The Bank Instruction With a Target Number
You are the principal consultant (RSV) in a four-partner firm in Abuja. A commercial bank instructs your firm to value a 12-unit terrace development in Lugbe as security for a N336m mortgage, and asks for the report in five working days for a fee of N850,000. On opening the file you find that three months ago your firm marketed the same development for the developer and introduced the borrower, Mr O, who signed a sale agreement at N480m. The bank's credit officer tells you on the telephone: 'The sale price is N480m, so make sure your figure comes out around there - our policy is 70% loan-to-value.' The property has a Certificate of Occupancy, but the approved building plan covers only eight of the twelve units; the remaining four were completed last year without approval. Unit 3 is let to a tenant on an unregistered two-year lease at N2.4m per annum. Your managing partner says the fee is too good to lose.
1. Identify the professional and ethical issues raised by this instruction and state, with reasons, what you would do before accepting the work.
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The issues. There are at least four: (i) a self-interest and advocacy threat, because the firm introduced the buyer at the very price the bank now wants confirmed; (ii) a confidentiality problem, because the borrower is also your client and the question the bank is asking is answered from his file; (iii) an independence threat created by the credit officer's request for a target figure; and (iv) a competence and time threat, because five working days at N850,000 may not allow proper inspection, planning enquiry and comparables research.
What I would do. Disclose the firm's prior involvement to the bank in writing before accepting: that you acted for the developer, marketed the property and introduced the purchaser. Ask the bank to confirm it is content. Even with consent, the safer course is to decline the valuation and let another firm do it, because the exposure to a negligence or bias claim if the loan sours outweighs the fee; the agency instruction can continue. If the firm does accept, a different partner must sign the report and the marketing team must be screened from the valuation file.
Terms of engagement. Put in writing: the basis of value, the purpose and addressee, the valuation date, the scope of investigation, the fee (fixed or time-based, never contingent on the figure), the limitation of liability and the complaints procedure. Disclose nothing about Mr O beyond what the valuation requires. Do not accept the instruction at all unless you can be, and be seen to be, objective.
2. How should you respond to the credit officer's statement, and what must the report contain to protect both the bank and your firm?
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Respond in writing, not on the telephone, and keep a copy on file: 'The figure will be our independent opinion of market value as at the valuation date. We cannot work to a target figure or to your loan-to-value policy.' That converts a corridor conversation into a document that protects the firm when the file is later examined. If the pressure is repeated, return the instruction and any fee paid: a valuer who accepts a target has abandoned the thing the bank is paying for.
The report should state the addressee and purpose; the basis of value (market value) and valuation date; the extent of inspection (internal and external, no structural survey, no test of services); the comparables relied on; the planning and tenancy matters; the assumptions and any special assumption; the currency; and a declaration that the valuer has no interest in the property and that the fee is not contingent on the figure. Add a short 'matters requiring the lender's attention' section - the four unapproved units, the unregistered tenancy, and the fact that the property is valued subject to that tenancy, so the bank understands that its security is encumbered. State that the report is for the bank's use only and that no liability is accepted to third parties.
It is also worth saying, politely, that the loan-to-value decision is a credit decision, not a valuation decision: you supply the value; the bank applies its policy to it. An independent figure below N480m is a legitimate outcome.
3. How do the planning irregularity and the tenancy affect your valuation figure and the way you report it?
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Planning. You must not value the four unapproved units as though they were approved, nor write them off as worthless. Establish their status with the planning authority: whether approval can be regularised, at what fee and penalty, and whether the units stand in a location where enforcement or removal is likely (setbacks, rights of way, flood plain). Then value the property as it stands and deduct the cost of regularisation, or apply a stated discount for the risk, and say which you have done. If the risk cannot be quantified, value on the special assumption that approval is obtained, and give the unadjusted figure only as a clearly labelled alternative.
Tenancy. The bank's security will be subject to the tenant's rights, so value subject to the tenancy, not with vacant possession. Test N2.4m against market rent; if it is below market, part of the value lies in the reversion at lease expiry and the bank cannot sell with vacant possession for two years. Flag that the lease is unregistered and may need stamping and registration to be fully enforceable - a legal question for the bank's solicitors, not for you.
The figure. These matters may justify a figure below N480m. Report it with the reasoning. A valuer who produces the number the bank wanted, without disclosing the planning and tenancy issues, has produced a misleading report whatever the arithmetic.