Valuation of Real

Estate-Principles and
Practices
Why Valuation?
A property valuation is done for a number of reasons including:

To work out how much you should pay for a house

To work out how much a house is worth when selling
As part of a mortgage application
As part of a financing application.

Definition of Terms:
Real Estate: Land plus anything permanently fixed to it,
including buildings, sheds and other items attached to the
structure.
Examples of real estate include undeveloped land, houses,
condominiums, townhomes, office buildings, retail store buildings
and factories.
Property:
movable or immovable.
Immovable property means any land, building or part of a
building together with machinery, plant and other permanent
fixtures.
Land Appurtenant to Building
Land appurtenant to a building is generally a land that is an
indivisible part of a building and is used for enjoyment of the
building and not put to any other use. Land appurtenant to a
building will cover approach roads connecting the building to
public streets, playground, backyard, kitchen garden, motor
garage, coach home, parking area, etc.
Free Hold Land
A parcel of land is said to be free-hold when the owner has
absolute right of enjoyment, possession and ownership over it

Lease hold:
A parcel of land is said to be lease-hold when the right of
enjoyment and possession is vested in a person other than the
owner for a definite period of time in consideration for a fixed
sum of rent known as lease (ground) rent.
Economic life of building:
Economic life of building means its life expectancy with normal
repairs and maintenance. Economic life of structure depends on
the type of construction, the quality of construction materials,
climatic conditions, use of structure and the level of maintenance
and upkeep.
Depreciation
Depreciation means the decline in the value of structure/asset
due to its normal wear and tear on account of its use and age.
Ground Rent:
When land only is given on lease for construction buildings or
any other use by the lessee, the periodic payment the lessee
under the covenants of the lease is called "ground rent". The
ground rent is of two kinds : Secured ground rent and Unsecured
ground rent.

Standard Rent
Rent which can be lawfully charged from a tenant under relevant
rent control act is known as standard rent.
Concessional Rent
When the property is let out at rent lower than the prevailing
market rent, the rent is known as concessional rent.
Contract Rent:
The actual rental income specified in a lease
Annual Gross Rent
It is the total amount of the rent received from a property during
the year.
Annual Net Rent
It is the net amount of the rent deducting the outgoings from the
annual gross rent.
Out-Goings
The amount of taxes levied by local authority/state govt. and
other recurring expenses in respect of a house property such as
repairs & maintenance, collection charges, insurance, ground
rent, service charges etc. is known as "outgoings".

Service Charges
It is the expenditure incurred by the owner for maintenance of
common services like watch and ward, operation of lifts and
illumination of the common spaces, fire fighting arrangement, for
proper enjoyment of the properties by the users.
Annual Sinking Fund
Sinking fund is the notional fixed sum of money allocated
annually at the prevailing rate of interest to create the necessary
capital for the replacement of an asset after the economic life
span of the asset is over.
Rate of Capitalization
It is the rate of return which a prudent investor would expect
from a particular kind of investment in an asset or immovable
property.
Value and Cost
The cost of an asset represents the actual amount spend in the
construction of the asset.
The term value means the amount of money for which the asset
will exchange in the open market.

Market Value and Fair Market Value

"Market value" is the price that a willing purchaser would pay
to a willing seller for a property, having due regard to its existing
conditions, with all its existing advantages and its potential
possibilities when laid out in its most advantageous manner.
"Fair Market Value" is the estimated price which any asset in
the opinion of valuer would fetch, if sold in the open market on
the valuation date.
The fair market value excludes sentimental value, advertisement,
brokerage, stamp-duty, commission etc. for affecting the sale
transaction.
Potential Value
This is the inherent value in the property which is realized when
the property is developed in its most advantageous manner. For
example, land on outskirts of a town possesses building
potential. Similarly, an under-developed property possesses
value which can be realized by fully developing the property.
Guideline Value
The value adopted for stamp duty is based on the land / building
rates fixed by the local authorities for the purpose of stamp duty
charges.

Salvage Value
This term is mainly in case plant & machinery. It is the value of
an
asset realized on sale after it has outlived its useful span of life
but has not yet become useless. In other words, it is the amount
realized over and above the cost of its removal. The salvage
value may be positive, negative or Zero. If this value is zero or
negative it may termed as junk value.
Scrap Value/Residual Value
It is the value which is realised when the property become
absolutely useless except for sale as junk. In other words, this is
the value of old materials less cost of demolition and disposal. It
is also known as residual value. This value depends upon type of
structure and quantities of useful materials which can be
obtained on its demolition.
Reversionary Value of Land
Reversion means right to repossess the property at the end of
term granted to the tenant or the lessee or it can be said that the
property comes back to the person who granted it to someone
after the specified term of grant is over.

For example
A building is purchased for Rs.1000000 sale price and it produces
Rs.100000 in positive net operating income ( the amount left
over after fixed costs and variable costs is subtracted from gross
lease income) during one year.
Rs.100,000 / Rs.1,000,000 = 0.10 = 10%
The asset's capitalization rate is ten percent; one-tenth of the
building's cost is paid by the year's net proceeds.
Potential Gross Income
Total income attributable to real property at full occupancy
before vacancy/collection loss and operating expenses are
deducted.
Vacant and Collection Loss:
An allowance for reductions in potential income attributable to
vacancies, tenant turnover, and nonpayment of rent. The
turnover process involves a thorough cleaning, changing the
locks, painting the walls and possibly new carpet or small repairs,
not to mention all the effort associated with marketing, showing,
screening and settling in a new tenant.

Effective Gross Income:

The anticipated income from all operations of the real property after
an allowance is made for vacancy and collection loss.
Operating Expenses:
The periodic expenditures necessary to maintain the real property
and continue production of the effective gross income, assuming
prudent and competent management. Operating expenses include
but not limited to Real estate taxes, insurance, utilities, repair and
maintenance, general and administrative, management and salaries.
Net Operating Income
The actual or anticipated net income that remains after all operating
expenses are deducted from effective gross income, but BEFORE
mortgage debt service and depreciation.

Potential Gross Income (PGI)

Less:
Vacancy & Collection Loss (V&C)
Equals: Effective Gross Income (EGI)
Less: Operating Expenses
Equals: Net Operating Income
Definition of Cost, Price and Value
Cost: It is the expenditure to produce a commodity having a
value
Price: It is the cost of a commodity plus profit to the producer
for his ideas, capital on raw materials, labour and overheads.
Value: It is determined in the open market by the forces of
demand and supply. Valuation varies with function, time, place
and purpose.
Factors affecting the valuation of buildings:
Type of construction
Services and amenities
Location and infrastructure

Factors affecting the valuation of buildings:

Type of hold
Rental Income
Supply and demand of property
Social setup and outlook
Government policy and Acts
Book Value: value of article shown in the account book as asset
value in that particular year.
Book value of any article at any year is the original cost minus
total depreciation till that year.
Distress value: If a property is sold at a lower price than the
market price due to financial crisis or urgency of the owner it is
said to be a distress value.
Speculative Value: If a property is purchased at some price
with a view to sell the same at a higher price after some years,
then it is know as speculative value.

Monopoly value:
In a developed colony the value of the plot goes on increasing
when the number of available plots goes on decreasing. The price
demanded by the owner of remaining plots is known as Monopoly
value.
Sentimental Value: The extra price demanded by the owner
when he attaches certain sentiments to his property is known as
sentimental value which will be higher than market value.
Replacement Value: It is the cost of reproduction of a similar
building with similar specifications at the current market rates and
prices on the date of valuation.
Fancy Value: If a purchaser wants to procure a property due to
necessity or various reasons, he is ready to pay higher price than
others quoted price. The desired extra amount is called Fancy
value.
Obsolescence: The value of a building becomes very low due its
out of style, structure, design, inadequacy to growing needs,
functional use, etc then it is termed as Obsolescence.

Depreciation:
It is the gradual exhaustion of usefulness of the property. It may
defined as the decrease in value of the property due to usage,
deterioration, wear and tear, etc.
Methods of calculating Depreciation:
Straight line method
Constant Percentage Method
Straight line Method:
The present value minus the salvage value is distributed uniformly
for its service life. It is assumed that the property value loses its
value by the same amount every year.
D=C-S/n
Where
D= Depreciation each year
C=Original Cost (Replacement Value)
S=Salvaging Value
N=Life of the property

Service life of structures:

A temple, mosque or chruch or a stone bridge designed to last for
500 to 1000 years
A concrete/Steel Bridge fro 150 years
A concrete house with tiled roof for about 100 years
For calculating depreciation, the total life of the building is
normally assumed as:

RCC framed structure:80 years

Load Bearing RCC roof:60 years
Madras Terraced roof:60 years
AC sheet Roofed:40 years
GI sheet Roofed:40 years
Mangalore tiled/country tiled:25 years

Example (1)
Cost of New building:10,00,000/Salvage Value 10% at the end of life:1,00,000/Life assumed:60 years
Annual Depreciation=15,000/Depreciation value after 10 years=1,50,000/Depreciation value after 60 years=9,00,000/Depreciated value after 10 years=10,00,000-1,50,000=8,50,000/Depreciated value after 60 years=10,00,000-9,00,000=1,00,000/(which is the salvage value assumed)
Depreciation percentage assuming the salvage value as
10%= Age of the building/total Life of the building X
(100-10)
Depreciation % age if the age value as 30
years=30/60X90=45%
Depreciation amount=0.45X10,00,000=4,50,000
Present Value= Replacement Value-Depreciation value
=10,00,000-4,50,000=5,50,000/Age of the building=15 years
Life Assumed=60 years
Salvage value=10%

Depreciation=15/60X(100-10)
=22.5%

For buildings which are sturdy and crossed its life, further
life is estimated and depreciation is calculated as
Depreciation=Age/Life span + further life X (100-10)
Linear Method: or depreciation method:
This method is called constant percentage method.
Depreciation is calculated by using the formula:
D=P(1-r/100)n
Where
D=Depreciated value of the building
P=Replacement value of the building
r-Rate of depreciation
N= Age of building (No. of years)

Example:1
Present value of the Building (P):10,00,000/Age of the building (n):10 years
Life of the building assumed:50 years
Depreciation percentage/year:2%
D= P(1-r/100)n
=1000000(1-2/100)10
=10,00,000(0.98)10
=10,00,000(0.817)
Depreciated value of the building=8,17,000/Depreciated Factor=1-0.817=0.183 and the depreciation amount
is 1,83,000
Standard rates of depreciation were given in PWD, CPWD

Comparison between straight line method and linear

method:
A RCC roofed strong building constructed in lime Mortar where first
class teakwood has been used through out is to be valued.
Age of the building is 40 years
Replacement Value is 3,50,000/Total life is assumed 100 years
Straight line Method:
Salvage value as 10%, depreciation=40/100X0.9=0.36
Depreciation value=0.36X3,50,000=1,26,000/Linear Method:
P(1-r/100)n=3,50,000(1-1/100)40
Depreciation Value=2,34,150
Depreciation Value=1,15,850
(1-.669=.331)=.331X3,50,000

Straight line method can be adopted:

For buildings with non-standard specifications
For buildings with good specifications
For different portions of the building constructed in various
years
If different salvage values are adopted for different floors
If different roofs were laid for different floors.
This method can be used for valuation for bank purposes,
purchasing and selling, assessing the true worth etc
Linear method:
Standard depreciation rates are prescribed for certain buildings
with some basic standards
Plinth area rates prescribed for each year for certain categories
of building and for different structures.

Rent Capitalisation Method :

This method is generally resorted to in the following situations : -

In case the land is fully developed i.e. it has been put to full use legally permissible and
economically

justifiable

and

the

income

out

the

property

is

normal

commercial/Residential/Industrial.

In

the case of fully tenanted property and statutory control of terms and conditions of

tenancy.

In the case of a property small portion of which is self occupied and balance large portion is
tenanted.

In the case of commercial establishment like cinemas and hotels, if the building is given on
outright lease / rental basis and rent fetched is reasonable.

Net maintainable Rent or annual letting value= Gross Income of the

property per annum- out goings.
Fair Market value of the property= Annual letting value X Years
purchases
Gross Maintainable Rent :
(a) In case of rented building attracted by Rent Control Act, the actual rent
received or receivable should be adopted.
(b) In case of a newly rented building, the actual rent if it is nearly equal to
the fair and normal market rent prevailing in the area be adopted.
(c) In case the rent fixed a lower level deliberately by collusion by letting
out to near relations or subsidiary concerned, the prevailing market rent
should be adopted. The reasons should be recorded in the report.
(e) In case of commercial building, prevailing market rent in the locality
should be adopted.
(f) In case the Rent Control Act is applicable, the rent should not exceed the
standard Rent, whether fixed or not.

Out Goings :

1. Municipal Taxes : The amount of taxes as actually levied or leviable by the municipalities should be considered
for deduction.

2. Repairs and maintenance Charges : Normally, 1/12 of gross annual rent should be considered for deduction as
outgoings for repairs and maintenance.

3. Ground Rent : Actual ground rent paid in the case of lease hold properties.

4. Insurance Cover : The actual amount paid by the owner for the insurance for the safety of building only limited
to the scale laid down by Fire and General Insurance Rules.

5. Management & Collection charges : This will vary depending upon the number of tenants, types of tenants,
legal disputes in collecting the rent. If there is only one tenant or the building is under occupation of the Govt. or
Public Sector undertaking only 2% should be adopted. In any case not more than 6% deduction is to be made on this
account.

6. Service Charges : Expenditure actually incurred by the owner for sweeper, chowkidar, liftman, pumpman,
electrical energy for common light point etc.

7. Sinking Fund : Deductions for sinking fund for equipments and machinery installed in cinemas, hotels and

Undivided share of land: Area of the apartment/FSI

What is sale deed? It is registered deed executed in the sub
registrar office by the promoter/developer/owner of the land or
power agent of the owner to convey the undivided share of the land
to the purchaser of the apartment.
What is Builder Agreement/construction agreement?
It is the agreement executed between the purchaser of the
apartment and promoter or developer of the apartment. Normally it
is unregistered deed executed in Non-judicial stamp paper of rs. 20/and it gives value like area, location, outline of specification and
payment conditions, total extent and details of the property, its four
boundaries and location of flat and floor.
What is super plinth area of an apartment?
It includes the plinth area of the apartment and the proportionate
common area in the apartment like corridor, staircase, lift area, lift
room, headroom, foyer and any other facilities provided in the
project.

Documents required for the property under valuation:

Sale deed executed for the undivided share of land in favour of the
owner
Builder/Construction agreement
Approved plan from local authority
Area of the site/land from sale deed
Plinth area of the building from Builders agreement
Payment details
Detailed specification
Year of construction
Permissible FSI, plot coverage, set back details
Amenities provided
Additional works like interior decoration, modular kitchen etc
Violations if there are any
Extent of violations.

It is a residential apartment having super built up area of 1,220

sq.feet constructed in 2006 in a residential area. It is a road facing
apartment in first floor. Common area works out to 10% of built up
area. The apartment got a reserved Car park provision in the stilt
floor.
Data collected are as under:
Area of the site:-8000 sq.feet
Built up area in each floorGround floor- 4400 sq.feet
1st floor- 4400 sq.feet
2nd floor-4000 sq.feet
3rd floor-4400 sq.feet
Total-17,600 sq.feet
FSI achieved-17,600/8000=2.20
The permissible FSI in this area is 1.8.
The plot coverage allowed is 45% but constructed was 55%. The
required side setbacks is 13 on all the 4 sides while only 10 was
provided.

Property under comparison

A recently constructed residential apartment is taken into
consideration for comparison.
The apartment consists of G+3 floors, stilt Car parking for residential
use.
The second floor apartment is sold for Rs.3250/-. This was fixed in
2011.
FSI achieved in this project is 2.00
The specifications is matching with the property under valuation.
Covered car parking is available in this project is Rs.100000/-.
Minor deviations from the approved plan.
Locational advantage are same for both the projects.
The composite rate (land and building component)-Rs.3250/Property under valuation:
Built up area of the apartment:1220 sq.feet
Year of construction: 2006
Undivided share of land:1220/2.2=555 sq.feet
Property under comparison:
Sale price: Rs.3250
FSI: 2.0
Composite rate: Rs.3250/-

Valuation of the Apartment-Format

I. General:
1.
2.
3.
4.
1.

Purpose of the valuation: To assess the present market value

Date of valuation:05.04.2011
Name of the owner and address:
Document produced for perusal:
Sale deed Regn. No. --------dated----- for undivided share of land
executed in the name of owner
2. Builders agreement executed between owner and apartment
promoter
3. Corporation tax receipt no.
4. Approved drawings

Apartment Building:
5. Nature of the apartment: Residential
2. Location:
T.S. No.:----------Block No.:---------Ward No.:---------Village/Municipality/Corporation:-----------3. Postal Address of the property:

Valuation of the Apartment-Format

4. City/town:
Residential:
Commercial:
Industrial:
5. Classification of the area:
High/Middle/Poor:
Urban/Semi urban/Rural:
6. Property falls under corporation limit/village
panchayat/Municipality:
7. Whether covered under any state/central govt. enactments or
notified under notified area/cantonment area.
8. Boundaries of the property:
North:
South:
East:
West:

Dimensions of the property: As per Deed (a)

North:
South
East:
West:

Actuals (b)

10. Extent of the site:

11. Extent of site considered for valuation: least of 9a or 9b.
12. Whether occupied by owner/tenant. If occupied by tenant since
how long? Rent received per month?
13.Description of the locality: Residential
14. Year of construction: 2006
15. Number of floors:stilt+ground+3 floors
16. Type of structure: Framed Structure
17. Number of dwelling units:16
18.Quality of construction: I class
19. Appearance of the building: Good
20. Maintenance of the building: Good
21. Facilities available:

Lift: Available
Protected water supply: available
Under Sewerage: Available
Car parking-Open/Covered: Covered
All-round compound wall existing: Yes
Pavement is laid around the building: Yes
III. Flat:
1. The floor in which the flat is situated: First floor
2. Door no. of the flat: Flat no. F3
3. Specification of the Flat
Roof: RCC
Flooring: Vitrified tiles
Doors: Entrance door in Teak wood and others in country wood
Windows:Country wood
Fittings: Aluminium
Finishing: Acrylic emulsion in the inner walls and exterior walls with
apex
4. House Tax
Assessment no.:------Tax amount:Rs.---------- per half year
In the name of: Mr X
5. Electricity service connection no. meter card in the name of: SC

6. How is the maintenance of the flat:good

7. Sale deed executed in the name of : Mr. X
8. What is the undivided share of land as per sale deed?:555 sq.feet
9. What is the plinth area of the flat?: 1220 sq.feet.
10. What is the floor space index: 2.20
11. What is the carpet area of the flat?:908 sq.feet
12.Is it Posh/I class/Medium/Ordinary?: Posh
13. Is it being used for residential or commercial? Residential
14. Is it owner occupied or tenanted?: Owner occupied
15. What is the rental value if let out?: Rs. 10,000/-

IV General
1. How is the marketability?:Good
2. What are the factors favoring for an extra potential value: Flat is
located in a very calm and prime residential area.
3. Any negative factors observed which affect the market value in
general: Nil
V-Rate
4. After analyzing the comparable sale instances, what is the
composite rate for a similar flat with same specifications in the
adjoining locality?:Rs. 3250/5. Assuming it is a new construction, what is the adopted basic
composite rate of the flat under valuation after comparing with
the specifications and other factors with the flat under
comparison.
Sale price of flat under comparison: Rs.3250
FSI of the project:2.0
Market rate of land in the locality:Rs.3000
Land Component (3000/2.0): Rs.1,500
Building component: 3250-1500=1,750
For the flat under valuation
FSI:2.20

3. Break up for the Rate:

i. Building+Services: Rs. 1750/ii. Land : Rs. 1364/iii. Total:Rs.3114
VI. Composite Rate Adopted after depreciation:
A. Depreciated Building Rate:
Replacement cost of flat with services: Rs.1750/Age of the building: 5 years
Life of the building estimated:60 years
Depreciation percentage assuming the salvage value as 10%:7.5%
Depreciation value: Rs.1575/B. Total Composite Rate arrived for valuation:
Depreciated building value: Rs. 1575/Value of land and others: Rs.1364/Total composite rate: Rs.2939/-

C. Valuation Details:
S.No. Description

Quanti
ty

Rate
per

Estimated
Value in
Rs.

1.

Present value of the flat

1220
sq.feet

2939/-

35,85,580/-

2.

Wardrobes done with

plywood

3 nos

15,000

45,000/-

3.

Showcases/Almirahs

1 nos

7500/-

7500/-

4.

Kitchen arrangements

5.

Interior decorations

6.

Electricity fittings/deposits

25,000

7.

Covered Car park

100000

1,00,000

8.

Extra collapsible gates

10,000

Potential value if any

Total

37,73,080

VII-Certificate:
1. It is certified that the present market value of the flat as
discussed above is in my opinion is Rs.37,73,100/-(Rupees thrity
seven lakhs, seventy three thousand one hundred only)
2. The property was inspected on01.04.2011 in presence of Mr.X
3. Value varies with the purpose and date. This certificate is not to
be refered if the purpose is different other than mentioned.
4. the connected title deed for the subject flat in the opinion of this
valuer are the sale deed, regn. No. dated registered in ---------sub registrar office.
Place:
Date
This report contains ------- pages
Registered valuer/panel valuer
Encl: Photograph of the apartment
Allotment plan

Valuation of land and building for capital gain tax:

Capital Gains Tax
If any property is sold and the profits or gains received by the seller
it is chargeable to Income tax under the head Capital Gain Tax
Calculation of Capital Gains
The Capital gain is computed by deduction of the following amounts
from the Value of Consideration received by the seller.
1. The cost of acquisition of the property.
2. Cost of Improvements carried out if any.
3. Any expenditure incurred in connection with the acquisition of the
property.
Indexed cost of acquisition:
Indexed cost of acquisition means the total cost of acquisition
including other expenses multiplied by the Cost Inflation Index at
the time of selling divided by the Cost Inflation Index at the
time of acquisition.

Indexed Cost of Improvements means the cost of

improvements at the time the improvements are carried out
multiplied by the Cost Inflation Index at the time of selling
divided by the Cost Inflation Index at the time of
improvements.
Cost of acquisition:
The following expenditure is added to the real cost of acquisition
1. Expenditure for completing the Sale Deed
2. Expenditure incurred for the purpose of acquisition like brokerage
etc
Example:1
A has purchased a property of 8 cents with a RCC single storied
building of Plinth Area 100 sq m for an amount of Rs 14,00,000/ in
the year 1990. He has done some improvements in the year 1996
for an amount of Rs 5,00,000/. He sold the property in the year
2002 for an amount of Rs 50,00,000/. Work out the Capital Gain Tax
to be paid by A.

Year of Acquisition of the property:1990

Cost of Acquisition:Rs.14,00,000/Year of sale of the property:2002
Sale consideration: Rs. 50,00,000/Cost Inflation Index at the time of acquisition: 182
Cost Inflation Index at the time of sale:447
The Cost of Acquisition:14,00,000
Indexed cost of acquisition: 447/182x Rs.14,00000= Rs.34,38,462
Indexed cost of Improvements
Cost Inflation Index at the time of
Improvements Year 1996:
281
Cost Index at the time of sale
Year 2002:
447
Cost of Improvements:
Rs. 5,00,000/Indexed Cost of Improvement
447/281xRs.5,00,000/Rs. 7,95,374

Total Indexed Cost of Acquisition = Indexed Cost of the Property +

Indexed Cost of Improvements
= Rs 34,38,462/ + Rs 7,95,374/ = Rs 42,33,836/
Actual Sale Price of the property = Rs 50,00,000/
Capital Gain = Rs 50,00,000/- Rs 42,33,836/ = Rs 7,66,164/
Since the property is sold after three years from the date of
acquisition it attracts Long Term Capital Gain Tax at 20%
Capital Gain Tax = Rs 7,66,164 x 0.20 = Rs 1,53,233/

Example:2
Hari has acquired a residential house property in Delhi on 1st April,
2000 for 10,00,000 and decided to sell the same on 3rd May, 2003
to Ms. Pari and an advance of 25,000 was taken from her. The
balance money was not paid by Ms. Pari and Hari has forfeited the
entire advance sum.
On 3rd June, 2012, he has sold this house to Mr. Suri for 35,00,000.
In the meantime, on 4th April, 2012, he had purchased a residential
house in Delhi for 8,00,000, where he was staying with his family on
rent for the last 5 years and paid the full amount as per the
purchase agreement. However, Hari does not possess any legal title
till 31st March, 2013, as such transfer was not registered with the
registration authority.
Hari has purchased another old house in Chennai on 14th October,
2012 from Mr. X, an Indian resident, by paying 5,00,000 and the
purchase was registered with the appropriate authority.
Determine the taxable capital gain arising from above transactions
Cost inflation Index - 2000-01: 406; 2003-04: 463; 2012-13: 852.

Example:2
Sale proceeds:35,00,000
Indexed cost of acquisition (10,00,00-25,000=9,75,000)
Indexed Cost of acquisition (Rs.9,75,000x852/406=20,46,059)
Long Term Capital Gain: 35,00,000-20,46,059=14,53,941)
Less: Exemption under section 54 in respect of investment in house
at Delhi :8,00,000
Taxable long-term capital gain :6,53,941
For exemption under section 54, a new residential house
should be purchased within a period of one year before or
three years after the date of transfer.
He has purchased within one year before the date of
transfer and paid the full amount as per purchase
agreement.
Hari can claim exemption for purchase of one house. It will
be beneficial to claim exemption in respect of delhi house
since the cost of same is higher than the cost of chennai
house.

Real Estate Modeling:

1. Measuring Real Estate
Plot Size

Building
Gross Area

Building
Rentable
Area

Measured in

Square feet or
Square meters.
Acres=43,560
sq.feet or I
hectare=10,000sq.
m

Square feet
or square
meters

Square feet
or square
meters

Used for

To calculate plot
area and land
acquisition costs.

To determine Rent,
rentable
parking
area and
spots etc.
construction
cost

Real Estate Modeling:

1. Real Estate Development Expenses;
Land Acquisition Costs: Buying actual land and paying broker
fees and permits
Hard Costs: Buying the raw materials and physically
excavating, demolishing, and constructing the building.
Soft Costs: Paying architects, designers, lawyers, and engineers to
design the building.
Furniture, Fixtures and Equipment's (FF&E):Paying for tables,
desks, chairs, computers and so on
Tenant Improvements (TIs): Paying for items specific to certain
tenants like different style of window, carpet, wardrobes etc.
Hard costs tend to be most expensive, followed by soft costs and
land acquisition costs, FF&E and TI and after those.

Real Estate Development Funding;

Loan to Cost (LTC) or Loan to Value (LTV) ratio tells you what
percentage of debt you can use.
Total project Cost:100 million; LTC is 70% i.e 70 million as debt
and rest 30 million as equity. This ratio can be estimated by
comparing with similar type of property development and through
negotiation with the banks.
Main financing methods for properties;
Developer Equity: Developer puts down their own cash much
lower than 3rd party investor equity and debt.
Investor Equity:
3rd party investor equity: Developer seeks third party investors
to invest their own cash in the project
Mezzanine: this form of debt with higher interest rates and
higher risk than senior debt. (mezzanine financing is usually
provided to the borrower very quickly with little due diligence on the
part of the lender and little or no collateral on the part of the
borrower, this type of financing is aggressively priced with the
lender seeking a return in the 20-30% range).
Senior debt: Lower interest rates than mezzanine(bond holders

Hidden Fees;
Capitalized Interest: Interest on debt is capitalized in the early
stages when the property is still under development, this is added
to total development costs.
Operating deficit: start paying property taxes and operating
expenses before you start collecting rents from tenants. Allocate
funds to cover this deficit.
Origination costs and Taxes: As you draw on debt, you must pay
bank a fee and pay taxes on it, these costs add to development
costs.

Construction Timeline:
Real estate time is granular- Think in months rather than quarters
years.
Phases in Construction time line:
Planning/Pre Construction: Acquire land and permits and design
the building.
Construction Phase: construction of main building as well as
additional properties attached to the building.
Post Construction: Tenants start to move in and start collecting
rent.
Sale Date: the property is sold at the end of the period once its
reaches stabilization.(when rent and expenses no longer change
aside from inflation).
Time line last for few years to 10 years or more depending upon the
scale of the project.

Property Revenue:
Net operating Income (NOI) = Potential property incomeVacancy allowance-operating expenses-property taxes
Maintenance Capital expenditures (Maintaining Cap Ex)
when calculating NOI the auditor subtract the cost of maintaining
the property and replacing parts of the building.
Operating expenses for energy, utilities, insurance, maintenance,
repairs and staff to operate the property.
Property taxes: levied by local governments
Deposits and Closing: Landlords collect payment in the first
month like security deposit and then return the deposit at the end
of lease.

Capitalization Rates: CAP Rates or called Yield in Europe

Cap Rate= Net Operating income/Property value or Cost
Cap rates tells two things:
Valuation of property and what kind of return on investment you can
expect.
10% cap rates means valuation on lower side and money you will
get back quickly.
5% cap rates more highly valued and takes twice as long to get
your money back.
Cap rates are reciprocal of valuation multiples. A higher cap
rates means lower valuation and vice versa.
Definition of 'Terminal Capitalization Rate'
A rate used to estimate the resale value of a property at the end of
the holding period. The expected net operating income (NOI) per
year is divided by the terminal cap rate (expressed as a percentage)
to get the terminal value. Terminal capitalization rates are based on
forecasts and estimates and changes based on the person doing the
calculation.

Real Estate Development Process

Real Estate Development modeling is more granular, happens in
months rather than years. It starts with nothing and generate
revenue only when the building is complete.
There are 9 steps in this model:
1. Determine the Size, parameters and construction timeline for the
property
2. Estimate the revenue, expense and NOI of the property
3. Estimate the Development Cost for the project
4. Create a sources and Uses schedule and determine the debt and
equity levels
5. Build an income statement down to net operating income or Net
Income
6.Distribute the Development Costs and Determine the Debt and
Equity required
7.Draw on Equity and Debt as Necessary
8.Assume an exit cap rate and stabilised NOI and determine the net
sale proceeds.
9.Calculate the internal rate of return.

Real Estate Development Process

1. Determine the Size, parameters and construction timeline for the
property:
Plot and Unit Assumptions- Sri apartments
Plot square meters

10,000sq.
m

Minimum square meters per unit

50 sq.m

Apartment units

200

Average apartment unit size

50 sq.m
. Start with plot size in square meters or square feet, then base the
number of units or gross area of the building on that.
. Take into consideration, FAR and local zoning requirements to
determine the exact size.

Real Estate Development Process

Average monthly rent per square meter: $50
Average monthly parking
fees per spot

$150

Average monthly rent per unit

$2500

Monthly operating expenses per unit:

$ 300

Monthly property taxes per unit:

$150

Total Operating expenses

$ 450

Required parking spots per unit

1.5

Parking spots

1.5X200=300

Assumed Vacancy rate at stabilization

5.0%

Real Estate Development Process

Determine the operating expenses and property taxes per unit or per
square foot or square meter.
If the building has parking structure attached, estimate the spots
required as well based on assumed number of spots per unit.
Determined the stabilized vacancy rate
Speak to local real estate agents, developers, property owners in the
area to determine proper figures.

Construction Time Line:

Pre-Construction
Months

Construction start
month

Construction ending
months

Rental period start

10
month
One year-pre-construction, construction and post construction
In more complex models tenant move in dates, FF&E and TI
purchase dates also taken into account for complex models.
Assume sale date to indicate which month the building will be sold.

Real Estate Development Process

Step 2: Estimate the Revenue, Expenses and NOI of the
property:
Annual Property Income Statement
Gross potential annual apartment $ 6,000,000
Revenue
Gross Potential Annual Parking
Revenue

540,000

Less: Vacancy allowance

(327,000)

Annual Net Revenue

6,213,000

Annual operating expenses

720,000

Annual Property Taxes

360,000

Total Property level expenses

1,080,000

Current year Net operating

$ 5,133,000
income
Net Revenue-operating expense-property taxes=Net Operating Income

Real Estate Development Process

Step 3: Estimate the Development cost for the project:
Project Cost Assumptions
Project costs

Per unit

Total

Hard Costs and FF &E

$ 130,000

$ 26,000,000

Soft Costs

50,000

10,000,000

Land Acquisition costs

70,000

14,000,000

Capitalized Interest

684,809

Total Project Cost:

$50,684,809

Other costs to be included are capitalized financing fees,

operating deficit and origination costs of debt.

The convention in real estate is to assume that the loan interest is capitalised
When the building is still under construction.
Operating deficit corresponds to the period when you start paying expenses
but you do not have sufficient income to cover everything.

Real Estate Development Process

Step 4: Create sources and Uses Schedule and determine the
debt and equity levels
Project Cost Assumptions
Project costs

Per unit

Total

Hard Costs and FF &E

$ 130,000

$ 26,000,000

Soft Costs

50,000

10,000,000

Land Acquisition costs

70,000

14,000,000

Capitalized Interest

684,809

Total Project Cost:

$50,684,809

Debt and Equity Assumptions

Loan to Cost Ratio(LTC)

70%

Debt interest rate

8%

Required equity

30%

Loan Amount

$35,479,366

Real Estate Development Process

Step 5: Build an income statement down to net operating
income or net income
Calendar Month

9/1/12

10/1/212

11/1/12

12/1/12

Month

10

11

12

Phase(1=pre, 2=Construction, 3=
Post

Gross Potential Monthly

Apartment revenue

500,000

500,000

500,000

Gross Potential Monthly Parking

revenue

45,000

45,000

45,000

Less: Vacancy allowance

(27,250)

(27,250)

(27,250)

Monthly Net Revenue

517,750

517,750

517,750

Monthly property taxes

30,000

30,000

30,000

Monthly operating expenses

60,000

60,000

60,000

Monthly expenses

90,000

90,000

90,000

427,750

427,750

427,750

Net operating income

Real Estate Development Process

Step 6:Distribute the Development Costs and Determine the
Debt and Equity Required
Calendar Month

Calendar Month
Phase(1=pre,
2=Construction, 3= Post

1/1/12

2/1/12

3/1/12

4/1/12

5/1/
12

6/1/12

7/1/12

8/1/12

9/1/12

Project construction Costs:

Hard Costs& FF&E

4333333

4333333

433333
3

4333333

4333333

4333333

Soft Costs

1666667

1666667

166666
7

1666667

1666667

1666667

6000000

6000000

600000
0

6000000

6000000

6000000

Land Acquisition costs

4666667

4666667

4666667

Total Construction costs

4666667

4666667

4666667

Straight line expenses over pre construction and construction phase

Normalized distribution schedule for hard costs and land acquisition costs
Random distribution for soft costs and FF& E, TIs

Real Estate Development Process:

Step 7: Draw on Equity and Debt as Necessary
Calendar Month

6/1/12

7/1/12

8/1/12

9/1/12

Hard Costs& FF&E

4,333,333

4,333,333

4,333,333

4,333,333

4,333,333

4,333,333

Soft Costs

1,666,667

1,666,667

1,666,667

1,666,667

1,666,667

1,666,667

Calendar Month
Phase(1=pre,
2=Construction, 3=
Post

1/1/12

2/1/12

3/1/12

4/1/12

5/1/12

Project construction
Costs:

Land Acquisition costs

4,666,667

4,666,667

4,666,667

Total Construction
costs

4,666,667

4,666,667

4,666,667

6,000,000

6,000,000

6.000,000

6,000,000

6,000.000

6,000,000

Ending Debt Balance

4,810,593

10,862,83
8

16,955,566

23,089,04
8

29,263,55
6

35,479,366

Capitalized interest 8%

16035

52245

92728

133,482

174,509

215,810

6,052,245

6,092,728

6,133,482

6,174,50
9

6,215,810

Funds required

4,666,66
7

4,666,66
7

4,666,66
7

6,016,03
5

4,666,66
7

4,666,66
7

4,666,66
7

1,205,44
3

Funds required = Total construction costs + Capitalized Interest

Maximum Draw

Equity Draw:
15,205,443

Real Estate Development Process:

Step 8: Assume an Exit Cap Rate and Stabilized NOI and
Determine the Net Sale Proceeds
Sale Assumptions and Output
Years to stabilised NOI

1.0

Annual Maintenance
Cap Ex per unit

$ 200.00

Annual Revenue inflation

3.0%

Stabilized NOI after

Maintenance Cap Ex

$ 5,246,990

Annual Expense Inflation

3.0%

Property Sale Capitalization:

7.0%

Gross Sale Value:

$74,939,857

Internal Rate of
Return:

20%

Less: Selling Costs

(2,997,594)

Less: Payoff Debt Principal

(35,479,366)

Net Sale Proceeds

36,462,897
Stabilized NOI After Maintenance CapEx means, After we account for revenue
and expense inflation a certain number of years into the future, and we subtract
out the required Maintenance CapEx each year, what is our Net Operating Income
at that future date?

Its more important if youre looking at the property over 3-5 years rather
than 1 year, because inflation is much more significant then.
You take into account inflation because both rent and expenses increase over
time, and you take into account Maintenance CapEx because most buyers will
subtract that from the NOI figures you quote.

Real Estate Development Process:

Step 9: Calculate the Internal Rate of Return (IRR or XIRR)
Calendar
Month

1/1/12

2/1/12

3/1/12

4/1/12

5/1/1
2

6/1
/12

7/1/
12

8/1
/12

9/1/
12

10/1/
12

11/
1/1
2

12/1/12

Calendar
Month

10

11

12

(4,666,6667)

(4,666,6667)

(4,666,6667)

(1,205,443)

Phase
(1=pre,
2=Const.
3= Post
Equity
Investor
Returns:
Equity
Invested
Net Sale
Proceeds
Net Cash
flow to
equity
investors

36,462,897

(4,666,6667)

(4,666,6667)

(4,666,6667)

(1,205,443)

36,462,897

You could use either the IRR or XIRR function for this (XIRR is for when the cash flows occur on an irregular schedule).
You track the Equity Invested each month with negative signs and then link in the Net Sale Proceeds at the end of the
period.

Determine Which Assets Qualify for Capitalization of Interest.

Qualifying assets include assets under construction for the firm's own
use (such as buildings, machinery) and assets under construction for
sale or lease as part of discrete projects (such as real estate projects).
Determine the Capitalization Period.
Capitalization period begins when all three of the following
Expenditures for the asset have been made (i.e., the firm has made cash
payments or has incurred debt for construction of the asset).
Necessary activities to get the asset ready for its intended use are in
progress (i.e., actual construction work is taking place).
Interest cost of some kind is being incurred (i.e., the firm has some type
of interest-bearing debt outstanding). This debt need not be specific debt
incurred on the asset. It may be general debt such as bonds payable.
Therefore a company may capitalize interest cost even though the entire
construction cost of the asset was paid for in cash, so long as the
company has some type of interest-bearing debt outstanding.
The capitalization period ends when any one of these three conditions
is no longer being met.

Compute Weighted-Average Accumulated Expenditures.

The amount of expenditures on qualifying assets usually
varies considerably; it builds up or accumulates as
additional expenditures are made during the year.
To determine interest cost, weighted average accumulated
expenditures to be computed.
The figure is an average or annualized quantity
representing the average amount of funds tied up in
construction throughout the year.
Compute Avoidable Interest
To estimate the amount of interest that theoretically could
have been avoided if expenditures had not been made on
qualifying assets.
Classify the company outstanding debt:
Specific debt-Debt incurred specifically to finance
construction of assets.
General Debt: all company debt excluding the specific
debt.
Determine the appropriate interest rate to apply to the
weighted average accumulated expenditures.
Specific debt rate: Interest rate associated with specific
debt.

Compute Avoidable Interest:

Multiply the specific debt interest rate times the portion of the
weighted average accumulated expenditures that is less than or equal
to the amount of specifically borrowed debt.
Multiply the weighted average of interest rates incurred on all other
general debt times the portion of the weighted average accumulated
expenditures that is greater than the specific debt.
Compute the Actual Interest Cost Incurred.
It would not be reasonable to capitalize more interest
than the total amount of interest cost actually incurred.
Determine the interest cost to be capitalized
Interest cost to be capitalised is the avoidable interest or
the actual interest whichever is less
The amount of interest capitalised is debited to an asset
account along with the construction and other costs of
acquiring the asset.
These costs are depreciated over the assets expected
useful life.

Sinking Fund Method:

The depreciation is assumed to be equal to the annual sinking fund
plus the interest on the fund for that year, which is deemed to be
reinvested on interest bearing investment. If V is original Cost And
F is the annual sinking fund and b, c, d, represent interests on the
sinking fund for subsequent years, then depreciated value at the
end of 4th year.
At the end
of

Depreciatio Total
Depreciated
n for the
Depreciatio value
year
n

1st year

(V F)

2nd year

F+b

2F+b

(V (2F+(b))

3rd year

F+c

2F+b+c

(V (3F+b+c)

4th year

F+d

4F+b+c+d

(V
(4F+b+c+d)