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IBBI Land & Building practice questions

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Question 1Land and Building Valuation Concepts and Principles

Under the IBBI (Insolvency Resolution Process for Corporate Persons) framework, the primary basis for valuing the assets of a corporate debtor is:

  1. Book value, being the historical cost less depreciation as per accounts
  2. Liquidation value, being the estimated realisable value on a going-concern or asset-sale basis Correct answer.
  3. Replacement cost, being the current cost of recreating the asset
  4. Fair value, being the highest price obtainable in an open market

Explanation

Insolvency regulation requires the resolution professional to obtain two estimates: fair value and liquidation value. Liquidation value reflects the amount that would be realised if the assets were sold on a going-concern or asset-by-asset basis, and it is the lower benchmark used for the liquidation test. Book value and replacement cost are accounting or costing constructs, not the regulatory benchmarks.

Question 2Land and Building Valuation Concepts and Principles

A valuer is instructed to estimate the value of land that the owner would achieve in a normal open-market transaction between a willing buyer and a willing seller, after reasonable marketing. This concept is best described as:

  1. Depreciated replacement cost
  2. Forced sale value
  3. Market value Correct answer.
  4. Investment value

Explanation

Market value is defined as the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties act knowledgeably, prudently and without compulsion. Forced sale value assumes compulsion or a shortened marketing period. Investment value reflects the worth to a particular owner.

Question 3Land and Building Valuation Concepts and Principles

Which principle of valuation holds that the value of a property is set by the price that a comparable property would fetch in the same market at the same time?

  1. Principle of anticipation
  2. Principle of conformity
  3. Principle of contribution
  4. Principle of substitution Correct answer.

Explanation

The principle of substitution states that a rational buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. This underpins the comparable sales or market approach, where value is derived from evidence of similar transactions. Contribution, conformity and anticipation address different aspects of value formation.

Question 4Land and Building Valuation Concepts and Principles

In the sales comparison approach applied to a residential flat, an adjustment for an inferior location of the comparable property would normally be:

  1. Added to the comparable's sale price Correct answer.
  2. Applied only to the subject property's cost
  3. Deducted from the comparable's sale price
  4. Ignored because location cannot be quantified

Explanation

Adjustments are made to the comparable's price to make it equivalent to the subject property. If the comparable has an inferior location, its price must be adjusted upward to reflect the subject's superior position. Deductions are made where the comparable is superior to the subject.

Question 5Land and Building Valuation Concepts and Principles

Depreciation in the context of the cost approach to building valuation is best understood as:

  1. A tax allowance granted on capital expenditure
  2. A provision for future repairs recorded in the accounts
  3. The loss in value from any cause as compared with the cost of a new equivalent Correct answer.
  4. The reduction in book value resulting from amortisation of the lease

Explanation

In the cost approach, depreciation means the difference between the cost of replacing or reproducing the improvement new and its value in its present condition. It covers physical deterioration, functional obsolescence and external obsolescence. Tax allowances and accounting provisions do not measure this loss in value.

Question 6Land and Building Valuation Concepts and Principles

Which of the following is a recognised limitation of the sales comparison approach when valuing a specialised building such as a hospital?

  1. The approach cannot be used for any property that is leased
  2. Comparable transactions are few and the properties differ materially in specification Correct answer.
  3. The approach ignores the land component entirely
  4. The approach requires a full bill of quantities

Explanation

The sales comparison approach depends on sufficient, reliable evidence of transactions in similar assets. Specialised buildings rarely trade and differ in layout, specification and locational attributes, so adjustment becomes unreliable. In such cases the cost approach or the income approach is often preferred.

Question 7Land and Building Valuation Concepts and Principles

The capitalisation approach to valuing an income-producing building divides net operating income by:

  1. The depreciated replacement cost
  2. The loan-to-value ratio
  3. The gross rental income
  4. The capitalisation rate Correct answer.

Explanation

Under the capitalisation approach, value equals net operating income divided by the capitalisation rate, which expresses the market's required return for that class of asset. The rate incorporates risk, growth expectations and financing conditions. Gross income and cost figures are inputs to other methods.

Question 8Land and Building Valuation Concepts and Principles

Which of the following best describes the principle of highest and best use?

  1. The use currently being made of the property by its owner
  2. The most profitable legally permissible, physically possible and financially feasible use Correct answer.
  3. The use that neighbouring owners consider most appropriate
  4. The use permitted under the zoning plan regardless of profitability

Explanation

Highest and best use is the reasonably probable, legally permissible, physically possible, financially feasible and maximally productive use of a property. It need not be the existing use, and it must satisfy all four tests. Zoning merely sets the legal envelope and does not by itself establish the highest and best use.

Question 9Land and Building Valuation Concepts and Principles

A valuer values a freehold shop by capitalising a net operating income of INR 8,00,000 at a capitalisation rate of 8 per cent. The indicated value is:

  1. INR 64,00,000
  2. INR 1,00,00,000 Correct answer.
  3. INR 6,40,00,000
  4. INR 10,00,000

Explanation

Value equals net operating income divided by the capitalisation rate, so INR 8,00,000 divided by 0.08 equals INR 1,00,00,000. This direct capitalisation reflects the market's pricing of a perpetual or long-term income stream. Multiplying or dividing by the rate incorrectly produces the other figures.

Question 10Land and Building Valuation Concepts and Principles

A building was constructed ten years ago at a cost of INR 50,00,000. The current cost of constructing an identical new building is INR 80,00,000. The valuer estimates total depreciation at 20 per cent of the new cost. Using the cost approach, the depreciated value of the building is:

  1. INR 50,00,000
  2. INR 40,00,000
  3. INR 80,00,000
  4. INR 64,00,000 Correct answer.

Explanation

Depreciated replacement cost equals the current cost new less accumulated depreciation. Twenty per cent of INR 80,00,000 is INR 16,00,000, which deducted from INR 80,00,000 gives INR 64,00,000. The historical cost is irrelevant once current cost new is established.

Question 11Land and Building Valuation Concepts and Principles

In the income approach, an increase in the capitalisation rate applied to a fixed net operating income will:

  1. Increase the gross income but not the value
  2. Increase the indicated capital value
  3. Decrease the indicated capital value Correct answer.
  4. Leave the indicated capital value unchanged

Explanation

Because value is income divided by the capitalisation rate, a higher rate as denominator produces a lower capital value. A rising rate signals greater perceived risk or lower growth expectations in the market. The income itself is unaffected by the rate applied to it.

Question 12Land and Building Valuation Concepts and Principles

Which of the following best explains why a valuer might prefer the investment method over the sales comparison approach for a fully let office building in a thin transaction market?

  1. The investment method is mandated for all commercial property by statute
  2. The investment method requires no market evidence at all
  3. The investment method converts the contracted and market rent into capital value using market-derived yields Correct answer.
  4. The investment method avoids the need to inspect the property

Explanation

The investment method capitalises rental income using yields derived from comparable investment transactions, which may be more plentiful than whole-asset sales. It does not dispense with market evidence, since the yield and rent must themselves be market-derived. Inspection remains necessary under any method.

Question 13Land and Building Valuation Concepts and Principles

A valuer is assessing functional obsolescence in an older industrial shed. Which feature most directly indicates functional obsolescence?

  1. An increase in property tax on the building
  2. Cracks in the external wall caused by settlement
  3. A ceiling height too low for modern forklift and racking operations Correct answer.
  4. A decline in demand for the goods manufactured in the locality

Explanation

Functional obsolescence arises from deficiencies or excesses in the property's design, specification or layout relative to modern requirements. Inadequate clear height for current logistics practice is a classic example. Physical deterioration, external economic decline and taxation changes fall outside functional obsolescence.

Question 14Land and Building Valuation Concepts and Principles

Which statement correctly distinguishes freehold from leasehold interests for valuation purposes?

  1. A leasehold interest is always more valuable than a freehold interest
  2. A leasehold interest carries no obligation to pay rent
  3. A freehold interest is perpetual, whereas a leasehold interest is limited to the term granted Correct answer.
  4. A freehold interest cannot be sold separately from the land

Explanation

A freehold estate endures indefinitely, subject to statutory controls, while a leasehold estate exists only for the term of the lease. The value of a leasehold therefore depends on the unexpired term, the rent payable and the conditions of the lease. Neither interest is inherently more valuable; it depends on the rent and term.

Question 15Land and Building Valuation Concepts and Principles

When valuing a property subject to a lease at a rent below the current market rent, the valuer should recognise that:

  1. The capital value reflects the contracted rent for the unexpired term and the reversion to market rent thereafter Correct answer.
  2. The rent shortfall is ignored because it is a matter between the parties
  3. The lease has no effect on value because the market rent governs
  4. The property must be valued as if vacant possession existed

Explanation

A lease at a rent below market creates a reversionary interest: the investor receives the lower contracted rent until the lease expires or a review occurs, then the higher market rent. The valuation therefore uses a term-and-reversion or equivalent explicit cash-flow structure. Valuing as if vacant would misstate the interest actually held.

Question 16Land and Building Valuation Concepts and Principles

In a discounted cash flow valuation of a shopping centre, which input has the greatest effect on value when all other inputs are held constant?

  1. The number of car parking spaces
  2. The discount rate applied to future net cash flows Correct answer.
  3. The name of the property manager
  4. The age of the building's lift equipment

Explanation

The discount rate converts future cash flows to present value and small changes in it produce large proportional changes in the result, especially over long horizons. It embodies the market's required return for the asset's risk profile. Operational details such as parking count or lift age affect cash flows only indirectly and marginally.

Question 17Land and Building Valuation Concepts and Principles

Which of the following is the most appropriate treatment of a property's title defect discovered during due diligence for a valuation?

  1. Value the property as if the defect had been remedied without disclosure
  2. Reflect the defect as a risk that affects marketability and hence value, and state the assumption clearly Correct answer.
  3. Reduce the value by a fixed 50 per cent irrespective of the defect
  4. Ignore the defect because valuation concerns only physical attributes

Explanation

Title affects the interest being valued, its marketability and the price a willing buyer would pay. The valuer should investigate, reflect the effect in the valuation where material, and disclose the assumption or special assumption in the report. Ignoring the defect or applying an arbitrary fixed reduction is not sound practice.

Question 18Land and Building Valuation Concepts and Principles

A valuer is asked to value a parcel of agricultural land on the urban fringe. Which factor most directly supports a higher value under the highest and best use analysis?

  1. The probability of imminent rezoning to residential use and demand for housing in the area Correct answer.
  2. The current crop yield on the land
  3. The number of years the present owner has farmed the land
  4. The availability of a farm subsidy scheme

Explanation

Highest and best use requires legally permissible, physically possible and financially feasible use. Where there is a reasonable prospect of rezoning and demonstrated residential demand, the market will price the land with reference to its development potential. Current agricultural yield and owner history do not capture that potential.

Question 19Land and Building Valuation Concepts and Principles

A property generates a net operating income of INR 12,00,000 per annum in perpetuity. The market capitalisation rate is 10 per cent and the valuer is asked for the value of the freehold interest. The value is:

  1. INR 1,09,09,091
  2. INR 1,20,00,000 Correct answer.
  3. INR 1,32,00,000
  4. INR 12,00,000

Explanation

For a perpetual income, value equals income divided by the capitalisation rate: INR 12,00,000 divided by 0.10 equals INR 1,20,00,000. This is the simple perpetuity formula, which assumes the income is constant and the rate reflects all risk and growth expectations.

Question 20Land and Building Valuation Concepts and Principles

Which situation best illustrates the valuation principle of external obsolescence affecting a building's value?

  1. The building's lifts are slower than those in a new development
  2. The building's roof requires replacement within two years
  3. A new motorway bypass diverts traffic away from the retail parade in which the shop is located Correct answer.
  4. The building has an outdated layout with narrow corridors

Explanation

External obsolescence arises from factors outside the property itself, such as changes in the neighbourhood, infrastructure or economic conditions. A bypass that reduces passing trade lowers the shop's income potential regardless of the building's own condition. Roof wear, outdated layout and slow lifts are physical or functional matters.

Question 21Land and Building Valuation Concepts and Principles

A valuer must value a leasehold interest in a property with 15 years remaining on a lease at a fixed rent of INR 5,00,000 per annum, where the market rent is INR 8,00,000 and the appropriate capitalisation rate is 9 per cent. Which statement about the valuation is most accurate?

  1. The value is derived from the profit rent of INR 3,00,000 per annum for 15 years, capitalised at the appropriate yield Correct answer.
  2. The value equals the capitalised value of INR 5,00,000 in perpetuity
  3. The value is nil because the leasehold interest expires
  4. The value equals the capitalised value of INR 8,00,000 in perpetuity

Explanation

The leaseholder's benefit is the difference between the market rent and the rent actually paid, known as the profit rent, received for the unexpired term. That profit rent of INR 3,00,000 per annum is capitalised using a year's purchase for 15 years at the appropriate yield. Capitalising either rent in perpetuity ignores the term and the profit-rent principle.

Question 22Land and Building Valuation Concepts and Principles

In reconciling the results of the cost approach, sales comparison approach and income approach, the valuer should:

  1. Select the figure supported by the most relevant and reliable evidence for the property type and interest Correct answer.
  2. Average the three results arithmetically in every case
  3. Always adopt the cost approach for owner-occupied buildings
  4. Always adopt the highest figure to protect the client

Explanation

Reconciliation is a matter of professional judgement in which the valuer weighs the relevance and reliability of each approach given the property type, the interest valued and the quality of available evidence. Simple averaging is not a recognised technique because the approaches may differ greatly in reliability. The final figure must be defensible, not selected to favour a party.

Question 23Land and Building Valuation Concepts and Principles

A valuer values a property with a net operating income that is expected to grow at 3 per cent per annum in perpetuity. Using the Gordon growth model with a discount rate of 11 per cent, the capitalisation rate to apply to the current income is:

  1. 11 per cent
  2. 3 per cent
  3. 14 per cent
  4. 8 per cent Correct answer.

Explanation

In the Gordon growth model the capitalisation rate equals the discount rate minus the expected growth rate, so 11 per cent minus 3 per cent gives 8 per cent. Applying this rate to current income produces the same value as discounting the growing income stream. Using the discount rate alone would understate value because growth is ignored.

Question 24Land and Building Valuation Concepts and Principles

A valuer is assessing the effect of a long-term lease at a rent above the current market rent on the value of the freehold interest. Which conclusion is most appropriate?

  1. The interest is worth more than vacant possession because the rent is above market
  2. The interest may be worth less than vacant possession because the above-market rent could deter purchasers until the lease ends Correct answer.
  3. The lease has no effect because the freehold reversion is perpetual
  4. The interest must be valued at the market rent regardless of the lease

Explanation

An above-market rent is a burden on the reversion because the investor cannot obtain the market rent until the lease ends or a review occurs. The capital value may therefore be lower than for vacant possession, and the valuer should reflect the term income and the deferred reversion explicitly. The perpetuity of the freehold does not neutralise the effect of the lease.

Question 25Land and Building Valuation Concepts and Principles

Which statement correctly describes the relationship between the capitalisation rate and the discount rate in a constant-income perpetuity?

  1. The two rates are unrelated concepts in property valuation
  2. The capitalisation rate is always double the discount rate
  3. The capitalisation rate equals the discount rate minus the growth rate only when income is declining
  4. The capitalisation rate equals the discount rate when income is constant and perpetual Correct answer.

Explanation

For a constant perpetual income with no growth, the capitalisation rate and the discount rate coincide because the growth term in the Gordon model is zero. Where growth or depreciation in income is expected, the capitalisation rate differs from the discount rate by that growth or decline. The rates are therefore closely related, not independent.

Question 26Land and Building Valuation Concepts and Principles

Which principle holds that a property's value is maximised when it is put to its most profitable legally permissible, physically possible, financially feasible, and maximally productive use?

  1. Conformity
  2. Highest and best use Correct answer.
  3. Substitution
  4. Contribution

Explanation

Highest and best use is the fundamental valuation principle that identifies the use that produces the highest value for a property, subject to four tests: legal permissibility, physical possibility, financial feasibility, and maximum productivity. It underpins all valuation approaches because it defines the basis for comparing the subject with other properties.

Question 27Land and Building Valuation Concepts and Principles

In the sales comparison approach, which adjustment is made to the comparable sale price when the comparable has a superior location compared with the subject property?

  1. An upward adjustment to the comparable's price
  2. An adjustment to the subject's net operating income
  3. No adjustment because location is not a variable
  4. A downward adjustment to the comparable's price Correct answer.

Explanation

Adjustments in the sales comparison approach are made to the comparable's sale price to reflect differences from the subject. If the comparable is superior in a feature such as location, its price must be adjusted downward to indicate what the subject would have sold for with its inferior location.

Question 28Land and Building Valuation Concepts and Principles

Which type of depreciation is caused by factors external to the property, such as a nearby industrial plant emitting noise and odour?

  1. Functional obsolescence
  2. Curable depreciation
  3. Physical deterioration
  4. External obsolescence Correct answer.

Explanation

External obsolescence (also called economic obsolescence) arises from influences outside the property boundaries, such as neighbourhood nuisances, zoning changes, or market conditions. It is generally incurable because the owner cannot control the external cause.

Question 29Land and Building Valuation Concepts and Principles

In the cost approach, which component is added to the current cost of constructing a new replica of the subject property to arrive at the indicated value?

  1. The net operating income
  2. The value of the land Correct answer.
  3. The seller's profit margin
  4. The capitalisation rate

Explanation

The cost approach estimates value by adding the current cost of constructing a new replica of the improvements to the value of the land, then deducting accrued depreciation. Land value is included because the approach values the entire property interest, not just the building.

Question 30Land and Building Valuation Concepts and Principles

Which method of estimating accrued depreciation compares the reproduction cost of the improvements with their market value and attributes the difference to depreciation?

  1. Market extraction method Correct answer.
  2. Age-life method
  3. Capitalisation method
  4. Breakdown method

Explanation

The market extraction method derives depreciation from market data by subtracting the depreciated value of the improvements from their reproduction or replacement cost. It is based on observed sales of comparable properties and is considered a market-supported technique.

Question 31Land and Building Valuation Concepts and Principles

Which of the following is the best definition of 'market value' for land and building valuation purposes?

  1. The original construction cost adjusted for inflation
  2. The price at which a forced sale occurs within a short timeframe
  3. The value to a particular owner based on personal attachment
  4. The most probable price in a competitive and open market under all conditions requisite to a fair sale Correct answer.

Explanation

Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller acting prudently and knowledgeably. It assumes a reasonable exposure period and that price is not affected by undue stimulus.

Question 32Land and Building Valuation Concepts and Principles

Which approach to value is most appropriate for a newly constructed specialised building with no rental income and no comparable sales?

  1. Sales comparison approach
  2. Discounted cash flow approach
  3. Income capitalisation approach
  4. Cost approach Correct answer.

Explanation

The cost approach is most reliable when the property is new, has no income stream, and lacks comparable sales, because it estimates value from the cost to replace the improvements plus land value less depreciation. For a newly constructed specialised building, depreciation is minimal and cost data are readily available.

Question 33Land and Building Valuation Concepts and Principles

Which of the following best describes the 'principle of substitution' in the context of land and building valuation?

  1. The value of a property is determined by its original construction cost
  2. A buyer will pay no more for a property than the cost of acquiring an equally desirable substitute Correct answer.
  3. The value of a property increases in proportion to its age
  4. The value of a property is based on its highest historical use

Explanation

The principle of substitution states that a prudent buyer will not pay more for a property than the cost of acquiring an equally desirable substitute property with similar utility. This principle underlies all three approaches to value: sales comparison, cost, and income.

Question 34Land and Building Valuation Concepts and Principles

A valuer is using the investment method to value a freehold office building. The net operating income is INR 15,00,000 per annum and the appropriate capitalisation rate is 10 per cent. What is the indicated value?

  1. INR 1,50,00,000 Correct answer.
  2. INR 1,65,00,000
  3. INR 1,35,00,000
  4. INR 15,00,000

Explanation

Under the investment method, value is derived by capitalising the net operating income at the appropriate capitalisation rate: Value = Net Operating Income ÷ Capitalisation Rate. Here, INR 15,00,000 ÷ 0.10 = INR 1,50,00,000.

Question 35Land and Building Valuation Concepts and Principles

When valuing a property that is subject to a lease at a rent below current market rent, what adjustment should the valuer make in the income approach?

  1. Deduct the difference between market and contract rent from the freehold value
  2. Ignore the lease and use market rent for the entire holding period
  3. Use the contract rent in perpetuity
  4. Reflect the lease terms until expiry and then market rent thereafter Correct answer.

Explanation

A below-market lease creates a leasehold advantage for the tenant until expiry, after which the owner can revert to market rent. The valuer should reflect the contract rent during the unexpired term and the market rent from the reversionary date, often using a term-and-reversion or discounted cash flow model.

Question 36Land and Building Valuation Concepts and Principles

Which of the following is a recognised limitation of the cost approach when valuing an older building?

  1. It requires a reliable net operating income figure
  2. It ignores the cost of construction entirely
  3. It cannot be used for properties with land value
  4. Estimating accrued depreciation accurately is difficult and subjective Correct answer.

Explanation

The cost approach requires an estimate of accrued depreciation, which becomes increasingly difficult and subjective as a building ages because physical deterioration, functional obsolescence, and external obsolescence are hard to quantify precisely. This limits the reliability of the approach for older improvements.

Question 37Land and Building Valuation Concepts and Principles

In a discounted cash flow (DCF) valuation of a retail building, which input typically has the greatest influence on the resulting value when all other inputs are held constant?

  1. The lease commencement date
  2. The discount rate Correct answer.
  3. The terminal capitalisation rate
  4. The annual operating expense ratio

Explanation

The discount rate reflects the time value of money and risk, and small changes in it can significantly alter the present value of all future cash flows, especially over long holding periods. It therefore typically has the greatest effect on the DCF result among the listed inputs.

Question 38Land and Building Valuation Concepts and Principles

A valuer discovers a title defect during due diligence for a mortgage valuation. What is the most appropriate treatment in the valuation report?

  1. Ignore the defect because it is a legal matter
  2. Reduce the value by a fixed percentage without explanation
  3. Disclose the defect and state its effect on value and marketability Correct answer.
  4. Value the property as if the defect did not exist

Explanation

A valuer must disclose any material facts that affect value, including title defects, and explain their impact on value and marketability. Ignoring the defect would mislead the lender and breach professional standards of care.

Question 39Land and Building Valuation Concepts and Principles

Which factor most directly supports a high value for agricultural land located on the urban fringe?

  1. The current crop yield of the land
  2. The likelihood of future conversion to urban use Correct answer.
  3. The distance from the nearest highway
  4. The soil type of the land

Explanation

Agricultural land on the urban fringe often commands a premium because of its potential for future conversion to urban use, which reflects the principle of highest and best use. The expectation of rezoning or development can make the land more valuable than its current agricultural use would suggest.

Question 40Land and Building Valuation Concepts and Principles

A property generates a net operating income of INR 12,00,000 per annum in perpetuity. The market capitalisation rate is 8 per cent. What is the indicated value using the income approach?

  1. INR 96,00,000
  2. INR 1,50,00,000 Correct answer.
  3. INR 1,44,00,000
  4. INR 1,20,00,000

Explanation

Value = Net Operating Income ÷ Capitalisation Rate = INR 12,00,000 ÷ 0.08 = INR 1,50,00,000. This is a direct capitalisation calculation for a perpetual income stream.

Question 41Land and Building Valuation Concepts and Principles

Which situation best illustrates external obsolescence affecting a building's value?

  1. A new motorway bypasses a town, reducing passing trade for a retail building Correct answer.
  2. A building has outdated electrical wiring that is costly to replace
  3. A building's roof requires replacement due to storm damage
  4. A building has an inefficient layout that cannot be altered

Explanation

External obsolescence is a loss in value caused by factors outside the property, such as changes in traffic patterns, zoning, or economic conditions. The motorway bypass reduces passing trade, which is an external influence beyond the owner's control.

Question 42Land and Building Valuation Concepts and Principles

When reconciling the results of the cost approach, sales comparison approach, and income approach, what should the valuer do?

  1. Weigh the approaches according to their relevance and reliability for the property type Correct answer.
  2. Select the highest value to protect the lender
  3. Use only the cost approach for all properties
  4. Average the three values equally

Explanation

Reconciliation requires the valuer to weigh the indications from each approach based on the property type, available data, and purpose of the valuation. The valuer should explain why one approach is given more weight and arrive at a single value conclusion.

Question 43Land and Building Valuation Concepts and Principles

A property has a net operating income expected to grow at 3 per cent per annum in perpetuity. Using a discount rate of 10 per cent and the Gordon growth model, what is the indicated value if the current net operating income is INR 10,00,000?

  1. INR 1,30,00,000
  2. INR 1,03,00,000
  3. INR 1,42,85,714 Correct answer.
  4. INR 1,00,00,000

Explanation

The Gordon growth model values a perpetually growing income stream as Value = NOI × (1 + g) ÷ (r − g), where g is the growth rate and r is the discount rate. Here, INR 10,00,000 × 1.03 ÷ (0.10 − 0.03) = INR 10,30,000 ÷ 0.07 = INR 1,42,85,714.

Question 44Land and Building Valuation Concepts and Principles

A valuer is assessing the effect of a long-term lease at a rent above the current market rent on the value of the freehold interest. What is the correct treatment?

  1. The above-market rent increases the freehold value until the lease expires Correct answer.
  2. The above-market rent decreases the freehold value until the lease expires
  3. The above-market rent increases the leasehold value only
  4. The above-market rent has no effect on the freehold value

Explanation

An above-market lease benefits the freeholder because the contract rent exceeds market rent until expiry, increasing the freehold value during the unexpired term. After expiry, the rent reverts to market, so the benefit is limited to the lease period.

Question 45Land and Building Valuation Concepts and Principles

Which statement correctly describes the relationship between the capitalisation rate and the discount rate in a constant-growth income capitalisation model?

  1. The capitalisation rate equals the discount rate minus the growth rate Correct answer.
  2. The capitalisation rate is independent of the discount rate
  3. The capitalisation rate is always equal to the discount rate
  4. The capitalisation rate equals the discount rate plus the growth rate

Explanation

In a constant-growth model, the capitalisation rate is derived as the discount rate minus the expected growth rate. This relationship shows that higher expected growth lowers the capitalisation rate and increases value for a given income.

Question 46Land and Building Valuation Concepts and Principles

In the valuation of a leasehold interest with 15 years remaining at a fixed rent of INR 5,00,000 per annum, what is the primary determinant of the leasehold value?

  1. The freehold value of the property
  2. The original cost of the lease
  3. The unexpired term and the discount rate only
  4. The difference between market rent and contract rent over the remaining term Correct answer.

Explanation

The value of a leasehold interest depends primarily on the profit rent, which is the difference between market rent and contract rent over the remaining lease term, discounted to present value. The unexpired term and discount rate affect the present value but the profit rent is the core driver.

Question 47Land and Building Valuation Concepts and Principles

Which of the following best explains why a valuer might prefer the investment method over the sales comparison approach for a fully let commercial building?

  1. The investment method directly reflects the income-producing potential of the property Correct answer.
  2. The investment method is required by law for all commercial valuations
  3. The sales comparison approach cannot be used for commercial buildings
  4. The sales comparison approach ignores location

Explanation

The investment method capitalises the net operating income, directly capturing the income-producing potential that is central to the value of a fully let commercial building. The sales comparison approach may be less reliable when comparable sales are scarce or differ significantly in lease terms.

Question 48Land and Building Valuation Concepts and Principles

Which type of obsolescence is most likely to be incurable because it is caused by factors outside the property boundaries?

  1. Deferred maintenance
  2. Physical deterioration
  3. Functional obsolescence
  4. External obsolescence Correct answer.

Explanation

External obsolescence is generally incurable because it stems from outside the property, such as neighbourhood decline or adverse zoning, which the owner cannot remedy. Functional obsolescence and physical deterioration may be curable if the cost of the remedy is justified by the value added.

Question 49Land and Building Valuation Concepts and Principles

A valuer values a freehold shop by capitalising a net operating income of INR 8,00,000 at a capitalisation rate of 8 per cent. What is the indicated value?

  1. INR 80,00,000
  2. INR 1,08,00,000
  3. INR 64,00,000
  4. INR 1,00,00,000 Correct answer.

Explanation

Value = Net Operating Income ÷ Capitalisation Rate = INR 8,00,000 ÷ 0.08 = INR 1,00,00,000. This is a straightforward direct capitalisation calculation.

Question 50Land and Building Valuation Concepts and Principles

Which of the following is a key difference between freehold and leasehold interests in valuation?

  1. Leasehold includes ownership of the land
  2. Freehold is subject to rent payments
  3. Freehold has an indefinite duration, while leasehold is limited to the lease term Correct answer.
  4. Freehold is always more valuable than leasehold

Explanation

A freehold interest is of indefinite duration, subject to statutory restrictions, while a leasehold interest is limited to the term of the lease. This difference in duration affects the income stream and the reversionary value, and therefore the valuation.