in the
investment which may be due to factors like inflationary tendencies, high and often
erratic interest rates, population changes, dearth of suitable new sites and other economic,
physical, social, legal and even political factors. This situation has continued to pose a
giant problem to property developers and investors and prevailed on them to demand
thorough and analytical level of advice from valuers as to the practicability and
credibility of their projects or proposed investment. This task of the valuers is called
feasibility and viability appraisal.
c) Business and Finance: Valuation can be done for business take-over or amalgamation
of businesses. This involves the determination of the value of a property such as land
and building, removable assets and good will.Also, professional advice can be sought
regarding “buy out” purposes. This normally occurs if any of the shareholders dies or
withdraws and there is need to value his shares and sell to other willing members. The
price at which the transaction would be consummated can be established by a
professional valuer.Under business and finance, we have valuation for mortgage and sale
and leaseback for mortgage, the property which is to be given as security for a loan (i.e.
collateral) the amount of loan applied for in case of fore-closure. In sale and leaseback, a

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 freeholder or leaseholder conveys his interest in the property to an institution on the
understanding that the institution will grant him back a lease of that property at a rent
which represents an agreed proportion of the purchased price or capital raised! It is one
method of raising equity capital in periods of financial troubles. Last, but not the least,
we have valuation of liquidation-value of specific assets of firms that are to be used as
collaterals for loans from lending institutions.
d) Taxation: The services of a valuer is needed here for rating valuation, valuation for
capital transfer-tax, capital gain tax and betterment levies. Rating is essentially valuation
for taxation by a local authority/government of all rateable properties. Capital transfer tax
otherwise called estate or death duty is a tax on the capital value of property and other
assets charged upon the passing of ownership following death, whereas capital gain tax is
always imposed on the gains that a property brings on disposal. Betterment levies can be
termed as government taxes for its development which causes the value of a particular
property to appreciate.
e) Insurance: A valuer may be called upon to calculate the compensation that should be
paid to the owner of an insured property on proof of loss actually suffered, technically
tagged as “indemnity”. The insurance usually covers a number of contingencies such as
subsistence of the foundation leading to excessive crack, damage to or destruction of the
building by some accidental causes such as fire, storm, earth-quake and riots. Added to
these, are busted water pipes and overflowing tanks, accidents involving civilian, vehicles
damage and aircraft damage.
f) Accounting: Some companies, cooperatives and parastatals prepare balance sheets at the
end of every financial year. Usually, a valuer comes into value the fixed assets of these
companies, which would be used for the final preparation of the balance sheet. Under
accounting also, we have valuation for depreciation and replacement assets.
g) Litigation Purposes: This involves valuation of properties in dispute. The dispute could
be between individuals, individuals and governments, or between governments. A
typical example of litigation valuation is that of marriage couple who hitherto enjoyed
joint ownership of a business. In such circumstances, the value of his or her own
contribution to the business may become an element in the total wealth that must be

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 shared between the parties, and valuation has to be made for the final settlement of the
investiture.

MATHEMATICS OF VALUATION

In most societies, the payment of interest for the use of capital is an established part of
economic life. In financial management the word “interest” may have various meanings
depending on the prevailing circumstance. Money is invested with the intention that it
should earn interest. Interest is a charge for the use of the money which depends upon the
money invested, the length of time it is invested and the rate of interest expressed as an
annual percentage. Basically interest is treated as being either

A. Simple or
B. Compound

A. SIMPLE INTERESTS
Simple interest arises when only the original capital (principal) earns interest. With
simple interest only the principal, that is the original amount of investment, will earn
interest. If a thousand naira is invested at ten percent per annum simple interest for five
years, the interest at the end of the first year would be one hundred naira. Because only
the principal earns interest, it would also be a hundred naira at the end of each of the
remaining four years, giving a total of five hundred naira. The formula for calculating
simple interest is thus;

Amount of Interest(I) = PIN

Where I=total amount of interest. P= Principal Amount.

i= rate of interest (10%=0.1, 5%= 0.05 etc) n= time period of the investment.

Thus the total interest earned on N1, 000 at 10% per annum for five years at simple interest is:

= N1, 000 x 0.10 x 5 = N500.

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 B. COMPOUND INTEREST

With compound interest, interest is paid not only to the outstanding capital but also accrue on
unpaid interest. The simple interest earned is to be re-invested at the same rate over a given
period of time. When money is deposited at compound interest the interest is automatically
added to the principal each year, and the two combined will earn further interest at the same rate.
If a thousand naira is invested at ten percent compound interest for five years it will become N1,
100 by the end of the first year. This will become the new principal amount and will earn interest
of N110 by the end of the second year to give a total of N1, 210. This will continue until at the
end of the fifth year when the total amount of interest will be N610.51 and the original
investment of a thousand naira will have accumulated to N1, 610.51. This is known as the
terminal value of the investment. The terminal value also depends upon the investment being
made immediately. It will not be the same if the investment is delayed for six months since there
will be a period of six months when the money is not earning interest. Calculations involving
compound interest involve:

 Compounding: the way a present sum of money will grow

 Discounting: which is the reverse of compounding, and considers how a future
sum of money might be worth today, given a particular rate of interest

In valuation practice, and other studies associated to land and buildings where some aspect of
interest is involved , compound interest calculations of a tedious and time consuming nature may
be required. A number of different books of valuation tables are now available with Parry’s
Valuation and Conversion Tables (Davidson, 1989) as the best known table. These tables give
the amount for the various functions based on a value of ‘ONE’ at different interest rates and
over different time periods. This eliminates the need to calculate the figures each time they are
needed, apart from multiplying the figure obtained from the tables by the actual sums being used.
With constant practice an electronic calculator with in-built financial or exponential function can
be used to obtain quicker results than with the tables. Most computer spread sheet programmes
have built-in functions which can also do the calculations. The unit of construction of these
tables is N1, and wherever there are exceptions, they are always well spelt out. It is very
important to note that, proficiency in the use of valuation tables can never be a substitute for

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practical experience of the property market or real appreciation of the factors which influence
value. Rather, they simply assist the valuer very much in carrying out his work.

The six (6) most basic tables are described below:

1. Future Worth of N1.00 (A) (also known as the amount of N1.00) table
2. Present Worth of N1.00 (PV) table
3. Amount of N1.00 per annum (APA) table
4. Annual sinking fund (ASF) table
5. Present Worth of N1.00 per annum (YP) also known as Year’s purchase table
6. Annual Equivalent worth of N1.00 (AEW) table

1. Amount of N1 (A)table

This table forms the basis of construction of the other tables. The multiplying factor given in the
valuation table represents the amount to which a unit of money say N1 accumulates at a given
compound interest over a known period of time whereby both the original capital and interest
earn interest at a given rate.

If an amount of N1 is to be invested at compound interest and at a rate iper annum, it will have
amounted to:

(1+i), at the end of the first year.

(1+i)i ,by the end of the second year

And this together with the amount invested at the beginning of the second year (that is the
original principal plus the interest earned during the first year will give a terminal value of:

= (1+i)+ (1+i)i

= (1+i) + (i +i2)

= 1 + 2i + i2

= (1+i)2

Interest earned during the third year will be (1 + 2i + i2)i.

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Thus the terminal value at the end of the 3rd year will be;

(1 + 2i + i2) + (1 + 2i + i2)i = (1+i)3 .

By extension it can be seen that the formula for calculating future worth of N1.00 is;

A = (1 + i)n
Where; - A= future worth of N1.00 or amount of N1.00

i= interest rate
n= the time period of investment.

Continuous Compounding:
Sometimes interest is payable at more frequent or longer intervals such as half yearly, quarterly,
monthly, etc. In such cases the formula is adjusted by observing the following rules:
i. Dividing iby the number of interest accumulations per year
ii. Multiply n by the number of interest accumulations per year

(1 + i)n=(1 + i/m)mn

Half yearly = =(1 + i/2)2n

Quarterly ==(1 + i/4)4n

Monthly =(1 + i/12)12n

Applications:
a) It can be used to calculate the amount to obtain after depositing a sum of money in a
commercial bank over a given period of time
b) To work out the alternative forgone in terms of interest where money is kept idle
Example: How much will N150 amount to in 21 years if it is invested at 6% per
annum compound interest?
Solution:-

A = N150 x (1 + i)n

= N 150 x (1 + 0.06) 21 = N 150 x 3.3996 = N 509.94.

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Exercise 1

Q1. A building estate was purchased for N6M. A sum of N 200,000.00 was spent on minor
repairs. Over the period of 60 years no return was received from the property. What is the total
cost of the property to the purchaser at the end of five years assuming interest at 9%?

Q2. To what amount will N1 invested at 6% compound interest accumulates in 4 years?

i. If interest is payable yearly

ii. If interest is payable half yearly
iii. If interest is payable quarterly
iv. If interest is payable monthly

Q3. To what amount will N20,000 invested at 15% interest rate accumulates to in 8 years, if
interest is payable every four months

2. Present Worth of N1.00 (PV)

The present worth of N1.00 is the amount which must be invested now at a given rate of
compound interest to accumulate to one N1.00 over a given period of time. This is the inverse of
the future worth of N1.00. Whereas the future worth of N1.00 tells the investor how much N1.00
will amount to in the future if it is invested now at compound interest, the present worth of N1.00
tells the investor how much must be invested now for it to accumulate to N1.00 over a given
period of time at compound interest.

Therefore Present worth of N1.00 is given by:

PV = 1/(1 + i)n or PV= 1/A

The present worth is sometimes referred to as present value or deferred value. Calculating
present worth of a sum which will not be received until sometime in the future is known as
deferring or discounting that sum. This is the process of making allowance for the fact that a
sum is not receivable or will not be expended until sometime in future.

18
Applications:

i. For calculating value at present time of sum receivable in the future eg premiums
ii. In making allowances for future expenditure in connection with real properties
iii. To ascertain the capital value of reversion

Example:- How much should be invested now to produce N1, 000 in 12 years if it is invested
at 6% per annum compound interest?
Solution:-

V = N 1, 000 x 1/ (1 + i)n

= N 1, 000 x 1/(1 + 0.06) 12 = N 1000 x 0.4697 = N 469.70

EXERCISE 2:

1. What sum must be invested now at 11% interest rate to accumulate to N500,000
in 12 years?
2. An investor has been given the option to purchase an area of land which is
estimated to be worth 465,000 in 5 years time. Assuming the investment is
expected to yield the return of 5.5%, how much must be put down for the site or
land now?
3. A freehold factory was recently let to substantial tenants on a 40 years lease at a
rent of N100,000 per annum. The premises are in good repairs and the tenants are
under full repairing covenants, but the owner has covenanted with the lessee that,
after 2 years of the lease has expired, he would rebuild, in the fire resisting
construction, a staircase which is now built of wood at a cost of 30,000, and also
that after a further period of four years he will rebuild the chimney shaft at a Cost
of N70,000, and that two years later(i.e. when the lease has 32 years unexpired)
he will replace a wooden fence with a brick wall; this will cost N12,000. Current
accumulative rates are 3%. Assuming that the works in question are necessary to
maintain the present rent, and that no higher rents would be expected when the
lease comes to an end, what is the value of the freehold interest?

19
3. Future Worth of N1.00 per Annum (APA)

The future worth of N1.00 per annum, also known as Amount of N1.00 per annum is the
terminal value of N1.00 invested each year at a given rate of compound interest over a
given period of time. An annuity is a series of equal payments made at regular intervals,
and the future value of an annuity can be calculated using the formula for the Future
worth of N1.00 per annum- though payments of many annuities are done monthly or
quarterly (not yearly), in which case the interest rate and time periods are adjusted
accordingly. The formula for calculating the future worth of N1.00 per annum will vary
depending on whether the money is invested, or payments starts at the beginning or end
of each period.

Ordinary annuity: When payments are made at the end of the period, it is known as
Ordinary annuity. The formula for calculating the Future worth of N1.00 per annum
when the payments are made at the end of the period is:

APA = [(1 + i)n – 1]/i or [A- 1]/ i

Where APA = Future worth of N1.00 per period.

Annuity due: This is when payments are made at the beginning of the period, as for
example insurance premiums or bank deposits which are made immediately, it is known
as an annuity due. The formula for calculating the Future worth of N1.00 per annum
when the payments are made at the beginning of the period is:

APA={[(1 + i)(n+1) – 1]/i }

–1
Example:- How much should be invested now to produce N150 a year amount to in
21 years if invested at 6% per annum compound interest (a) with the first
instalment being made immediately, and (b) with the first instalment being
made in a year’s time?
Solution:-

20
(a) = N150 x {[( (1 +0.06)(21+1) - 1]/0.06} -1

= N150 x 42.3923 = N6, 358.85

(b) = N150 x [(1 + i)21- 1]/0.06

= N150 x 39.9927 = N5, 998.91

Note that the time period for (a) is a year longer than for (b) because the first deposit will
start earning interest immediately.

4. Annual Sinking Fund (ASF)

This table is the reciprocal of the previous table(Amount of N1 per annum). It is used to
calculate the annual amount to be saved each year at a given rate of interest in order to
meet up with a known expenses at an expected date in the future.. When a corporate
entity or Government issues bonds it knows that, besides paying interest on bonds, it will
repay the loans when the bonds mature. In order to ensure that it can meet the repayment
at maturity it creates (or should create) a separate fund into which it makes equal periodic
deposits which, with compound interest, will equal the amount of the loan by the time the
loan has to be repaid. This is called a sinking fund because its purpose is to sink, or
shrink, the debt.

The same applies to developers who are putting up new structures. A building, unlike
land, is a wasting asset because eventually it will come to the end of its life and have to
be replaced. If the developers don’t put aside part of their income and deposit it in a
sinking fund they will be left one day with a piece of land with no building on it, and
insufficient capital to construct a new one. Sinking fund payments are made at the end of
each period so the formula is the reciprocal of the future worth of N1.00 per annum when
the investment is made at the end of the period. So;

ASF = i/ [(1 + i)n - 1] or i/ (A – 1)

Where ASF = the annual sinking fund factor.

21
 Example: - How much should be invested at the end of each year to produce N5, 000
in 10 years’ time at 6% per annum compound rate?
Solution: - N5, 000 x 0.06/ [(1+0.06)10 – 1]

= N5, 000 x 0.07587 = N379.35

EXERCISES 4

Q1. An investor purchased N100, 000.00 a freehold property which is estimated to yield a net
income of N20, 000 for the next 15 years. At the end of that time it will be necessary to rebuild
at the cost of N150, 000 in order to maintain the income. How should the owner provide for this
and what will be the results on the percentage yield of his investment, assuming interest rate at
3%?

5. Present Worth of N1.00 per Annum (YP)

This table shows the present value of streams of future cash receipts of fixed amount received at
the end of each year for some number of years in the future given a discount rate (r). The figures
in the table show at varying rates of interest, what sum might reasonably be paid for a series of
sums of N1 receivable at the end of each year given a number of successive years. It is given as:

PV per annum = 1-PV/i

The present worth of N1.00 per annum will depend on whether the income is to be earned in
perpetuity or whether there is a limited life to it and, if it has a limited life, whether the income
starts immediately or starts at the end of the first period.

Years Purchase (YP) single rate:

As the number of years approaches perpetuity, the value of PV of N1 becomes so small that it
really becomes insignificant. For instance, if an investor wishes to invest a sum of money which
will give a 10% return amounting to N10, 000 a year, the amount needed to be invested is:

100/10 x N10, 000 = N100, 000

22
The multiplier (i.e. 100/10) which has to be applied to the annual income to give the capital
investment is known as the Present worth of N1.00 per Annum or Years’ Purchase. It can be
calculated easily by dividing one hundred by the rate of interest. For example

If the rate is 5% YP =100/ 5 or 20.

If the rate is 4% YP =100 /4 or 25

If the rate is 6% YP = 100/6 or 16.67

These calculations apply only when the income is perpetual, and is given by:

YP = 1/ i= 100/i

Years Purchase (YP) Dual rate:

The table for single rate provides for the same rate on both interest on the sum invested, and the
annual sinking fund (ASF) to recover the capital value over the term of years. However, in
practice, the rate of interest on the loan and the ASF may be different. In this circumstance it is
necessary to use the dual rate (DR) table which allows these rates to be different.

YP = 1/(i+ASF)

This formula gives the amount which must be invested now to give to give an income of N1.00
per year, together with a sinking fund to replace the original capital, at given rates of simple
interest for the investment and compound interest for the sinking fund, over a given period of
time.The purchaser of an income for a limited time will receive the income only for that period
and will then lose not only the income but also the initial investment. This means that the
purchaser of an income-producing property will need to make two calculations to find its present
value, one for the land using simple interest and another for the building. The one for the
building will need to incorporate a sinking fund so that it can be replaced at the end of its life and
the formula to be used is the Present worth of N1.00 per Annum also known as INWOOD
ANNUITY FACTOR or YEARS’PURCHASE WITH A LIMITED TERM.

23
In most circumstances the income starts at starts at the end of the first period, not immediately,
and it has to equal the amount of interest plus the sinking fund, that is i + ASF. Since the capital
investment (P) equals the income times the Years’ Purchase, then;

P = (i + ASF) x YP and YP = P/ (i + ASF).

Thus in finding the Present Worth of N1.00 per annum where the capital investment is N1.00,
then the formula becomes

YP = 1/ (i + ASF) or 1/ {i + [ i/{(1 + i) n-1}]. This is the common formula for calculating

Present Worth of N1.00 per annum.

{It is not common to start receiving income on an investment immediately, but where this
happens the formula becomes; YP = {1/ (i + SF)} x (1+i)}.

Example: - How much should be invested in a building which will be demolished in ten
years’ time if an income of N20, 000 a year can be expected from it and the rate is assumed to be
6%?

Solution: - YP = 1/ {i + [ i/{(1 + i) -1}]

N20, 000 x 1/ {0.06 + [0.06/ {(1+0.06)10 – 1}]

= N20, 000 x 7.3601 = N147, 202

METHODS OF VALUATION

The method use in a valuation process at a given point in time for a property depends on:

 Evidence available
 Nature of interest being valued
 Purpose for which the valuationis being carried out.

Therefore, the approaches to adopt in respect of a particular interest for two different purposes
may differ.Based on that, different approaches/methods have evolved over the years ranging
from traditional to advanced methods.

24
The advance methods also known as data analysis methods, are usually based on decision
support tools from Automated valuation models(AVM).The major defect of these methods lies in
the inability of the models to critically observe the subject, its conditions, etc

Examples of AVM are:

 Hedonic pricing methods

 Artificial neural networks based models (ANN)
 Fuzzy logic based models
 Spatial analysis method
 Real options method

Traditional methods(principal valuation methods):

There are five (5) standard traditional valuation method namely

 Comparison method
 Investment method
 Cost method
 Profit method and
 Residual method

Comparative method:

This exercise entails comparison of similar properties that have been recently in the open market
transaction with the current subject property. This price mainly serves as a guide for the
appraiser to take informed decision. Every property is unique, and any differences in properties
influence the value adduced to the property under appraisal.
The underlying theory of value of this approach is that the value of the real estate is based upon
the views of the typical buyer and seller of such property, independent of cost, to create or wear
and tear. This means that the observed prices used by valuers to infer value of a subject property
by sales comparison include random variation.

It is perhaps the simplest and most accurate method of valuation employed y values to determine
the capital values as well as rental values of property.The rationale behind this method is that if
property A and B are within the same location and are similar in all respects, then the price or
rental at which A has recently been sold or rented out in an open market is the most reasonable
and accurate estimates of the value of B should it be ready to be sold in an open market.
However, because properties can never be absolutely identical, the use of this method is limited
to only simply cases.

Adjustments are usually done to capture the possible differences between the subject property
and the comparable.Thedifferences/similarities are established based on the following elements
of comparisons:

25
  Property right conveyed
 Financial terms
 Conditions of sale
 Expenditures mode immediately after purchase
 Market conditions (time)
 Location
 Physical characteristics
 Economic

Therefore, it is given by :

Po = Pμ+ε,

Where; Po = the observed price, Pμ is the mean of the possible price distribution, and ε is
random error.

Pμ and ε, are unknown, only the Po( the transaction price) is known. Thus, due to heterogeneity
of hedonic characteristics, valuers now develop models of price differences. For instance, instead
of P(t)=P(t-1), where price of the subject property equals recent transaction prices, valuers have
to use Psubject(t)=Pcomparable(t-1)+-differences. ‘Differences’ means the price implications,
positive or negative, of the differences in hedonic characteristics between the properties.

The primary criticism of the sales comparative approach is that it is subjective, both in terms of
selecting comparative sales and with regards to the types of adjustments that are made to
determine value. In practice, the number of comparable is usually limited to three or four
properties, and separate adjustments are made for specific property characteristic.

EXAMPLE:

Ahmadu Bello University is planning to sale out one of its largest estate properties located in
GRA Zaria. The property which is a large estate residential accommodation is located along
Queen Elizabeth way has 150 units of 3-bedroom flats. The property was built since 1979 and
has a total square feet of 122,500 leasable area which is 94% occupied. The subject property
amenities include a swimming pool, club house, laundry room and a tennis court.

You have obtained market data for comparable properties. The first comparable is a block of
flats also located on the same street with 108 units of residential accommodation. The property
which is currently 94% occupied has a 118,296 left leasable space and was built in 1965.the
property sold 6 months ago @ N456m. Property amenities include a swimming pool, club house
and a covered parking area. The second comparable is a 132unit estate located some 400m away
from the subject property it has 87,776ft rentable space, built in 1978 and in currently 85%

26
occupied. The property sold 6month ago for N705m property amenities include swimming pool,
club house, exercise room and tennis court in addition on the sale took a 500,000 loan
@7%.annual interest rate with monthly payment for 25yrs.Estimate the market value of the
subject property using market comparison approach.

If property values are increasing at an annual rate of 3%, the amenities adjusted values are given
below.

Laundry 12,500,000.00

Tennis court 27,000,000.00

Covered park 1,500,000 per unit

Exercise room 18, 500,000.00

Age 0.5%

Sales date 3% per 12 month

Comparable A

Sales price 456,000,000

Adjustments:

Sales date
(3% x 456,000,000)
(3% per 12 month) x6 684,000, 000
12

Age

0.5% per year(14 x 0.5% x 456,000,000) 31, 920,000

Amenities:

Laundry +12,500,000

Tennis court +27, 000,000

Covered park 108units@1,500,000 -162,000,000

______________

593, 420, 000.00

______________

27
 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 593,420,000
Unit price=𝑛𝑜.𝑜𝑓𝑢𝑛𝑖𝑡𝑠 = = 5,216,851.85
108

Amenities Subjectproperty Comparable A Comparable B

Swimming Pool Swimming Pool Swimming Pool

Club House Club House Club House
Laundry Room Covered Parking Exercise Room
Tennis Court Tennis Court
+Laundry Room +Laundry Room
+Tennis Court -Exercise Room
-Covered Parking

Comparable B

Sales price 705,000,000.00

Adjustment

1) Loan
PV @ 7% for 25yrs: 1/(1.07)25 x500,000 -92,124.59

(3𝑥705,000,000)𝑥6
2) Sales date +10,575,000.00
12
3) Age 1x0.5%705,000,000 +3,525,000.00
4) Amenities:

Laundry room +12,500,000.00

Exercise room -18,500,000.00

703,490,376.00
𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑𝑝𝑟𝑖𝑐𝑒
Unit Price= = 703,490,376/132= 5, 329,472.55
𝑛𝑟𝑜𝑓𝑢𝑛𝑖𝑡𝑠

Value of Subject Property = (5,216,851.85+5, 329,472.55)/2x150 = 790,974,330.1

28
EXERCISE

1. The subject property is improved with a single-family residence, and recently sold for
$160,000. No vacant lots have sold in the subject property's neighbourhood; however,
Vacant lots have sold in three nearby neighbourhoods in which improved properties also
have sold. Estimate the value of the subject property?

2. The highest and best use of a 100-acre vacant land tract is a farm suitable for row crops
and the raising of livestock. Research of market data reveals only one vacant land sale
and two improved sales. The three sales are as follows

Sale A includes a rental tenant house that rents for $200 per month. Similar houses onone-acre
lots are valuedwith a monthly gross rent multiplier of 100.SaleA is also improved with a

29
livestock barn with a current cost of $10,000; it has an estimatedeffective age of 20 years and a
useful life of 40 years.
Sale C is improved with a livestock barn with a current cost of$12,000. The barn isestimatedto
have an effective age of 5 yearsand a useful life of 30 years.
What is the subject land worth?

A) INVESTMENT METHOD:

This method is used for valuing properties that are held as income producing investments

Usually, property which are income generating in nature are sold out to purchasers who are
buying them for investment purposes and the underlying principle in this method is that a
prudent investor will invest his capital in aproperty in order to obtain the best possible return in
the form of rent from the property.

The value of a property (V) using this approach is given by:

V= Net income per annum x YP

1
YP=𝑅𝑎𝑡𝑒𝑜𝑓𝑟𝑒𝑡𝑢𝑟𝑛

Net income=Gross income-Outgoings

B) PROFIT METHOD:

This method is used for properties which are specialized in nature and have limited potential to
be converted to alternative uses other than for running business e.g petrol stations, hotel, parks,
public house etc. The value of these types of properties can only be determined based on the
profits made from their use.

For properties valued based on this method, it is almost impracticable to make comparisons with
other similar properties and the value of such properties can only be determined in relation to the
profits which can be made for their use. Therefore, to arrive at profit, there is the need to

30
examine the accounts kept of the business carried out in the property to determine typical
figures

C) RESIDUAL METHOD:

The residual method is commonly applied when the nature of the subject property is unique and
comparables cannot be found. It is used in the valuation of land or buildings which are to be
developed or redeveloped

The formula below is used for the residual method:

Value of completed dev (GDV) –Total expenditure cost= Value of site

The ‘proceeds of sales’ is the gross development value (GDV) which accrues in the form of
capitalized streams of incomes generated from the estate property. The cost of development is
the total cost incurred in constructing the property. It is usually determined using the gross fllor
area technique (GFA)

Proceeds of sale - Cost of dev - profit= cost of land

Proceeds of sale: GDV/capitalized streams of income

Cost of development: Cost of building based on GFA technique

EXAMPLE

Q. You have been asked to value the site of development potential of a proposed four storey
office bldg 3220m2 gross external area(2900m2N/A) with 55 car parking spaces. It is located in
the centre of a busy city.

Building cost 247,500,000

Rent 1500/m2

Cost of finance 16%

Development period 12months

Yield 9%

Professional fees @ 10%

Voids and contingencies @5%

Advert, Mktg&sales @8%

31
Developers profit @15%

Finance @16%

Value of completed development (GDV)

Net income =15000 X 2900=43,500,000

GDV=net income x YP@9%

=43,500,000 x11.11

=483,285,000.00

Total expenditure

Building cost 247,500,000

Professional fees@10% 24,750,000

Voids &Contig @ 5%12,375,000

Advert & mkg@8% 19,800,000

Developers profit@15% 37,125,000

Finance @ 16% 7,543,800

_____________

Total expenditure 101,841,300.00

_____________
Residual Value=483,285,000.00 - 101,841,300.00 = 381,443,700.00

COST APPROACH:

An appraiser arrives at the market value by systematically estimating the cost of production.
Estimation of the market value through this approach involves carrying on following process:
estimating the value of the site as though it is vacant; next, estimating the cost to produce the
improvements; next, subtracting depreciation, and finally adding the site value at highest and
best use.

The underlying value theory here assumes that the ―value of the property is inherent in the cost
to create the property based on land acquisition and building costless wear and tear and
depreciation.

32
 Cost approach is used for assessing value of properties which do not normally come into the
market and are yet not used for profit making, therefore have no comparables. Examples of such
properties include public buildings such as hospital, school, and fire station, libraries, police
station etc. Therefore, the value of these type of properties are established by determining cost of
the site, cost of building/development and any subsequent improvements made on the property.

The formula below is used to estimate the value of properties using cost approach

Land cost +Cost of site development +Cost of improvement – Depreciation cost=property value

Site development cost includes:

 Utility installations
 Roads/walkways
 Landscaping
 Non-structural site improvements such as fences, gates, street furnishings,
swimming pools, pool decks,etc

VALUATION REPORT WRITING

Approaches to a good valuation report could be broken down into five distinct stages:

i. Planning stage
ii. Understanding the subject of the report
iii. Preparation of the report
iv. Revising the report
v. Presentation and transmission

Planning the report:

This is done by following the steps below:

Step 1: Defining the purpose of the report

Step 2: Collecting information/ data for the report

Step 3: Data Analysis

Step 4: Synthesis and conclusion

33
Understanding the subject of the report

The second stage in the approach to good report writing is getting to understand the subject of
the report. This may call for further consultation if there is any element of doubt. It is more of
reviewing the plan made in stage one. The reporter must be fully convinced of the logic Some
people get hooked up somewhere along the line when they begin to write their report. Such
uncertainties could have been taken care had it been taken to pass through stage two of the
approach.

Preparing the report

This is the actual writing of the report. A good report is expected to cover the five main
headings below:

 Introduction
 The main issues and discussion
 The findings
 Conclusion
 recommendations

Revising the report

The revision of a report is much more than merely reading through to correct spelling and other
typographical errors. It may at times make some structural re-adjustment of the entire write-up

Presentation and transmission

This is the last stage of the report writing. It is expected that the overall report should be clear,
complete and correct; and where necessary it will highlight and /or emphasize on key issues.

CONTENT OF A TYPICAL VALUATION REPORT.

A Typical valuation report should contain the following issues properly captured and
contextualized based on the properties under assessment:

1. Title page
2. Executive summary
3. Preamble
4. Purpose
5. Definition of key terms
6. Date of inspection
7. Location of the property
8. General features of the property; site,title/ interest, limiting conditions, etc
9. Assumptions
10. Detailed features of the property under valuation
34
 a. Structure and design
b. Condition of property
c. Outline specification
11. Sources of information
12. Basis of valuation
13. Valuation approach/estimation
14. Valuation opinion
15. Disclosure
16. Certification

A sample valuation report capturing these key issues is provided in appendix A.

EXERCISE:

Ahmadu Bello University is planning to privatise the entire university structures in adherence
with a new government policy on education. The policy demands the sale of all hostels, some
departmental buildings and commercial properties in the entire university with te sole objective
of reducing recurrent expenditure to a bearable level. In compliance with this directive, you have
been assigned the responsibility of valuing Quantity surveying departmental building.

i. Collect all necessary data and establish the market value of the property using any of
the valuation approach
ii. Prepare a detailed valuation report of the property

35
MODULE 2: INVESTMENT APPRAISAL TECHNIQUES

Appraisal refers to a systematic report produced by a qualified appraiser(Estate Valuers,

Building Economist, Quantity Surveyor or an accountant).The report shows clearly a supported
(with facts) opinion or estimate of value. Simply, appraisal refers to a process by which an
opinion or estimate of value is obtained.
Value refers to market Value which is the highest price a willing buyer is ready to pay to a
willing seller for a piece of real estate or property, where by non of the actors are forced to act
and they both know the full uses to which the property may be put.
Investment decision refers to allocation of capital funds, which involves decisions to commit
funds to long-term assets (sometimes short-time), which would yield benefit or gain in future.
Future benefits are difficult to measure and cannot be predicted with certainty because of its
uncertainty of the future; as such investment decision involves risks. Therefore, investment
proposals should be evaluated in terms of both expected return and risk.

TECHNIQUES OF APPRAISAL INVESTMENT PROPOSALS:

Most investment appraisal techniques use cash flows (inflows and out flows) to analyze and
evaluate returns from an investment. The analysis involves a cash outlay made currently (now)
or in the future to obtain future net cash flows enables the investment. The consideration of cash
flow enables the investor to recognize the essence of “time value of money” in measuring the
returns from lies investment. The time value of money is based on the principle that one would
prefer to receive money (naira) now instead of any time later.
A number of investment appraisal techniques are used to evaluate the viability or attractiveness
of intended investment proposal, some of which include the followings:
i. Present worth.
ii. Equivalent annual cost.
iii. Payback period method.
iv. Rate of return method.

v. Discounted cash flow techniques:

a. Net present value (NPV).
b. Internal rate of return (IRR).

Present Worth Method

The object of economic comparison is to compare the cash flows that will result from one course of
action with the cash flows that will result from another course of action. The most popular technique
for economic comparisons is the present worth method of comparison and an alternative method is
that of comparing expenditure on a basis of equivalent annual cost. The present worth method
converts all cash flows to time now. Equivalent annual cost allocates the initial capital investment to
each year of operation.

36
Example 1:

A lift will need replacing in 30 years time. It is estimated that the new lift will cost £110,000. If the
average annual rate of interest is 6%, what amount should be invested today in order to be able to
make this replacement?
Solution:

1
PV= 110,000 *PV(6%,30yrs)= 110,000*(1.0630 )

= 110,000 x 0.174 = £19,152.11

Example 2:

Consider Scheme 1 and 2 and the cash flows estimated at today’s prices pertaining to buying and
operating an item of equipment.

Scheme 1 Scheme 2

Initial Cost N5,000,000 N4,000,000

Running Cost N 500,000 N 800,000

Life 6 years 6 years

If interest rate is 10% for both schemes, which of the schemes is more economical?

Solution
Using the present value table,
Scheme 1
Present worth = 5,000,000 + 500,000 (4.3552) = N7, 177,600.00

Scheme 2
Present worth = 4,000,000 + 800,000 (4.3552) =N 7,484,160.00
Thus, since Scheme 1 has the smaller present worth, it is said that Scheme 1 is the more
economical

37
Equivalent annual cost Method

These comparisons are based on calculating the equivalent capital cost each year of the project.

Example 3
Using Scheme 1 (example 2 above) the equivalent annual cost is:
AEC= 500,000 + 5,000,000 (0. 2296) = N 1,648,000.00
where 0.2296 is the capital recovery factor for 10%.
For Scheme 2;
AEC= 800,000 + 4,000,000 (0.2296) = N 1,718,400.00

Payback period method

This method simply involves calculating the length of time it takes to payback the original
investment in a project. The fewer the number of years is takes to payback the original
investment then the better the project.

Example 4
Consider two projects. Project A has an initial capital outlay of £15,000 and Project B has the
initial investmentof £20,000. The cash flows expected from Project A span 5 years (£4,000
inyear 1, £8,000 in year 2, and £3,000 in years 3,4 and 5). Project B is expected to yield £8,000
in year 1, £13,000 in year 2 and £5,000 in year 3. Which project is best?

Project A Project B
Investment £15,000 £20,000
Cast inflows (£) Year 1 4,000 8,000
Year 2 8,000 13,000
Year 3 3,000 5,000
Year 4 3,000 0
Year 5 3,000 0

Total cash inflows £21,000 £26,000

Payback period 3 years 2 years
Project B pays back the initial sum ofcapital in two years while Project A takes three years.
Therefore, Project B would be preferred.

38
This analysis uses time as the means of appraisal. It is simple but crude. It does not take into
account the timing of the cash flows or the cash flows after the payback period. Therefore, it
ignores the overall profitability of the project.

Rate of return method

The rate of return appraisal method measures the profit of an investment as a percentage of the
costof the investment. The general formula is:
𝑷𝒓𝒐𝒇𝒊𝒕
Rate of Return= x100
𝑪𝒐𝒔𝒕

where profit is the average profit (before or after taxation) over the life of the project and the
capital cost employed can either be gross or the average figure (minus depreciation) over the life
of the asset.

Example 5
Is Project B from example 4 still the preferred project if you use the rate of return method to
evaluate both projects?

Project A
Average profit: (£21,000-£15,000)/5= £1,200
Return on the investment before tax and any interest payment:
=(1,200/15,000) x100% = 8%

Project B
Average profit: (£26,000-£20,000)/3= £2,000
Return on the investment before tax and any interest payment:
(2,000/20,000) x100% = 10%
The rate of return percentage from the project you are evaluating is then compared with your
target rate of return.Usually, the higher the percentage the better the project/investment.
This suggests that Project B is the still best investment but if your target rate of return is 15%
thenboth projects would be unacceptable. However, like the payback method it ignores the time
value of money so directly comparing costs and revenues that arise at different times is
meaningless.

NET PRESENT VALUE (NPV) METHOD

The net present value methods incorporate the concept of time value of money, on the
postulation that money does not have the same value all the time. The methods involves
calculating the present value of expected cash inflows and out flows(i.e., the process of
discounting) and establishing whether in total the presents value of cash flow from a given
project or investment is greater than the present value of cash out flow of the investments.

39
Actually the NPV is the value obtained by first discounting all future cash flows from a capital
investment project at a chosen discount rate which is normally the cost of total or required rate of
return of an investor or a company and then subtracting the initial cost of the investment or
project.
The Net presents Value (NPV) can be calculated using the formula below. Io
𝑨𝒕
NPV=∑𝒏𝒕−𝟏 -Io
(𝟏+𝒓)𝒕

Where:
At=amount of cash flow at time t
t=1………….n
n=number of cash flows or periods (mostly yearly)
r=required rate of return or cost of capital (interest rate)
Io=Initial outlay or initial project/investment cost.

Example:
A freshly admitted 100 level student of faculty of engineering has an idea of investing the sum of
N5, 000,000 in a modern recreational centre in Samaru town. The student obtains a loan from
Diamond bank plc, which is set to mature after five years. The estimated cash in-flow from the
proposal shown on the table below:

Year Cash flow

1 1,000,000.00
2 2,300,000.00
3 2,500,000.00
4 1,900,000.00
5 700,000.00

If the cost of the capital (borrowed money) is at 17% rate of interest,

a) Evaluate the student’s proposal
b) Analyze how clever the student is and advice him appropriately.

Solution:
𝐴𝑇
NPV=∑𝑛𝑡=1 (1+𝑟)𝑡−𝐼𝑂

𝑁1,000,000.00 𝑁1.3𝑚 𝑁2.5𝑚 𝑁1.9𝑚 𝑁0.7𝑚

NPV= ( + (1+0.17)2 + (1+0.17)3 + (1+0.17)4 + (1+0.17)5) − N5m
1+0.17

40
=[N854,700.86+N949,667.62+N1,560,939.06+N1,013,928.18+N319,270.24]- N5000,000.00
=N4,698,505.96-N5,000,000.00
=-N301,494.04
Solution in Tabular form:

End of year Particular Cash-flow PV at 17% Present value

(PV)
0 Capital -N5,000,000.00 1.0000 -N5,000,000.00
expenditure
1 Cash- N1,000,000.00 0.8547 N854,700.00
Inflow(income)
2 Income N1,300,000.00 0.7305 N949,667.62
3 Income N2,500,000.00 0.6244 N1,560,939.06
4 Income N1,900,000.00 0.5337 N1,013,928.17
5 Income N700,000.00 0.4561 N319,270.24
Net PV -N301,494.91

The negative sign appearing at the Net present value is indicating a loss (i.e. a loss of N1,
301,494.91).As such the student should be advised not to undertake the proposal investment.

INTERNAL RATE OF RETURN (IRR) METHODS

This is a discounted cash flow method that seeks to find the precise rate at which the capital
invested will earn money i.e. it reveals the earning power of money.The internal rate of return
helps the investor to know the size of likely profit(or lost)and it enables a more precise
comparison to be made between competing investment opportunities.The rate of return can also
be defined as the interest rate equivalent to the cash flows which the investment will yield in
addition to returning the original expenditure.
The IRR can be calculated using the following formula;
IRR=A+(a/(a-b) x B-A)
Where;
IRR=Internal Rate of Return.
A=Discount rate that gives a positive NPV
B= Discount rate that gives a negative NPV
a= Positive NPV derived from discount rate A
b=Negative NPV derived from discount rate B

Example:

A Property developer is proposing to invest the sum of N5, 600,000.00 in a housing

project. The housing will generate future cash flows (rent) as shown below:

41
 Year Rent (cash flow)
1 N1,700,000.00
2 N1,800,000.00
3 N2,000,000.00
4 N2,500,000.00
5 N1,600,000.00

If cost of the developer’s capital is 15%, calculate the IRR of the project and advice the
developer appropriately.

Solution:
We have to find the Net present values of all the cash-flows (i.e. inflow and outflow) using the
developer’s cost of capital (15%).

Year Particulars Cash flow Present value of Present value (p

N1.0 at 15% v)of the cash
flow
0 Investment -N5,600,000.00 1.000 -N5,600,000.00
1 Rent N1,7000,OO.00 0.8696 N1,478,320.00
2 Rent N1,800,000.00 0.7561 N1,360,980.00
3 Rent N2000,000.00 0.6575 N1,315,000.00
4 Rent N2,500,000.00 0.5718 N1,429,500.00
5 Rent N1,600,000.00 0.4972 N795,520.00
NPV N779, 320.00
Net Present Values (NPV) = N779, 320.00
Since the NPV at 15% is positive, then the IRR must be higher than 15%.
Let’s try 25%, so as to get a negative NPV.

42
Year Particulars cash flow P v ofN1.0 at P v of cash-flow
25%
0 investment -N5,600000 1.0000 -N5,600000.00
1 Rent N1,700000.00 0.8000 N1,360,000.00
2 Rent N1800000.00 0.6400 N1,152,000.00
3 Rent N2,00000.00 0.5120 N1,024,000.00
4 Rent N2,500,000.00 0.4096 N1,024,000.00
5 Rent N1,600,000.00 0.3277 N524,320.00
NPV -N515, 680.00

Net Present Value (NPV)= -N515, 680.00

Since the NPV at 25% is negative, then the IRR must be lower than 25%.
IRR=A+ [(a/a-b) x B-A]
779320
IRR=15+ [779320—515680 𝑋(25 − 15)]
779320
=15+ [ 𝑋10]
1295000

=15+ (0.6018 x 10)

=15+6.02=21.02%
IRR=21.02%
The developer is strongly advised to accept and undertake the proposal housing project, because
the project has an IRR of 21.02% which is greater than the cost of his capital or the developers
required rate of return (i.e. 15%)
It is important to note the following decision guide;
 When the internal rate of return (IRR) is less than the cost of capital (or required IRR),
the project proposal should be rejected.
 When the IRR is equal the developers or investors cost of capital, the project may just be
worth understanding at least for some other benefits (but not monitory profit/gain).
 When the IRR exceeds the investors cost of capital, the project proposal should be
accepted and undertaken.

43
MODULE 3: NATURE AND STRUCTURE OF THE NIGERIAN FINANCIAL SYSTEM
3.1 DEFINITION OF A FINANCIAL SYSTEM
The financial system itself is an omnibus term which encompasses the generality of
financial intermediaries that operate in the financial sector and the institutional facilities being
employed in its operational activities within the economy. Furthermore, the term also
incorporates a system of rules, regulations and operational norms which govern financial
transactions and financial flows through and within the economy. The financial system, as you
will appreciate from above analysis, functions by providing needed facilities with which it
directly and indirectly interface between savings-surplus and savings-deficit units within
the economy. It is therefore a complete network that is made up of receipt (collection) and
payment mechanisms as well as lending and borrowing of funds (money). A financial system
consists of markets, market participants, financial instruments and financial institutions. These
organs are meant to facilitate the transfer of resources from one unit to another. The main
function of financial system is to mobilize funds from surplus spending units (savers) and
channel them to the deficit spending units (investors or users or consumers) for more profit table
economic activities.
The former unit of the economy refers to group of individuals and organizations within
the economy that has more funds that they require for current utilization and therefore,
constitute the savers and suppliers of surplus funds to the financial system. Hence the
latter unit is at the receiving end because it is the actual user of the surplus funds being
supplied by the players of the former unit in the financial system. The corporate entities and
institutions that constitute the surplus-deficit unit in terms of the investing group within the
economy that are interested in raising more funds than that which is currently available
for operations. Therefore, they make use of some instruments to raise needed funds
through the operations of the financial system, in enhancing the quantum of their operational
capital outlays. The mutual interactions between savings-surplus and savings-deficit units
within the economy provide the opportunity for organizations interested in raising funds
to have access to surplus funds with the utilization of varied financial instruments. These
financial instruments constitute some claims on their fortunes in exchange for funds being
raised from the financial system. On the other hand, the interactions between both groups
avails the fund suppliers the opportunities to access income yielding financial assets in
exchange for some liabilities on their operations. The system of interactions which border on
financial transactions creates financial assets from the surplus unit of the economy and
financial liabilities for the deficit unit of the economy. This implies that the mutual
interactions which create financial transactions between the two groups ultimately generate
continuous exchanges of claims and counter-claims over financial assets. The exchanges
within the financial transactions create flows of financial assets and liabilities among the
participants in the financial system of any economy around the world.

3.2 FUNCTIONS OF A FINANCIAL SYSTEM

The financial system performs some vital functions to the economy, which tend to
enhance the performance of the economy toward its growth and development. Such
functions include the following:

44
 1. The financial system provides the necessary market mechanism for mutual
interactions between the suppliers of funds and the fund raisers that u se the funds for
short-term and long-term purposes.
2. It also ensures that necessary operating procedures, rules and regulations are
provided for the smooth interactions and transactions within the confines of the system.
3. The system provides facilities for the custody, distribution and marketing of financial
assets by the participants.
4. The system ensures the smooth and orderly transfer and delivery of
financialinstruments among the participants.
5. It has inbuilt mechanism of moderating the pricing regime of financial instruments or
securities as well as the cost of raising funds by the users.
6. The financial system ensures adequate stock of money to service the needs of the
economy.

3.3 NIGERIA FINANCIAL SYSTEM

Before and at independence, the financial system in Nigeria was predominantly foreign; i.e.
British. Where by the domestic financial market was linked directly to the London money
market. At independence and 500m after, new financial institutions, financial instruments and
other regulatory bodies were created in response to the growing demand and needs for more
sophisticated financial (intermediation) function in the country.
The Nigeria financial system is structured to enhance the following:
 Mobilization of savings and its effective and efficient channeling to the productive
sectors of the economy.
 Provide non-inflationary support for the economy.
 Assist in achieving greater linkages and integrations in agriculture, industry
(manufacturing) and commerce.
 Enhance the indigenization (ownership) control and management of the economy.

3.4 STRUCTURE OF NIGERIAN FINANCIAL SYSTEM

The Nigerian financial system comprises various banks that are operating in the economy
as well as many non-bank financial institutions. In essence, the Nigerian financial system
is made up of various segments which include the banks, their regulatory and supervisory
authorities and non-bank financial institutions. There are important segments which include
Money Market and its institutions, the Capital Market and its players, and the Development
Finance.
The participants in the Nigerian financial system include the following:
1. Central Bank of Nigeria
2. Commercial Banks
3. Federal Mortgage Bank
4. Insurance Companies
5. Nigerian Stock Exchange
6. Securities and Exchange Commission

45
 7. Brokerage Firms;
8. Investment Houses
9. Pension Funds Institutions
10. Mortgage Institutions

3.5 SECTORS OF NIGERIAN FINANCIAL SYSTEM:

The Nigeria financial system is made up of three components:
i. The financial markets
ii. The financial instruments, and
iii. The financial institutions
The Financial Markets: This is a sector of the financial system that deals with creation and
transfer of financial assets and liabilities within the system.There are two types of financial
market.
 The Money Market and
 The Capital Market.
Money Markets:
The money market is a component of the financial market for assets being used for short-term
borrowing of funds by corporate entities and government. This implies that the money market is
used for buying and selling of financial instruments with original maturities within a period of
one year. The transactions in money market are carried out over the counter and are on wholesale
basis. There are various instruments that are traded on as being issued by corporate entities and
government for raising funds for the short-term use. Such financial instruments being used in the
money market include Treasury bills, Treasury certificates, Commercial papers, Bankers’
acceptances, Certificates of deposits, Bills of exchange, Repurchase agreements, Federal funds,
Short-lived mortgages, and Asset-backed securities.
In money market, instruments that mature within one year or less are traded. In Nigeria the most
common of these instruments are treasury bills, treasury certificates, commercial papers and
CBN certificate. The government is the mover or actor of the market, where it has control of
over three quarters (3/4) of the transactions.
Capital Market:
Capital market refers to a market where the financial institutions mobilize the savings of the
people and lend them for long term, period for raising new capital in country.
Capital Market, in other words, refers to the long term borrowing and lending of capital funds.
In another perspective, capital market is a market in which financial securities such as stocks,
bonds and government loan instrument are bought and sold. Corporate entities and
governments therefore, use capital market to raise funds for their operations and
programmes respectively. For example, a company may float an initial public offer while
a government may issue bond or development loan stock to raise funds for new projects or
ongoing public programmes Investors purchase securities (stocks or bonds) in the capital markets

46
in order to extract some returns or earn profits on their investment. Capital markets include
primary markets, for the initial public offers of securities that are placed with investors through
issuing houses and underwriters, and secondary markets, in which all subsequent trading
on existing securities takes place.
There are financial regulators and agencies such as stock exchange and Securities and Exchange
Commission in the secondary markets that regulate their operations.
In other words, capital markets refer to financial markets for the buying and selling of long-term
debt- or equity -backed securities. As a financial market, the market serves as conduit for
facilitating the wealth of savers to those who need for long-term productive uses, such as
companies or governments that engage in long-term investments.
In the capital market, instruments that mature in more than one year are traded. The most
common instruments traded in Nigeria capital market include the following; The government
development loan shares, debentures and bonds. Also, the capital market in Nigeria is
characterized by the predominance of government instruments.

3.6 THE FINANCIAL INTRUMENTS

These are the means by which funds are transferred from one unit to another either in the short,
medium or long time. The financial instrument include both the money and capital markets
instruments like treasury certificate, commercial papers ,bonds, share, etc.

3.7 REGULATORY FRAMEWORK OF NIGERIAN FINANCIAL SYSTEM

The financial institutions that operate in the country’s financial system come under
regulatory framework of established government agencies comprising the Federal Ministry
of Finance (FMF), Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation
(NDIC), Securities and Exchange Commission (SEC), National Insurance Commission
(NAICOM), and Federal Mortgage Bank of Nigeria (FMBN).
The regulatory authorities of the financial institutions in the country are identified and
discussed below.

Federal Ministry of Finance (FMF)

The Federal Ministry of Finance is one of the ministries that the affairs of the country
generally. The Federal Ministry of Finance in particular has the responsibility of advising the
Federal Government on its fiscal operation and therefore, co-operates with Central Bank of
Nigeria (CBN) on monetary matters in the country.

Central Bank of Nigeria (CBN)

The Central Bank of Nigeria (CBN) as the apex bank is charged with the regulatory
authority of the financial system. The Bank was established at the instance of the
enactment of the Central Bank of Nigeria Act of 1958 and commenced operations on 1st July
1959. It performs many functions in the process of regulating the banking institutions, which
include:

47
  Promoting monetary stability and a sound financial system;
 Acting as banker and financial adviser to the Federal Government;
 Acting as banker of last resort to other banks;
 Encouraging the growth and development of all financial institutions;
 Overseeing the overall development of the banking sector; and
 Licensing banks and finance companies.
. Nigerian Deposit Insurance Corporation (NDIC)
The Nigerian Deposit Insurance Corporation (NDIC) plays complement role to the CBN
in the regulation of the banking institutions in the economy. The Corporation commenced
operations effectively in 1989 and it is autonomous of the Central Bank of Nigeria (CBN) in
the discharge of its statutory obligations in the country’s financial system. Nevertheless, it
reports to Federal Ministry of Finance on its activities.
Therefore, the Corporation performs the following functions in the financial system of the
country.
 The Corporation supervises the operations of various banks in the economy.
 It provides deposit insurance and related services for banks;
 It aids in the promotion of confidence in the banking industry in the country;
 It is empowered to examine the books and affairs of insured banks and other
deposit taking financial institutions
 It generates funds from licensed banks to provide cover for depositors’ money;
since such banks are mandated to pay 15/16 of 1 per cent of their total deposit liabilities
as insurance premium to the Corporation

The Securities and Exchange Commission (SEC)

This is formerly called the Capital Issues Commission. The SEC was established by the SEC Act
of 27th September 1979, which was further strengthened by the SEC Decree of 1988. It is the
apex regulatory organ of the capital market. There are some vital functions which are being
performed by the Commission, among which include the following:
 The Commission approves and regulates mergers and acquisitions of publicly
quoted companies;
 The Commission also authorizes the establishment of unit trusts
 It has the responsibility of maintaining surveillance over the capital markettowards
enhancing its efficiency.
The Commission issues guidelines for the establishment of Stock Exchanges in different
locations of the country due furtherance of the deregulation of the capital market.

Debt Management Office (DMO)

The Federal Government of Nigeria took a major step in addressing the debt problems recently
by establishing an autonomous Debt Management Office (DMO). The creation of the DMO
consolidates debt management functions in a single agency, thereby ensuring proper
coordination. The DMO centralizes and coordinates the country's debt recording and

48
management activities, including debt service forecasts; debt service payments; and
advising on debt negotiations as well as new borrowings. The Office also keeps tab on
debts being taken by government at various levels (federal, state and local government) from the
capital market. These debts are in form of Federal Government Development Loan Stock, State
Government Bonds and Local Government Bonds.

National Insurance Commission (NAICOM)

The National Insurance Commission (NAICOM) has been established to replace the
Nigerian Insurance Supervisory Board (NISB). The Commission serves as the watchdog over
the operations of the various insurance companies operating in Nigeria. Hence NAICOM
is charged with effective administration, supervision, regulation and control of the business of
insurance in Nigeria. The specific functions of the National Insurance Commission (NAICOM)
include:
 Establishment of standards for the conduct of insurance business;
 Protection of insurance policy holders against unfair practices by insurance
companies;
 Establishment of a bureau to which complaints may be submitted against insurance
companies and their intermediaries by members of the public;
 It ensures adequate capitalization and reserve for the operations of insurance
companies in the country;
 It also ensures good management and high technical expertise in the operations of
insurance companies;
The Commission ensures judicious fund placement by insurance companies towards meeting
claims by their clients.

MODULE 4: TAX SYSTEMS IN NIGERIA

Tax can be defined as “an amount of money levied by a government on its citizens and used to
run the government, the country, a state, a county or a municipality. The way in which taxes are
to be calculated and the actual rate of tax are subject to change from time to time. There are
many types of taxes.

A. CORPORATION TAX

Anyone who initiates a building development will normally do so through a corporation rather
than as an individual because this has a certain legal and tax advantages. Either an existing
development company will be used or, if the project is large enough, a new company may be
may be incorporated expressly for the development. In most instances taxpayers file tax returns

49
with the federal government for both federal and provincial taxes. The federal government then
collects both taxes and passes on the provinces’ (i.e. state) portion to them.

B. GOODS AND SERVICES TAX (GTS)

Generally, any person, corporation, partnership or association conducting commercial activity in

a country is required to register with the revenue board (e.g. FIRS- Federal Inland Revenue
Services) for the purpose of collecting and remitting GST on their sales. For GST purposes a
commercial activity includes any activity involving the supply of real estate that is subject to
GST and may include non-profit organisations

C. VALUE ADDED TAX

A vaue added tax (VAT) is a form of consumption tax. It is a tax on the estimated market value
added to a product or material at each stage of its manufacture or distribution, ultimately passed
on to the consumer. It differs from a sales tax, which is levied only at the point of
purchase.Maurice Lauré, Joint Director of the French Tax Authorityintroduced VAT on April 10,
1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918.
Initially directed at large businesses, it was extended over time to include all business sectors. In
France, it is the most important source of state finance, accounting for nearly 50% of state
revenues.Personal end-consumers of products and services cannot recover VAT on purchases,
but businesses are able to recover VAT (input tax) on the products and services that they buy in
order to produce further goods or services that will be sold to yet another business in the supply
chain or directly to a final consumer. In this way, the total tax levied at each stage in the
economic chain of supply is a constant fraction of the value added by a business to its products,
and most of the cost of collecting the tax is borne by business, rather than by the state. Value
Added Taxes were created since visibly high sales taxes and tariffs stimulate avoidance and
circumvention, including cheating and smuggling. Critics point out that VAT disproportionately
raises taxes on middle- and low-income homes.

D. PAYE (PAY- AS- YOU- EARN)

50
This is the amount of tax withheld from wages and salaries. In Nigeria it is determined partly by
the employee's expected tax allowances, exemptions and reliefs for the full tax year, and partly
by the employee's expected other income. Published tables apply the tax code to determine the
amount of tax to be deducted from the salary or wage paid to the employee. It is the employee's
responsibility to inform the government of changes which will affect his or her allowances and
reliefs and other income in the tax year. The employer is responsible for sending the tax on to the
government account.PAYE is applied to sick pay, maternity pay, directors' fees and pensions.
Because the tax code reflects other income (including the state pension), the PAYE system
typically results in the correct amount of tax being paid on all the income of a taxpayer, making a
tax return redundant. However, if the taxpayer's affairs are complicated, a tax return may be
required to determine the amount of tax payable or refundable.

E. WITHOLDING TAX

This is a government requirement for the payer of an item of income to withhold or deduct tax
from the payment, and pay that tax to the government. In most jurisdictions withholding tax
applies to employment income. Many jurisdictions also require withholding tax on payments of
interest or dividends. In most jurisdictions there are additional withholding tax obligations if the
recipient of the income is resident in a different jurisdiction, and in those circumstances
withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments
use withholding tax as a means to combat tax evasion, and sometimes impose additional
withholding tax requirements if the recipient has been delinquent in filing tax returns or in
industries where tax evasion is perceived to be common.Typically the withholding tax is treated
as a payment on account of the recipient's final tax liability. It may be refunded if it is
determined, when a tax return is filed, that the recipient's tax liability to the government which
received the withholding tax is less than the tax withheld, or additional tax may be due if it is
determined that the recipient's tax liability is more than the withholding tax. In some cases the
withholding tax is treated as discharging the recipient's tax liability, and no tax return or
additional tax is required.

The amount of withholding tax on income payments other than employment income is usually a
fixed percentage. In the case of employment income the amount of withholding tax is often

51
based on an estimate of the employee's final tax liability, determined either by the employee or
by the government.

land tenure system in Nigeria is defined as the body of rules which govern the access
to land and the relationship between the holder of the land and community on the
other hand or between the holder and another party. It is also referred to the set of
principles that protect the right to enter or hold a land to the community. In the land
use Act it was defined that land tenure is the method and mode of holding or
occupying a land. Some authors opined that land tenure is the manner in which the
law permits a person to hold land.

52
 Land tenure system in Nigeria has been described as those systems which represent
the relationship of man in society to land even though actual patterns may differ
from community to community but there are certain uniformities of type in relations
involved which make it possible to apply a common scheme of analysis [1][6]. *Land
Tenure System in the Northern Nigeria* In the northern Nigeria in particular before
the land use Act, 1978 all land in the region with only minors exceptions, were
declared native lands and were vested in the commissioner responsible for land
matters as trustee for the people of that region[1][1].Under section 4[1][2]and
5[1][3]citizens are entitled to statutory or customary right of occupancy in such land.
The discussion in form of limitation apply to land covered by section 48[1][4]and
49[1][5]of the land tenure law 1962[1][6]. *Land Tenure in Western Nigeria * In
western Nigeria, it is not necessary to employ words of limitation to create an
interest in land because the property and conveyance law, cap. 100, law of the
western Nigeria, 1959 made provision for that[1][7] Section 85 (1)[1][8]provides
“Any conveyance of free hold to any person without words of limitation or any
equitant expression, shall pass to the grantee the fee simple, or other, the whole
interest which the grantor had power to convey in such land, unless a contrary
intention appears in the conveyance. *Land Tenure System Southern Nigeria* In
Northern Nigeria, Fulani conquered most of their land in early 1800^s and brought a
change in land tenure in areas under Fulani control. The conquerors bestowed fiefs
on certain individuals, who sometimes appointed overseers with power to allocate
unused land without regard for local community interests [1][9]^ One result was a
growing number of grants to strangers during the nineteenth century because
overseers sought to increase the revenue from their landlord’s holding. This
practice gradually reduced the extents of bush land and encouraged the migration of
farmers to urban areas that began toward the end of the nineteenth century [1][10]
In the same south colonial authorities introduced the concepts of individual
ownership of property and authorized the legal conveyance of land that could be
registered with the government, various laws was made and ordinances which gave
government the power to expropriate statutory land holdings in return for
compensation, Expansion of the money economy and the resulting emphasis on
commercial crops encouraged framers to seek private ownership of land,
nonetheless, customary tenure remained the principals form of land holding in south
in1970^s , individuals and business enter prizes drove up land prices, especially in

53
newly urbanized areas, by investing heavily in real estate them in real estate. In
south customary owners turned from land sales to more profitable high rent leasing
arrangement [1][11]. *Land Tenure System in Eastern Nigeria.* Land in eastern
Nigeria was more of communal, individual and public ownership while the communal
land tenure systems continue to move towards individual land ownership owing to
strong population pressure [1][12] ^ The land use decree represents an attempt on
the part of the government of Nigeria to modify land tenure in rural areas; the land
use Decree has produced a number of unforeseen results. This article compares the
performance of the communal, individual and public land tenure systems. Large-
scale capital intensive agricultural production is usually restricted to communal
tenure because of the difficulties of acquiring a sufficiently large are under private
ownership. However, the proportion of land under public tenure remains relatively
low in eastern Nigeria, despite the land decree. It is argued that the trend towards
private ownership of communal land should be recognized and that the process of
administrative allocation of public land should be abandoned

LAND OWNERSHIP IN NIGERIA

Ownership in Nigeria is regulated by the Lands Use Act Cap 202 Volume 11 Laws of the Federation,
1990. The law vests ownership of all land within a state (except those vested in the Federal
Government or its agent) in the Governor of the state who holds land in trust for the people and
allocate same as far as the urban area is concerned, to individuals and corporate entities for
residential, commercial, agricultural and other purposes allowed by law. Land located in rural areas
is under the control of local government authorities.

54
Documentary evidence of ownership is called title deeds or title documents. Ownership of land
before the Land Use Act was either by settlement, conquest, sale, gift or larches and acquiescence.

With the promulgation of the Land Use Act, ownership acquired by the above methods became
extinguished and became vested in the Governor of the state. Freehold interest acquired prior to the
Act became convened to leasehold, the Governor becoming the lessor. A lease granted by the
Governor is usually for 99 years, subject to review upon expiration. The terms of the lease are, under
the Land Use Act, contained in a Certificate of Occupancy (C of 0) granted by the Governor. The ‘C
of O’, which is the document of title provided for under the Act, grants a right of occupancy for the
leasehold term stipulated therein.

Documents of title obtained and registered at the lands registry prior to the advent of the C of O do
not by that fact lose their validity. They remain valid subject to the general condition that freehold
interests purportedly conveyed in them have now been convened to leasehold held at the governor's
mercy. Holders of such title documents, usually called a Deed of Conveyance, Deed of Gift etc., are
deemed by law to have a statutory right of occupancy over the land.

Even where title to land, prior to the operation of the Land Use Act, is not evidenced by a registered
document, or held under customary law, the holders of such title are also deemed to have a statutory
right of occupancy. Such title-holders are however at liberty (and advisable) to apply to the Governor
for a C of 0 as written / registered evidence of their title to the same.

The Land Use Act does not abolish any prior interest in, or the right of the holder of a title to, land to
freely transfer or deal with the same. The only condition imposed on such right is that it is
exercisable subject to the consent of the Governor, in line with his ownership thereof. Therefore, in
order to validate a transfer of title, the transferor by law (but usually the transferee in practice) must
apply for the Governor's consent to the Deed of Assignment duly executed by the parties. This is
followed by stamping at the Stamp Duties office and registration at the Lands Registry.

After endorsement of the Governor's consent, stamp duty is paid on the document and the same
registered at the lands registry. It is worthy of note that the requirements differ from state to state and
are subject to review from time to time.

OBTAINING A CERTIFICATE OF OCCUPANCY

55
This becomes necessary only where land purchased is not already covered by a registered document.
The common procedure is to obtain and fill the necessary form and accompany the same with other
documents which may include:

i. Land Information

ii. Survey Plan.

iii. Evidence of title (e.g. purchase receipt etc) duly stamped.

iv. Tax clearance certificate of applicant.

v. Passport Photograph of the Applicant (4 copies).

vi. Bank Draft for the publication fee. An advert is placed in the national newspaper asking
for any objection to the transaction.

vii. Bank draft for capital contribution.

viii. Approved Building plan (if property is developed).

ix. Covering letter forwarding the documents.

The above requirements are essentially those stipulated by Lagos State. The stipulations differ
from state to state and are subject to review from time to time.

The average processing time for obtaining a C of 0 or Governor's consent is six months from the
submission of the application, all other things being equal. This, as usual, is subject to variation
from state to state.

INVESTIGATION OF TITLE

Before a person accepts to buy a property, it is proper to determine the authenticity and validity
of the seller's title. Where the title to the property is covered by a registered document, a search
will be conducted at the Lands Registry to investigate the same. The search will reveal the name
of the registered owner of the property or persons) entitled by law to deal with the same. Its size,
in some cases, its history, and any encumbrances such as a mortgage, charge, caution or caveat,

56
if any. Where land is not covered by a registered document, investigation is informal. This is
done by making inquiries from those expected to know about the history of the land, and around
the locality of its situation, with a view to determining who is legally entitled to deal with the
land.

CONCLUSION OF TRANSACTION

Where a search reveals any encumbrances, the buyer will be advised to tread with caution.
Where all doubts have been allayed and title found to be clean and satisfactory, the process
continues to the negotiation of the purchase price (if not previously agreed) and preparation of an
Agreement to sell and a Deed of Assignment. The documents are, normally, prepared by the
purchaser's solicitors. The execution of the transfer documents then follows, accompanied by the
surrender to the buyer of all documents relating to the property by the seller.

OBTAINING THE GOVERNOR'S CONSENT

After the exchange of the payment for the purchase price with the executed Deed of Assignment
and other relevant documents, the purchaser must take steps to obtain the Governor's consent to
the transaction. An application is made on the prescribed form to the Governor's office. In Lagos
State, for instance, an application is made on Land Form 1C and is accompanied by the
following:

i. A covering letter forwarding the documents.

ii. Certified true Copy of the title document.

iii. 6 copies of the Deed of Assignment.

iv. Receipt for the payment of tenement rate (where land is developed) or affidavit in lieu.

v. Initial deposit on consent fee (final payment determinable upon independent valuation of
property by the Governor's office).

vi. Tax clearance certificate of parties to {he transaction.

vii. Evidence of payment of ground rent.

57
 viii. Payment of Development Levy, Charting and endorsement fees.

ix. 6 copies of survey plan.

2.1.0 NATURE OF LANDHOLDING PRIOR TO THE PROMULGATION OF

THE ACT IN1978.
Prior to the Land Use Act 1978, Nigeria operated three systems of land tenure vis:
customary, non-customary and special system of land tenure which was applied in the
former Northern Nigeria. The nature of these laws and the systems of land tenure
practiced under them are briefly reviewed.
2.1.1 Customary System of Land Tenure
Customary land tenure system is a system of landholding indigenous to the people, and
like all other customs, it varied from place to place. The system was pure and free from
external influences, values and judgments. The evolution of this system and the various
principles regulating it exhibit the historical credentials rooted in the custom and tradition
of the different ethno cultural grouping in Nigeria over a period of time. 71
The basic rule under customary law is that land belongs to the villages, communities or
families with the Chief, community or the family head as the ‘manager’ or ‘trustee’,
holding the land in trust for the use of the whole community or family. Title to land under
customary law is vested in the corporate unit. It is trite law that land cannot be owned by
an individual. In the case of AmoduTijani v. The Secretary of Southern Nigeria,72Lord
Halden observed that the basis of ownership under customary law is communal
ownership. In that case, it was held that land belongs to the community or family, and
that the concept of individual ownership is alien to native idea. No individual can lay
claim to the ownership of land corporately owned. The individual’s right is limited to the
use and enjoyment of the land, and as such individual cannot alienate same without
requisite consent. This position was also supported by the court in Eze v. Igiliegbe& It is
worthy of note that the Chief, village or a family head in the exercise of his power of
control and management of land is often regarded as a ‘trustee’, but he is not in the
proper concept of the English trusteeship because unlike the trustee in English Law, the
title to land is never vested in him but in the community or corporate unit. The Chief or
family head is a care-taker performing pure administrative function in a representative
capacity.
It is equally instructive to note that Elias, 75Coker76, Bensti-Enchill77, among others have
taken contrary views to the observation of Lord Halden in AmoduTijani’s case (supra).
In their views, the concept of individual ownership under customary law is not foreign to
native notion. According to them, individual ownership under customary law forms the
basis of either communal or family ownership in land. Thus, the concept of gift intervivo,
devolution of his property on his children when the founder of the family dies affirms the
concept of individual ownership under native and customary land law.
One thing that is very clear however is that, the traditional basis of tenure under
customary law is common ownership and that is one feature that even today makes the
system peculiar.

58
The customary land tenure and law was characterized by ownership problem, which in
turn created negative impact in the hope and aspiration of many Nigerians who spent
their hard earn money on the purchase of landed property and later discovered that they
had only bought from those without valid title in such property. According to Verity in
Ogunbambi v. Abowaba,78many owners that sprang up were dishonest in the manner
they deliberately swindled the people all in the name of buying land. Supporting this
view, Adigun79 remarked that ‘…the means of verifying the authority or otherwise of
the title of the family was not in existence’.
Similarly, the Europeans upon their advent into Nigeria levied series of allegations
against customary land law. The system was seen as not performing up to the
expectation
of the Europeans who wanted to commercialize land. It was seen as archaic, primitive
and confused. One of the serious allegations of the unsatisfactory nature of the Nigerian

allodial title or absolute ownership is vested in the Crown to the exclusion of all the
subjects. The doctrine of estate which could be freehold or less than freehold estate is
the
right to possession held by individuals either directly or indirectly to the crown as a
tenant. All titles to land under this doctrine are ultimately based on possession or
‘seisin’.
This right to seisin entitles its owner to exercise proprietary rights over the land for the
prescribed period subject to the observance of the tenure duties, and it may be
disposed of
as freely as any other subject matter of ownership.82
Freehold estates are not subject to a superior title unlike the estates less than freehold
which usually have overlords or landlords. Also, the period of seisin in a freehold estate
is uncertain unlike a leasehold estate which is characterized by certainly of period.
Thus, while a leasehold estate can be equated with the right of occupancy created in
section 5, 6 of the Land Use Act, Estate of freehold is more than that, but may find
equivalence in the deemed grant of rights of occupancy created in sections 34 and 36 of
the Act because such a deemed grantee is not obliged to so limit his interest by
obtaining
a certificate of occupancy which creates a term of years.
This doctrine of tenure and estate was practiced in Nigeria especially in Lagos Colony.
Thus, following the Treaty of cession in 1861, the British Crown became the absolute
owner of the land in Lagos by virtue of Article 1 of the Cession Treaty. However, the
rights of properties existing in the inhabitants under the grant were respected as
evidenced in AG. of Southern Nigeria v. John Holt.83 It was contended by the White-Cap
Chiefs (Idejo)84that King Docemo85 could not transfer the land to the British
Government because of the principle of nemodat quo non habet.
Logically, it can be inferred from the foregoing that despite the absolute ownership
granted to the Crown by the Cession Treaty, the people still have their interests in land
preserved. This agrees with Smith’s86 view that ‘the theoretical ownership of the
Crown in England is no bar to the existence of freehold estate in England’. By
implication, the English land tenure system also emphasizes individual landholding in
the

59
form of freehold estate. This has a tendency of creating confusion as to who is entitled
to
the ownership of land. Is it the Crown of a freehold estate holder? In OduntanOsiniwo v.
A.G. of Southern Province,87it was recognized that this nature of problem or confusion
was created by the Treaty of Cession 1861 which was said to have failed to state in
express terms the nature and scope of the right of the British Crown over the land in
Lagos. The received English land tenure system operated side by side with the
customary land tenure system in Nigeria before the enactment of the Act.
2.1.3 The Special Land Tenure System in the Former Northern Nigeria
This land tenure system also known as paternalism was a system of landholding which
applied in the Northern Nigeria under the Land Tenure Law of 1962. Following the move
by the British Government to take over ownership of land, the Land and Native Rights
proclamation of 1910 was enacted, and later repealed and replaced by the Land and
Native Rights Ordinance, 1916, which in turn was repealed and replaced by the Land
Tenure Law in 1962. Under this law, all land comprised in Northern Nigeria was under
the control and management of the Governor for the use and benefit of the natives of
any
particular area88. The interest any person could acquire in any land was a right of
occupancy as opposed to right of absolute ownership. The law has the singular quality
of
introducing state control of land into Nigeria.
By section 4 of the law, which saved and perfected the existing rights the whole of the
land in the former Northern Nigeria whether occupied or non-occupied was declared to
be natives’ land subject to the provisions of sections 48 and 49 of the law. And no title to
the occupation and use of any such lands by an outsider is valid without the consent of
the Permanent Secretary by virtue of section 5 of the law. This makes the law to be
discriminatory against the non-natives in favour of the natives for whom the land is to be
held and administered for their use and common benefit. This distinction between
natives
and non-natives was evident by the nature of the right of occupancy granted to them.
Only natives were by section 5 entitled to customary rights of occupancy, which are
their
superior exclusive preserve. However, a statutory right of occupancy could be granted
to
both natives and non-natives by the Minister.89 The expression ‘native’ is defined as a
‘person whose father was a member of any tribe indigenous to Northern Nigeria.’ 90
By implication, both Nigerians who are not indigenous to any part of the former Northern
State and aliens can only acquire statutory right of occupancy, the customary right of
occupancy being reserved only for the natives.
This land tenure system was criticized for being expropriatory by converting rights of
ownership into mere rights of occupancy. While the law seemed to assert State
ownership
of land, it also protected the customary rights of the natives. It is in this spirit of dual
allegiance that the law found itself in a state of confusion in respect of absolute
ownership in land. This system adopted in the Northern part of this country was seen to
be more backward for national integration as it made discriminatory provisions in favour

60