italian property valuation standard - confedilizia eu · editor and co-author ... lo sviluppo del...

Italian Property Valuation Standard

Codice delle Valutazioni Immobiliari

Third Edition

ALDO DE MARCO Supervision

GIAMPIERO BAMBAGIONI

Editor and Co-author

MARCO SIMONOTTI Scientific Director

This study was commissioned by Tecnoborsa in collaboration with: ABI ASSOCIAZIONE BANCARIA ITALIANA

AGENZIA DEL TERRITORIO

CENSIS

CONFEDILIZIA

CONSIGLIO NAZIONALE DEGLI ARCHITETTI

CONSIGLIO NAZIONALE DEGLI INGEGNERI

CONSIGLIO NAZIONALE DEI GEOMETRI

CONSIGLIO NAZIONALE DEI PERITI

INDUSTRIALI CONSIGLIO NAZIONALE DELLE

BORSE IMMOBILIARI ITALIANE

FIAIP FEDERAZIONE ITALIANA AGENTI

IMMOBILIARI PROFESSIONALI

GEO.VAL

INU ISTITUTO NAZIONALE DI URBANISTICA

ISMEA

MINISTERO DELLE ATTIVITÀ PRODUTTIVE

MINISTERO DELL’ECONOMIA E DELLE FINANZE - DIPARTIMENTO DEL TESORO E CONSIGLIO DEGLI

ESPERTI POSTE ITALIANE

UNI ENTE ITALIANO NAZIONALE DI UNIFICAZIONE

UNIONCAMERE

UNIVERSITÀ L. BOCCONI - NEWFIN

UNIVERSITÀ LUISS GUIDO CARLI

First Edition: July 2000 Second Edition: May 2002

Third Edition: December 2005

© Copyright 2000-2006 Tecnoborsa S.c.p.a. Consorzio per

lo Sviluppo del Mercato Immobiliare, Rome

Rights of translation, reproduction by any means (including microfilm, films,

photocopies, etc.), electronic memorization and total or partial adaptation, are reserved

for all countries. Quotation is permitted provided that specific reference is made to the publisher, editor, and supervisor of the

work.

Head Office – Management Via dell’Umiltà, 48

00196 ROME – ITALY Tel. +39 06.6780119

Fax +39 06.69380180 E-mail: [email protected]

www.tecnoborsa.it

Graphic Design and Layout ATON Immagine e Comunicazione S.r.l.

Rome, Italy

Printed by Telligraf S.r.l.

Rome, Italy

English version March 2006

The publisher and authors of this work cannot assume any liability regarding losses suffered by third parties deriving from the use or failure to make use of the information or material contained herein. In order to facilitate the acceptance of this work on the part of operators in the European Union and also of all those international organizations or individuals having an interest in this field, the “Italian Property Valuation Standard – Codice delle Valutatzioni Immobiliari,” was translated into English by native speaking experts. In the event of any differences between the texts or doubts over interpretation, the Italian version of the book will be authoritative

TECNOBORSA TECHNICAL-SCIENTIFIC COMMITTEE ABI Associazione Bancaria Italiana – Italian Banking Association Raffaele Rinaldi Agenzia del Territorio – National Land And Building Registry Giuseppe Montagna, Director, Consultation and Appraisals Service Gianni Guerrieri, Director, Property Market Observatory CENSIS – Social Investment Study Centre Giuseppe Roma, Director General Confedilizia – Italian Property Owners’ Federation Giovanni Gagliani Caputo Consiglio Nazionale degli Architetti, Pianificatori, Paesaggisti e Conservatori – National Council of Architects, Planners, Landscapers and Curators Daniele Cario, Councillor Consiglio Nazionale degli Ingegneri – National Council of Engineers Renato Buscaglia, Councillor Consiglio Nazionale dei Geometri – National Council of Surveyors Antonio Benvenuti, Councillor Consiglio Nazionale dei Periti Industriali – National Council of Industrial Experts Giuseppe Cairoli Consiglio Nazionale delle Borse Immobiliari Italiane – National Council of Italian Real Estate Exchanges Giuliano Marini FIAIP – Italian Federation of Professional Real Estate Agents and Consultants Rocco Attinà, Past President Geo.Val. Esperti – Association of Expert Valuers-Surveyors Benito Virgilio, President INU - National Town Planning Institute Paolo Avarello, President Stefano Stanghellini Ismea – Institute of Agricultural and Food Market Services Angelo Donato Berloco Ministry of Productive Activities Cosimo Fabrizio Dell’Aria Ministry of Economy and Finance Department of the Treasury, Marcello Visca Council of Experts, Daniela Grazioli Italian Post Office UNI – Italian National Unification Institute Alberto Simeoni, Administration UNIONCAMERE – National Union of Chambers of Commerce Giuseppe Tripoli, Secretary-General Bocconi University - Newfin Roberto Bottiglia (University of Verona) Luiss Guido Carli University Bruno Capponi Tecnoborsa Giampiero Bambagioni, Vice President - Committee Coordinator

AUTHORS, RESEARCHERS AND EXPERTS

The main core of the book was developed by Marco Simonotti; some parts were prepared and other chapters edited by Giampiero Bambagioni. Representatives of some the principle credit institutes in Italy collaborated in the drafting of the text (with additions and changes made by the Technical-Scientific Committee), along with the following researchers and/or experts: Antonio Benvenuti and Marina Ciuna for rereading all of the drafts of the Standard and for useful suggestions; Maurizio Radici for the outlining of the Explanatory Note on valuation for the extension of credit, for rereading the text and for useful suggestions on the final draft of the Note; Angelo Donato Berloco for rereading the Explanatory Note on the valuation of agricultural property and for useful suggestions; Raffaele Rinaldi for his contribution to bank debts secured by property; Fabrizio Duranti for comments on the Interntational Accounting Standards and on the Basel II Accord, as well as for updating the profiles of the Technical-Scientific Committee organizations, to which Giovanni Chessa also contributed in part.

Italian Property Valuation Standard Table of Contents

5

Table of Contents

PRESENTATION

SECTION I – ITALIAN PROPERTY VALUATION STANDARD

INTRODUCTION

CHAPTER 1 - TOTAL QUALITY AND PROPERTY VALUATIONS 1 Introduction 2 Definitions 3 Discussion 4 Application

CHAPTER 2 – PROPERTY MEASUREMENTS 1 Introduction 2 Definitions 3 Discussion 4 Application

Appendix A – Area Classification Criteria

CHAPTER 3 - SEGMENTATION OF THE REAL ESTATE MARKET 1 Introduction 2 Definitions 3 Discussion 4 Application

CHAPTER 4 – VALUATION PRINCIPLES 1 Introduction 2 Definitions 3 Discussion 4 Application

CHAPTER 5 – APPRAISAL VALUES AND CRITERIA 1 Introduction 2 Definitions 3 Discussion 4 Application

CHAPTER 6 – PROPERTY PRICES AND CHARACTERISTICS 1 Introduction 2 Definitions 3 Discussion 4 Application


6

CHAPTER 7 – PROPERTY DATA COLLECTION 1 Introduction 2 Definitions 3 Discussion 4 Application

Appendix B – Market Segment Data Form Appendix C - Property Data Forms (summarized and detailed)

CHAPTER 8 – APPRAISAL METHODOLOGIES 1 Introduction . 2 Definitions 3 Discussion 4 Application

Appendix D - Market Comparison Approach Appendix E - Income Capitalization Approach Appendix F - Cost Approach

CHAPTER 9 – VALUATION REPORTS 1 Introduction . 2 Definitions 3 Discussion 4 Application

CHAPTER 10 – REVIEWING VALUATION 1 Introduction . 2 Definitions 3 Discussion 4 Application

CHAPTER 11 – VALUER’S ETHICAL-DEONTOLOGICAL CODE 1 Introduction . 2 Definitions 3 Discussion 4 Application

CHAPTER 12 – GUIDELINES FOR VALUATIONS FOR THE EXTENSION OF CREDIT 1 Introduction 2 Definitions 3 Discussion 4 Application

CHAPTER 13 – GUIDELINES FOR AGRICULTURAL PROPERTY VALUATIONS 1 Introduction 2 Definitions 3 Discussion 4 Application


7

CHAPTER 14 – GUIDELINES FOR VALUATIONS OF CONDOMINIUM SHARES OF PROPERTY 1 Introduction 2 Definitions 3 Discussion 4 Application

SECTION II – ORGANIZATIONS IN THE TECNOBORSA TECHNICAL-SCIENTIFIC COMMITTEE AND THE EFFECTS OF THE MAIN INTERNATIONAL LAWS AND REGULATION IN THE PROPERTY SECTOR

CHAPTER 15 – ORGANISATIONS IN THE TECNOBORSA TECHNICAL-SCIENTIFIC COMMITTEE

Introduction 1 ABI - Italian Banking Association 2 National Land and Building Registry 3 Censis - Social Investment Study Centre 4 Confedilizia - Italian Property Owners’ Federation 5 National Council of Architects, Planners, Landscapers and Curators 6 National Council of Engineers 7 National Council of Surveyors 8 National Council of Industrial Experts 9 National Council of Italian Real Estate Exchanges 10 FIAIP - Italian Federation of Professional Real Estate Agents 11 Geo.Val - Association of Expert Valuers-Surveyors 12 INU - National Town Planning Institute 13 ISMEA - Institute of Agricultural and Food Market Services 14 LUISS Guido Carlo University 15 Ministry of Productive Activities 16 Ministry of Economy and Finance: Department of the Treasury and Council of Experts 17 Italian Post Office 18 Tecnoborsa Scpa 19 UNI - Italian National Unification Institute 20 Unioncamere - National Union of Chambers of Commerce 21 Bocconi University - Newfin 22 Chambers of Commerce, Industry, Crafts and Agriculture

- The case of the Chamber of Commerce of Rome

CHAPTER 16 - BASEL 2 AND REAL ESTATE RATING. BANK DEBTS SECURED BY PROPERTY

1 Basel 2 and Real Estate Rating 2 Bank Debts Secured by Property

Bibliography

Italian Property Valuation Standard Presentation

Presentation The third edition of the Italian Property Valuation Standard is an innovative, far-sighted tool that will make a fundamental contribution to the transparency and growth of the Italian real estate economy, as well as to the creating of conditions favourable for further development of the market, toward the goal of fully integrating the Italian system with the most advanced international economic-financial systems. The market is the place where it is essential to evaluate opportunities and risks, and to be able to do this one must have not only the tools, but also the perception of high ethical standards and set rules. These are the prerequisites – also for the consumer – for carrying out free choices. The real estate market also needs ethical behaviour and set rules, shared and put into practice, to be adopted on the basis of its own choices, and thus not a “locus naturalis” without rules or references, but, tendentially, a “locus artificialis” which is appropriately regulated. The Italian Property Valuation Standard is a synthesis of “knowledge born of research and experience” which involved authoritative intellectual resources, activated synergies and pursued the concerted efforts of the institutions and organizations making up the Tecnoborsa Technical-Scientific Committee. The final result represents the benchmark of property valuation in Italy for the entire economic-financial, institutional and professional world, as well as for European Union citizens and international operators interested in developing investment activities in Italy. In order to achieve results of strategic importance for our country’s system, in following with the objectives of process and product (or service) quality, harmonized with the International Valuation Standards, the IAS/IFRS and Basel II, specific valuation guidelines were developed for the extension of credit, for agricultural properties and for condominium shares of property.

Italian Property Valuation Standard Presentation

9

Therefore, thanks are due to all those who contributed to the achievement of the final result and, in particular, Marco Simonotti for his authoritative scientific guidance and Giampiero Bambagioni for having directed the work, contributed to the writing of the text, and coordinating the Work Group regarding the credit sector, which involved the ABI (Italian Banking Association) and representatives from the major Italian banks. Conclusion This volume – which constitutes the evolution of a technical-scientific project begun by Tecnoborsa in 1998, taking shape in the first edition of the standard in 2000 followed by the second edition in 2002 – pursues the objective, in the words of Pareto (V.), of “resolving the antinomy between the necessary abstraction of scientific laws and the complex concreteness of real phenomena,” so as to allow the national economic-professional system to avail itself, more than ever, of a shared and accepted valuation methodology, univocal and easily applied, in line with international best practices.

Aldo De Marco, President

Italian Property Valuation Standard Acknowledgments

Acknowledgments Representatives of the institutions and the organizations of the Tecnoborsa Technical-Scientific Committee Andrea Mondello (Rome Chamber of Commerce, President) Maurizio Sella (ABI, President) Mario Picardi (Agenzia del Territorio - National Land and Building Registry, Director) Giuseppe De Rita (Censis, Secretary- General) Corrado Sforza Fogliani (Confedilizia, President) Raffaele Sirica (National Council of Architects, President) Sergio Polese (National Council of Engineers, President) Piero Panunzi (National Council of Surveyors, President) Mariano Magnabosco (National Council of Industrial Experts, President) Franco Arosio (FIAIP, President) Benito Virgilio (Geo.Val, President) Paolo Avarello (INU, President) Ezio Castiglione (ISMEA, Director General) Marcello Foschini (Luiss Guido Carli, Rector) M.P. Maria Teresa Armosino (Ministry of the Economy and Finance, Undersecretary of State) Paolo Scolari (UNI, President) Carlo Sangalli, (Unioncamere, President) Angelo Provasoli (Università Luigi Bocconi, Rector) Lorenzo Tagliavanti (Rome Chamber of Commerce, Vice President)

Experts on the Work Group for Property Valuations in the Credit Sector (TLSC) Raffaele Rinaldi - ABI Maurizio Radici - Banca Intesa Paolo Merati - UniCredit Banca Paolo Di Biasi, Angelo Castagneris - Sanpaolo IMI Vittorio Gagliani, Rosario Zanchiello, Maria Beatrice Rinaldi - Banca di Roma Giovanni Basco, Vincenzo Di Carluccio, Aldo Ronci - BNL Simone Brogi, Romano Romanini - Banca Monte dei Paschi di Siena Alfredo Falli - Banca CR Firenze Giorgio Gobbi - Banca d’Italia Giuseppe Montagna, Massimo Curatolo - Agenzia del Territorio - National Land and Building Registry Daniela Grazioli – Committee of Experts, Ministry of the Economy and Finance Giuliano Giovannetti - PMI Mortgage Insurance Antonio Benvenuti - CNG Mario Gigliucci - Geo.Val Silvia Cappelli - Crif (observer) Massimiliano Pratesi - Experian (observer) Michele Cuneo - Fitch Ratings (Italia) Marco Simonotti, FRICS Giampiero Bambagioni, CIPS - TLSC Coordinator

Italian Property Valuation Standard Acknowledgments

Experts Fabrizio Autieri (Rome Chamber of Commerce, Secretary-General) Paolo Garonna (UNECE United Nations Economic Commission for Europe, Executive Secretary – Officer In Charge) Giuseppe Zadra (ABI, Director General) Corrado Rossitto (CIU, President) Giacomo Elias (ISO International Organization for Standardization, Past President) Enrico Cantarelli, Francesco Cilloni, Fabio Polidori, Adriano Rossi (Council of Experts, Ministry of the Economy and Finance) Domenico Santececca (ABI, Central Manager) Paolo Mottura, (Università Bocconi, Director, Institute of Financial Markets and Institutions) Candido De Vito (Rome Chamber of Commerce, Deputy Secretary-General) Gino Alisi (PEGroup, Director General) Gaetano Martino (Università degli Studi di Perugia, Economies-Valuation Sciences Department) Maurizio D’Amato, FRICS (Politecnico di Bari, 1st Department of Engineering) Filippo Crocè (Borsa Immobiliare Italiana - Italian Real Estate Exchange, Chairman, Supervisory Committee) Andrea Rubino (Borsa Immobiliare Italiana - Italian Real Estate Exchange, Chairman, Price List Committee) Antonello Palmieri (Borsa Immobiliare Italiana, Chairman, Appraisal Committee) Mauro Danielli (FIMAA, Deputy Vice President) Paolo Bellini (ANAMA, President) Paolo Righi (FIAIP, Deputy Vice President) Marcello Bambagioni (Immobilcredit, Vice President) Fabrizio Duranti (Valutatori Immobiliari Italiani) Fabio Mastantuono, FRICS Lucilla Scelba (Tecnoborsa) Ettore Troiani (Tecnoborsa, Director General)

Italian Property Valuation Standard Section I

12

Section I Italian Property Valuation Standard

Italian Property Valuation Standard Introduction

13

Introduction It should be said first of all that “the” Italian valuation standard (univocal, recognized, independent and generally adopted) still does not exist; however, today we have an independent “shared standard of reference,” which consists of the guidelines set forth in the Italian Property Valuation Standard II. This is useful in estimating the market value and other than market values of real estate, movable property, rights and economic interests. The Italian Property Valuation Standard aims at prefiguring that uniform and generally shared valuation standard. This standard can represent the professional element of comparison and a point of reference for Italian valuers and provide them with the tools necessary for responding to the demands of the Italian and international real estate sectors based on the recent changes in legislation and real estate best practices. It should be noted that despite the considerable changes taking place in the last 10 years, the Italian real estate market is conditioned by a series of factors, due mainly to the lack of transparency in real estate prices, the reduced competition in certain areas, tax laws that are less favourable than in other EU countries, and the growing but still limited integration with the securities market. The real estate culture, understood as the whole of the manifestations concerning the evolutionary process of the real estate sector, tied to economic and environmental conditions and historical periods, appears – in some cases – to be behind in comparison with other more advanced countries, where overall the people have a more mature attitude and are better informed. The general objective of the Italian Property Valuation Standard is to bring about conditions of greater transparency and fairness in the real estate market, so as to help modernize it and make it more efficient, dynamic and integrated. The Italian Property Valuation Standard intends to represent the current procedure and to prefigure the best practice in the valuer’s profession. To this end the Standard takes into consideration the concepts, the definitions and criteria of appraisal value, the procedures given in the scientific valuation literature, and international accounting and valuation standards. Thus the approach required for the Standard was often different from that used in local practice and/or in the legislation.


14

The development of the Property Valuation Standard regards: the current valuation practices of professional Italian valuers; the advances in scientific appraisal methods; the principles and concepts of the standard international principles. The standard anticipated by the Property Standard takes into consideration professional valuation practices and valuation literature, adapting the needs of operators (valuers, buyers, agents, taxpayers, professionals, etc.), so as to configure a standard of minimum requisites, or a category of the minimum rules necessary and required for valuation. This standard possesses the prerogative of pursuing total quality, understood as a well-balanced path between service (or product) quality and production process quality; its ambition is to define an Italian standard that is recognized internationally. To achieve this the Italian Property Valuation Standard gathers together the concepts, definitions, criteria and procedures of valuation, describing their content, and invites one to make decisions regarding the parts that are missing or wanting in the current methodological and professional framework. The result is a valuation standard composed of an entire series of minimum application requisites. The International Valuation Standards (IVS), the European Valuation Standards (EVS) e la Royal Institution of Chartered Surveyors (RICS) uphold appraisal regulations that are uniform and generally valid for valuations. The International Accounting Standards/International Financial Reporting Standards (IAS/IRFS) and the Generally Accepted Valuation Principles (GAVP) provide information for the valuation of company and equity assets for accounting purposes (fair value). As regards the introducing of international standards, one must be aware that these standards were set in real estate areas and conditions different than those in our country. There are many definitions of market value and of other than market values (value in use, salvage value, marriage value, etc.), and in our real estate world they may appear distant and at times overabundant. In these standards there are estimates of interests and rights that are very different from ours and from those in our laws and regulations. Thus it is necessary to include, to the extent that it is possible and appropriate, the international standards in order to propose a standard that can be fully adapted to the situation in Italy. The Italian Property Valuation Standard proposes: – the definitions of values (of the market and other than market values),

chosen in a manner fitting for our situation and our real estate and valuation culture;


15

– a method for measuring property areas, according to the principles and criteria of international measurement standards, which distinctly separate the measurement of areas from the calculation of the “commercial area”; the former is a physical measurement which can be standardized, while the latter refers to the commercial practice followed in different local markets which can rarely be standardized;

– the appraisal procedures according to international standards (market approach, cost approach and income approach); these are uniform appraisal methods in these standards and unquestionable in international valuation literature;

– the essential elements for drawing up a Valuation Report; – the principles for reviewing Valuation Reports; – explanatory notes on specific valuation topics. The estimate procedures indicated by international standards are widely disregarded in our country. Some estimate procedures in use in Italy do not pass the test of international standards, besides being intrinsically weak from a scientific standpoint and professionally unacceptable. Many Italian estimate methods do not apply appraisal and accounting rules and standards. Commercial appraisal manuals uncritically offer stereotyped valuations, incautiously based on fixed numeral coefficients, as if the multiform nature of the local real estate markets, where the appraised properties are located, were typologically and spatially undifferentiated and unchanging over time. Nevertheless, these estimate procedures are widely used and, lacking others, accepted by most clients. The fact remains that the valuation procedure most widely used in the world and that gives the most convincing results, internationally known as the market approach, is not applied in Italy. Therefore the Italian Property Valuation Standard must describe the steps in this procedure and adapt it to the real estate and valuation situation in our country. In Italy the income approach is known as an analytic procedure, and can be compared to direct capitalization, but the valuation literature and international standards also consider yield capitalization and the discounted cash flow analysis. The minimum application requirements and the applicative assumptions must be defined for all of these procedures. The minimum requirements seek to adapt the exigencies of correctly applied appraisal procedures to the difficulties of procuring data, working out procedures and presenting value conclusions encountered by Italian professional valuers. The cost approach estimates other than market values, and deals with accounting estimates and as a basis for separating the value of the land from


16

that of the building, and pure real estate rent from building rent. In Italy this procedure is often considered a methodological expedient that is used in the appraisal of specialised properties. The topics and themes dealt with in the Italian Property Valuation Standard should not be considered exhaustive as concerns the profession of valuator, which is based on a variety of valuation principles, appraisal criteria and procedures, and as concerns the countless actual practices. The Standard recognizes that its applications are tied to specific valuation problems, and the solving of these problems depends on the valuer’s judgment and ability to choose the right criteria and procedures. When valuations require the application of the standards for other fields, the Italian Property Valuation Standard suggests to valuers that they fully understand the purpose of the valuation, and that they comply with both the regulations of the other fields and the standards for property valuations. The chapters of the Italian Property Valuation Standard are divided into the following subsections: – an introduction, in which the topic is presented and the Standard’s

objective is indicated in a preliminary manner; – the definitions, in which the whole of the elements that characterize and

circumscribe the topic on a conceptual level are indicated, in accordance with the valuation literature and international valuation standards;

– a discussion, in which the topic and pertinent questions are examined in depth, and exceptions and proposals are also discussed;

– the application, in which practical uses of the chapter topic are indicated and regulations for the valuation are prescribed and solutions offered for problems and questions.

In short, the Italian Property Valuation Standard deals with the following topics: – the measurement of properties for valuations according to a single

standard (Chapter 2); – the definition of market value and the definitions of other than market

values (Chapter 5); – the examining of appraisal procedures (Chapter 8); – the contents of the Valuation Report (Chapter 9); – reviewing valuations (Chapter 10); – the Standard’s rules for ethical-deontological conduct (Chapter 11); – guidelines for valuations for the extension of credit (Chapter 12); – guidelines for agricultural property valuations (Chapter 13);


17

– guidelines for valuations of condominium shares of property (Chapter 14).

It is important for the understanding and use of the Italian Property Valuation Standard to be aware that the definitions, discussion and application of each chapter must be taken as parts of a whole.

Italian Property Valuation Standard Chapter 1

18

Chapter 1

Total Quality and Property Valuations 1.0 Introduction 1.1 In order to facilitate the adoption of the Italian Property Valuation

Standard, attention should be drawn to the essential concepts of “quality,” as concerns information and valuation in the real estate sector.

1.2 It is well known that over time the concept of “quality” has

undergone a process of gradual extension and evolution, to arrive at the current vision of “total quality.” This process can be summarized in three stages: 1) product or service quality; 2) production process quality; 3) total quality.

1.2.1 Quality standards were originally concerned with the product or

service destined for the market, with particular attention paid to the protection of the user or consumer. The growing realization that the quality of the product or service is generated in the processes soon led to the extending of the standards to the production processes. Finally, the concept of Total Quality evolved more recently, in reference to the extension of the qualitative approach to all levels, sectors, and company processes, including those that do not generate products or services for the market.

1.3 The gradual extension of the concept of quality is closely associated with

the parallel extension of the horizon of the subjects involved, from the viewpoint of the buyer to the viewpoint of the supplier or producer. At first the quality (of the product) was directed mainly toward the


19

satisfaction of the customer. Later, with the aim of improving efficiency, reducing times and minimizing costs, the quality (of the process and total) was also directed toward the satisfaction of the producer.

1.4 The evolution indicated by the three stages mentioned above is mirrored

exactly in the evolution of the legislation. At first the standards were conceived from the point of view of the protection of the customer in regard to the supplier, in order to guarantee minimum quality standards for the service. More recently, legislative activity has also taken a different direction, which is fully incorporated into the ISO 9004 standard. This is a guide to the construction of quality seen from the point of view of the supplier, intentionally divorced from the contractual relationship between the supplier and the buyer, and which focuses on the former rather than the latter.

1.5 As regards the Italian Property Valuation Standard’s specific area of

interest, it must be noted that in the sector of real estate information and valuation, the approach tied to quality has not yet become sufficiently widespread. On the one hand, in fact, the definition of minimum standards for the quality of the service (information or valuation) seems anchored to initiatives in specific areas, even though it is becoming more widespread and more frequently applied, for example the UNI 10750 Standard “Estate Agents - Requisites of the Service1,” which, moreover – where and to the extent that it is compatible – must be understood to be complementary to and incorporated into this edition of the Italian Property Valuation Standard. However, in many cases the spreading of the concepts of Total Quality within structures devoted to the collection and processing of property information has still not reached a sufficient and intelligible level of evolution.

1 The Italian UNI 10750 standard was the first regulation for quality in the real estate services sector to be approved (in 1998) for the EU. For purposes of harmonization with national and international best practices the standard was rewritten in 2005, under the guidance of a commission of Uniter experts, in which Giampiero Bambagioni was involved. In particular, although centered around the regulating of services typical of the real estate market, new quantitative and qualitative parameters for valuation procedures were introduced through the definition of specific guidelines for the measurement of the commercial value of property.


20

1.6 With a view to overcoming the limits described above, with the Italian Property Valuation Standard the foundations are laid for the evolving of two areas of activity: – valuation, i.e. the preparation of appraisals and inspections regarding

real estate property; – information, i.e. the collection, processing and restitution of primary

market data (values, incomes, etc.). – While the first sector of activity is wholly covered by the Standard,

the sector relative to information is involved only as regards the interface between information and valuation. In other words, it is intended to define the qualitative requisites which the information activities must meet so that the relative outputs can be used for the purposes of valuation.

1.7 The use of the Italian Property Valuation Standard is not binding, but

voluntary. It can be of use for the recognition of the reliability of property information and of the structures that process such information, on the basis of code of self-regulation, with a view to market transparency and harmonization of the procedures.

1.8 The activities in question (information and valuation) are carried out in

the context of structures characterized by highly complex management, a multiplicity of services and associated activities (e.g. banks, Property Exchanges, research centres, industry associations). The information and valuation activities represent, however, only a segment of the whole of the activities carried out in such structures. The application of the Standard should therefore be understood to be intended as a valid interpretative aid, in the specific Italian context, to the application of the Total Quality System for information and/or valuation activities in the property sector.

2.0 Definitions 2.1 The Quality System or Subsystem (QS) comprises the organizational

structure, the activities, programs and actions designed to ensure that a product, a process or a service is in keeping with the final objectives and with the purposes for which it will be used.


21

2.2 The structure of a QS consists of various processes. A process is defined as an organized activity which, using the necessary inputs, generates pre-established outputs for defined users. In general, the QS consists of three main processes: – the process of market research; – the process of planning the service; – the process of creation (or provision) of the service. These processes combine to create the service, and can be represented as parts of the circle of quality, of which the UNI EN 29004-2 standard supplies an effective graphical outline (Figure 1.1).

Figure 1.1 - Circle of Quality of Services according to the UNI EN 29004-2 Standard 2.3 The planning process involves the preparation of written documents,

which consist of three levels of specifications: – specifications of the service;

Summary information

Process of market research

Planning Process

Analysis & of performance of service

Process of supply of service

Valuation of supplier

Service

Specifications for quality

control

Specificationof the service

Specificationfor creationof service

Organization of the Service

Needs to be satisfied with

the service

INTERFACE

Client Supplier

Valuation of the client

= Needs/Results = Processes =Documents = Valuations


22

– specifications for the creation of the service; – specifications for quality control.

2.3.1 With reference to the property valuation sector, the main aim of

the Standard is to provide a support for the preparation of specifications at the first level (specifications of the service), outlining a model applicable to a variety of different cases. The specifications of the second and third level, instead, can only with difficulty be established as a generally valid model, because they need to refer to the real configuration of a specific subject doing the valuation. However, the systematic description of specifications of the service contained in the Standard may also help in the preparation of specifications for the creation of the service and for the quality control.

2.3.2 The specifications of the service (UNI EN 29004-2 6.2.3.) are

intended to provide a complete and precise description of the characteristics of the product/service offered and of the relative conditions of acceptability (minimum requisites). In particular, the Italian Property Valuation Standard aims to provide a support as regards: – the definition of the terms and conventions to be adopted; – the definition of the minimum requisites with reference to the

economic and technical contents. 2.3.3 The Specifications for the creation of the service (UNI EN

29004-2 6.2.4.) contain the procedures for the creation of the service, with the description of the methods to use in the service creation process. They define the means and the methods used in offering the service. In particular, the specifications for the creation of property valuations may involve: – the definition of the level of professional competence

required, of ethical standards, and of the criteria for conduct; – the identification of the minimum requisites for the choice of

secondary suppliers (market information); the importance of this aspect is forcefully stressed by the UNI EN 29004 Standard: “The products and services acquired can be decisive for the quality, the costs, the efficiency and the reliability of the services provided by an organization


23

supplying services. [...] The requisites for sourcing such services should at least involve [...] the selection of qualified secondary suppliers.”

2.3.4 The specifications for quality control (UNI EN 29004 6.2.5)

define the procedures for the valuation and the control of the characteristics of the product/service and of its provision. These procedures are brought together in checklists which permit verification of the completeness of the report and its compliance with the specifications listed in the previous points

2.4 As regards the possibility of defining a set of specifications suited to

governing the valuation process and the relative product, i.e. the Valuation Report, the starting point must be an analysis of the main approaches already in use. On first examination, all the approaches can be divided into two main categories, which can be briefly defined as follows: – the product-based approach, which consists of defining the

specifications of the valuation in terms of the organization of the content of the final report; this is by far the most widespread approach, essentially thanks to its flexibility, as the specifications that derive from it are independent of the characteristics of the organism or subject responsible for the valuation, and consequently can be adapted and applied to a variety of different subjects.

– the process-based approach, which consists of defining the specifications of the valuation in terms of the organization (generally chronological) of the activities or actions that the subject responsible for the valuation must carry out during the valuation process.

The product-based approach 2.5 The product-based approach is applied in numerous manuals of

specifications produced for internal use by public bodies and institutions. It is also found in the standards defined by professional industries and organizations carrying out valuations at national and international levels. The most representative example of this approach is the Appraisal and Valuation Manual of the Royal Institute of Chartered Surveyors (better known as the Red Book).


24

2.5.1 As regards the latter example, it is useful to point out certain peculiarities, which can be summarized in the following characteristics: flexibility, liability, and transparency.

2.5.1.1 Flexibility is understood to mean that the specifications

do not force the valuer to adopt rigid and pre-established schemes and methods, such as in the case of identifying the value to be sought in the appraisal.

2.5.1.2 Liability encourages surveyors to declare the limits of

their work and, consequently, the degree of liability toward clients and any third parties. In particular, the accent is placed on the sources, on the limits of their reliability and on the nature of the information on which the appraisal is based; the valuer must clarify whether any aspects of the Valuation Report require further investigation, or whether access to essential information has been denied.

2.5.1.3 Transparency is tied to the appraisal process, so as to

avoid any ambiguity or misunderstandings on the part of the eventual users of the valuation; the valuation process must be clearly stated and defined.

The process-based approach 2.6 The process-based approach is rarer, although it has been well known for

some time to scholars of the topic of valuation and to the more up-to-date valuers; the appraisal method divided the valuation into three parts (E. Di Cocco): – the interpretation of economic and juridical relations between things,

facts and persons involved in the appraisal; the identification of the economic aspect of the value (or appraisal criterion);

– the choosing of one or more valuation procedures; – the identification of the actual conditions; the definition of the

hypothetical conditions; the identification of the necessary actual elementary data; the identification of the necessary hypothetical elementary data.


25

2.7 Subsequent operations are: the measurement (or computation or assessment) of the values of the actual elementary data; the estimate of the hypothetical data; the carrying out of the calculations envisaged in the procedure.

2.8 On the basis of this approach, a graphical model of the valuation process

was produced. This is a diagram, in which the different activities are connected by unbroken lines (mandatory stages) or broken lines (possible and, therefore, optional stages) (M. Grillenzoni, G. Grittani) (Figure 1.2).

Figure 1.2 – Summary of the valuation process

Integration or reformulation

of the aim

Appointment

Surveys, Inspections, gathering of information

Identification of type of

value

Choice of one or more

procedures

Processing of data and check

on hypotheses. Final calculations

Preparation of technical report

Final judgement

End Yes

Economic/juridical relations between tthings, facts, persons

Formulation of the purpose or aim of the appraisal

Elementary data available

Interpretation and hypotheses

No


26

3.0 Discussion 3.1 The peculiarities of the framework of specifications contained in the Red

Book emerge more evidently comparing this model with those commonly used in Italy, which can be found in specialist publications and manuals (for internal use) issued by bodies or institutions which, for various reasons, are involved in property valuation. One example is the “Schema unificato per la redazione delle perizie di stima” (“Unified Scheme for the Preparation of Appraisals”) drawn up by ENEL in 1990. This is a product-based approach, intended essentially to establish the organization of the content of appraisals, which can be used as an outline for the preparation of appraisals and as a checklist to verify the completeness of the content.

3.1.1 The “Unified Scheme” is organized in six points:

– premises and purpose of the appraisal; – general description of the property; – technical report; – valuation; – conclusions and indication of the value of the property; – list of appendices. This is a scheme of service specifications in a strict sense, which adequately regulates the content of the final product, but avoids certain essential aspects, such as references to the sources and to the liabilities of the valuer.

4.0 Application 4.1 If there is no reference to specific valuers, the valuation process models

suffer from a certain amount of vagueness. Indeed, it is not easy to fully identify and classify a set of activities for the purposes of valuation, independently of an analysis of the organization and/or person responsible for the valuation itself. Therefore the Italian Property Valuation Standard offers a model of specifications of the property valuation service based essentially on the product (valuation report), without neglecting certain relevant process-related problems, even when these have no direct reflection on the product, as in the case, for example, of the procedures and form of the appointment.


27

Chapter 2

Property Measurements 1.0 Introduction 1.1 The expense of the purchase of property is made up of the measurement

of its size and the unit price in reference to the size: thus, for example, the commercial area of a building represents the size, and the price per unit of area represents the unit price.

1.2 The measurement of property areas serves primarily for the measurement

of the size of the property, divided into various types of main and secondary areas, annexed and connected areas, covered and open areas, and internal and external areas.

1.3 The commercial area of a property is based on the actual measurement of

the main and secondary areas; the latter come within the commercial area according to the agreements between the contracting parties, on the basis of their function and the quality conferred to the property.

1.4 For the measurement of the real area, a metric standard can be established

beforehand, i.e. a set of uniform criteria, generally valid and shared by market operators, experts and contracting parties. When calculating the commercial area where there are secondary areas, a measurement standard cannot be established beforehand, because the commercial ratios of the secondary areas vary in space locally from one market segment to another and in time according to the market dynamics.

1.5 The measurement standard regards physical and technical measurements

used for commercial transactions and property valuations. The measurement of property areas is therefore purely instrumental to the estimating of the market value and the other than market values of a property.


28

1.6 The objective of the Italian Property Valuation Standard is to provide a

standard property measurement criterion to be applied in property valuation.

2.0 Definitions 2.1 The commercial area is an imaginary measurement which includes the

main area and the secondary areas of the property, which come within the commercial area in proportion to the commercial ratios known in real estate transaction procedures, sometimes explicitly indicated in contracts and other times calculable in those stipulated in block.

2.2 The commercial ratios of the secondary areas regard the ratios between

the prices of the secondary areas and the price of the main area. These ratios are available for the most common and recurrent property types; they are less or not at all available for other types, such as external areas.

2.3 The property measurement coordinates are:

2.3.1 The purposes of the measurement, such as:

2.3.1.1 the town-planning and building indices regulated by law; 2.3.1.2 brokerage activity; 2.3.1.3 the direct transaction between buyers and professional

sellers; 2.3.1.4 litigation in which the parties agree on measurements or

the way of measuring;

2.3.2 The type of property; 2.3.3 The type of contract of sale or lease for entire properties, for

covered and open spaces, for rooms and for parts within complex buildings;

2.3.4 The use of the property;


29

2.3.5 The market forms, from the more to the less competitive; 2.3.6 The appraisal criteria:

2.3.6.1 of the price according to the market practice, unless

otherwise agreed upon by the parties; 2.3.6.2 of the construction cost and remodelling costs for

builders; 2.3.6.3 of the property operating and management costs; 2.3.6.4 of the other than market values, such as the assessed

value based on the conventional ratios of different types of areas; the investment value and value in use according to subjective criteria of the entrepreneur, except when considering a single type of measurement for comparing alternative projects (under equal conditions); the insurable value according to the terms of the insurance contract; the security value according to the provisions of the institutes and bodies extending credit (Chapter 5).

2.4 The classifications of property areas are numerous and interrelated.

Classification criteria essentially regard the nature, function, commercial purpose and value for which the measurements were taken (Chapter 2, Appendix A)

3.0 Discussion 3.1 The commercial area of a property is equal to the sum of the main area

and the secondary areas considered on the basis of their respective commercial ratios.

3.2 As a matter of principle, the commercial area regards the areas

exclusively owned or used, whereas it does not regard the areas owned or used in common, even though these are included in the transaction and are important for establishing the price and the appraisal. Indeed, the common parts contribute to the establishment of the property’s market


30

price, and thus they influence its price and its valuation; consequently the measurement of the common areas may be requested in the appraisal when they bear to a greater or lesser degree upon the value of the property and its parts. For example, two apartments hypothetically the same in every way and located in two nearby condominium buildings may have different prices because the outside condominium areas are different. To this end they must be must be measured, even if not provided for in the contract.

3.3 The commercial ratios vary by market segment and are not always

available for all types of property areas; often in individual transactions for particular types of areas simplifications are applied in the calculation of commercial ratios accepted voluntarily by the contracting parties.

3.4 In measure contracts, an agreement is made as to the unit prices of the

different types of areas making up the complex properties. In block contracts, the total market price or the unit price of the summarized commercial area is agreed upon. In commercial transactions and for valuation purposes, in both forms of contracts the commercial ratios are used: in measure contracts, the unit prices of the areas and their relative commercial ratios are clear; in block contracts, the unit prices of the areas and their relative commercial ratios are hidden.

3.5 The volume of a property is often identified with that determined in

conformity with the town-planning regulations applicable for the particular case. It can happen that two properties having the same physical volume have two different buildable volumes. Thus it is necessary to standardize the criterion for calculating the buildable volume of properties, in order to make a comparison between properties belonging to the same market segment (typological) and to obtain useful elements (construction cost, requalification cost, etc.) necessary for valuation and real estate counseling.

4.0 Application 4.1 The Italian Property Valuation Standard defines common, consistent

criteria for the accurate metric measurement of properties.


31

4.2 With reference to the Italian real estate situation and the criteria adopted in Europe, the criteria for the measurement of property areas are identified and proposed in the following types of measurement. (Cf. also: UNI 10750 Standard “Estate Agents - Requisites of the Service” from 2005 and the Handbook of the National Council of Surveyors.)

4.2.1 Gross External Area (GEA) – the gross external area is the area

of a building delimited by vertical perimeter elements, measured externally on each floor above ground or in the ground at the conventional height of 1.50 meters from the floor level; the GEA includes: – the thickness of the free outside main walls and one half (1/2)

of the thickness of the adjoining walls bordering with other buildings, the thickness of the internal load bearing walls and the partitions;

– the internal pillars/columns; – vertical circulation spaces (stairs, elevators, escalators, lifting

systems, etc.) and horizontal circulation spaces (halls, antechambers, etc.);

– the electric transformer room, the heating plant, the systems rooms inside or adjacent to the building;

– vertical air ducts or other type of conduits; and does not include: – external uncovered access ramps; – balconies, terraces and the like; – porticoes within the projection of the building; – purely ornamental architectural elements; – open areas delimited by the outside walls.

4.2.2 Gross Internal Area (GIA) – the gross internal area is understood

as the area of a real estate unit measured along the internal perimeter of the outside main wall for each floor above ground or in the ground at the conventional height of 1.50 meters from the floor level; the GIA includes: – the thickness of internal walls and partitions; – the internal pillars/columns; – internal horizontal circulation spaces (halls, antechambers,

etc.) and internal vertical circulation spaces (stairs, elevators, escalators, lifting systems, etc.);


32


– vertical air ducts or other internal type of conduits; and does not include: – the thickness of outside main walls; – porticoes within the projection of or adjacent to the building; – balconies, terraces and the like; – external vertical and horizontal circulation spaces; – rooms for common use.

4.2.3 Net Internal Area (NIA) – the net internal area is understood as

the area of a real estate unit determined by the summation of the individual rooms that make up the unit, measured along the internal perimeter of the walls and partitions for each floor above ground or within the ground at the conventional height of 0.50 meters from the floor level; the NIA includes: – the thickness of the wainscoting; – the area of the window bays (concave mouldings); – the areas occupied by movable partitions; – the passageways in internal walls for doors and/or openings; – the areas occupied by built-in closets or recessed elements or

similar occupying the internal space of rooms which can be used differently;

– internal horizontal circulation spaces (halls, antechambers, etc.) and internal vertical circulation spaces (stairs, elevators, escalators, lifting systems, etc.);


– vertical air ducts or other internal type of conduits; and does not include: – the thickness of both outside and inside walls; – porticoes within the projection of or adjacent to the building; – the thickness of partitions; – the space occupied by columns and pillars.

4.3 The calculation of the buildable volume serves for property valuation and

is obtained from the product of the gross external area times the height.


33

4.4 Height is understood as the measurement starting from the ground level to the soffit of the uppermost floor, if there is one, or if not, to the intersection of the outside wall with the soffit of the roof, with the following specifications: – when the building is built on terraces, the height for the calculation

of the buildable volume is that of each section standing on the same terrace;

– if there is a basement floor, the height for the calculation of the buildable volume is taken from the floor (the lowest) up to the ground level;

– if there is an attic floor, even if it is not habitable but its purpose and finishing is connected with the real estate unit of which it is part, the height for the calculation of the buildable volume is measured from the floor level of the attic to the mean (soffit) of the roof.

4.5 In the Valuation Report, it must be specified in the measurement of

property areas whether the calculation of the size of a property was done from a metric survey or deduced from the graphic measurement of the plans (Chapter 9). In the latter case, the type of plan used must be stated, if it was furnished by the Buyer, and if that method was requested by the Buyer. The measurement figure should be approximated to the first decimal point.


34

APPENDIX A

Area Classification Criteria A.1 The classification criteria essentially regard the nature, function,

commercial purpose and appraisal value for which the measurement is carried out.

A.2 The criterion of the gross area and the net area concerns: the gross area

of a structure without deductions for holes or cuttings; the gross building area, including the space under the street level, but excluding the areas not walled, measured from the outside of the outside main walls; the gross floor area, including the intermediate floors, the mezzanine, the cellar, etc. measured from the external faces of the outside walls of the building; the gross leasable area for exclusive use of tenants, including cellars and mezzanines and measured from the central axis of the internal partitions to the internal face of the outside walls (Appraisal Institute, 1993: The Dictionary of Real Estate Appraisal); the net internal area, which in short regards the usable area inside a building measured along the internal face of the outside main walls of each floor, including kitchens, recessed elements, closets/wardrobes or other similar objects that occupy usable space, the areas covered by ventilation and heating grilles, the areas occupied by wainscoting and perimeter ventilation ducts, removable partitions, and excluding condominium spaces (entrance lobby, landings, etc.), bathrooms, rooms for cleaning personnel and similar, elevator shafts and stairs, machinery rooms, hallways, internal structural walls, partitions, columns, pillars, etc. (RICS, 2004).

A.3 The criterion of the internal area and the external area concerns: the gross

external area of a building includes the external faces, taking into consideration each floor at any level, including the areas occupied by internal walls, partitions, columns, stairwells and elevators, vertical conduits, etc.; the elevator engine rooms, the rooms for the heating and/or air-conditioning systems, the rooms for the water reservoir and the


35

electrical transformer; the covered areas with open sides, the access ramps, the fenced-in parking areas, the storerooms (basement floor); the gross internal area of a building included between the internal faces of the outside walls of the building, or up to the line where the windows begin, in cases in which at least 50% of the outer building wall is made up of glass; this measurement takes into consideration each floor at any level and takes measurements at a height of 1.5 meters from the floor (EVS, 2003); the gross external area, which in short regards the area of a building measured externally on each floor, including the thickness of the outside main wall, of the internal walls and of the partitions, columns, pillars, stairwells and elevators, and excluding the outside balconies with open sides, the covered passageways, projecting ornamental elements, hollow air spaces, etc.; the gross internal area which in short regards the area of a building measured along the internal face of the outside main walls on each floor, including the area of the internal walls and of the partitions, columns, pillars, stairwells and elevators, and excluding the thickness of the walls and external projections, outside balconies with open sides, covered passageways, projecting ornamental elements, hollow air spaces, etc. (RICS, 2004).

A.4 The usable area criterion includes: the gross living area of a property for

use as a dwelling, which excludes uncovered areas such as porches and balconies; the usable area of a floor or an office, calculated measuring from the intercommunicating areas of the offices and from the other permanent walls to the centre of the partitions that separate the office from the adjacent usable areas, and to the internal surface of the external walls of the building, including the columns and projections necessary to the building (Appraisal Institute, 1993: The Dictionary of Real Estate Appraisal).

A.5 The use criterion specifies: the store area of the rentable ground floor of

an office building, occupied as a store space; and also the area of the store space computed by measuring from the building line of street frontages, and from the internal face of the other external walls of the building and from the internal face of the intercommunicating spaces and the other permanent partitions and to the centre of the partitions that separate the building to define the rentable areas, including the lobbies within the line of the building, the columns, the vertical projections necessary to the


36

building and the windows extending outside the building (Appraisal Institute, 1993: The Dictionary of Real Estate Appraisal).

A.6 The type of contract criterion includes: the rentable area that considers

the space upon which the calculation of the rent is based according to local custom (Appraisal Institute, 1993: The Dictionary of Real Estate Appraisal); the effective floor area or rentable area that can be used inside a building included between the internal faces of the outside building walls, or up to the line where the windows begin, in cases in which at least 50% of the outer building wall is made up of glass, excluding the calculation of the following areas for each floor: the internal structural walls, the vertical ventilation ducts, the electric system or piping system, the structural columns (only if each element occupies more than one square meter); the elevator shafts and stairwells; the elevator engine room, the storerooms, the tanks or reservoirs (with the exception of those containing material for processing) the transformer rooms, etc.; the space occupied by permanent air-conditioning, heating or cooling systems and conduits passing over the surface, etc. This measurement takes into consideration each floor at any level and the measurements are done at a height of 1.5 meters above the floor (EVS, 2003); the rentable area as the per share portion of the entire floor of the tenant’s office, excluding the building elements that penetrate through the floor (Appraisal Institute, 1993: The Dictionary of Real Estate Appraisal). The rentable area of a floor is fixed for the entire life of a building and is not affected by changes in corridor sizes or configuration. The rentable area is recommended for measuring the total income producing area of a building and for computing the shares of each individual tenant. Experts use the rentable area in analysing the economic potential of a building. The rentable area of a floor is calculated by measuring the inside of the finished area of a dominant portion of the building walls, and excluding all vertical penetrations of the floor, including the columns and the projections necessary to the building.

A.7 The appraisal value criterion includes the preceding areas in relation to

the purpose of the valuation and the construction area. The construction area is a measurement used primarily for determining the building cost or value, and is not applied for leasing purposes except when an entire building is leased to a single tenant; the construction area of a floor is computed by measuring to the outside finished surface of permanent


37

outer building walls (Appraisal Institute, 1993: The Dictionary of Real Estate Appraisal). The construction area of a building is computed as the sum of the construction areas of all the floors of the building, including basement floors, the mechanical equipment floors, and penthouse floors.

A.8 Other measurements may regard areas and volumes: the architectural

area of buildings is the sum of the areas of the building floors, including the basements, the mezzanines, the intermediate floors and the penthouse of headroom height, measured from exterior walls or from the centreline of the separation walls; it may include one half of the area of the covered walkways, of open roof areas, of porches and similar spaces; it does not include pipe trenches, external terraces or steps, chimneys, stacks or roof overhangs; the architectural volume of buildings is the sum of the products of the architectural area of the building and the height measured from the underside of the lowest floor construction system to the average height of the surface of the finished roof (Appraisal Institute, 1993: The Dictionary of Real Estate).


38

Chapter 3

Segmentation of the Real Estate Market 1.0 Introduction 1.1 The real estate market is divided into sub-markets, called segments.

Knowledge on these segments is based on data and information used in commercial practice by operators and by valuers in valuation activities.

1.2 The segmentation of the real estate market represents the preliminary

stage of the appraisal analysis process. 1.3 The objective of the Italian Property Valuation Standard is to provide the

concept and the definition of real estate market segment. 1.4 The identification of the market segment is necessary for the purposes of

the real estate appraisal and the parameterisation of the market. 2.0 Definitions 2.1 The real estate market segment is the basic unit that cannot be further

divided in the economic-valuation analysis of the real estate market. 2.2 The classification of real estate market segments depends on the market

structure and on the purposes of the classification. 2.3 For the purposes of the economic-valuation analysis, in concrete terms a

market segment is defined with regard to the following main parameters: the location, the type of contract, the use, the property type, the building type, the size, the characteristics of the supply and demand, the form of market, the price level and the number of exchanges.


39

2.3.1 The location indicates the real estate unit’s position in geographic and economic space, according to the land rent.

2.3.2 The type of contract indicates the sale, lease or other right,

contract or interest regarding the property. 2.3.3 The use indicates contracts for residential use, for offices, or for

commercial, crafts, industrial or service activities. 2.3.4 The property type indicates whether the contract regards

buildings or land; whether it is used, renovated or restored, new or semi-new; whether it is a unit in a condominium (apartment, attic, studio/bedsit) or exclusively owned.

2.3.5 The building type refers to the building characteristics (for

example, multi-storey buildings, houses, bungalows, industrial buildings, building complexes, etc.)

2.3.6 The size indicates whether the real estate surfaces are small,

medium or large according to established area categories. From the viewpoint of the demand, for consumer use the different sizes correspond to different consumption models and income levels, and for production use to different technical requirements.

2.3.7 The characteristics of the supply and demand describe the

subjects operating in the market, their behaviour, and the interrelations between supply and demand and with the other market segments.

2.3.8 The form of market aims essentially at establishing the degree of

competition from the respective viewpoints of the demand and of the supply. The degree of competition directly influences the price level. The main forms of real estate market are, in short:

2.3.8.1 perfect competition, which represents a form of abstract

market and which provides for numerous sellers and numerous buyers, a homogeneous product, freedom of entry, transparent prices and quantities and simultaneous


40

negotiations and exchanges; there is a single price and no operator can influence it;

2.3.8.2 a monopoly, which provides for one seller and numerous

buyers and a property or building product without alternatives; the price is discretionally unlimited or discriminated with an effective separation of the market segments;

2.3.8.3 monopolistic competition, which provides for numerous

sellers and buyers, a differentiated building product or a property with alternatives and freedom of entry and exit; the price is discretionally limited;

2.3.8.4 the oligopoly, which provides for few sellers and

numerous buyers and a differentiated building product or property; in a non-collusive oligopoly the companies compete with each other; in a collusive oligopoly the companies make direct or indirect agreements and the price can be discretionally unlimited or discriminated;

2.3.8.5 a bilateral monopoly, which provides for just one seller

and one buyer and a single building product or property; the price is not determined and it is possible to establish the range within which the price will be set.

2.3.9 The market price level is represented by the average price of the

properties in the market segment, or by the minimum average price and by the maximum average price, at a given moment. The cyclical stage of the market segment expresses the increasing, decreasing, or stationary trend in prices, as well as the variations in the number of contracts over time.

2.4 The real estate quotations are indications of the average unit prices in

reference to the market segment. Thus they are sample statistics processed from the data collected in the market segment.


41

3.0 Discussion 3.1 The concept and the definition of market segment are fundamental to all

valuation activities. 3.2 The market segment is identified from the behaviour of the buyers, the

sellers and the operators (agents, experts, etc.) in real estate transactions. In concrete terms, the specification of a market segment requires a preliminary investigation and an on-site inspection.

3.3 The market segment parameters must be measured and collected and,

conditions permitting, they must be translated into a series of economic-valuation indicators for the particular real estate market segment. Two or more real estate units fall within the same market segment if they have equal amounts for the economic-valuation indicators, i.e. if they are properties similar for the purposes of the appraisal. The valuation objective aims essentially at conditions of uniformity.

3.4 The real estate market is a notoriously imperfect market tied to contingent

circumstances. Generally, the imperfection of the real estate market derives from: the atypical nature of real estate (starting with location); the existence of entry barriers, due on the demand side to the expense level and the ability to pay and on the supply side to the behaviour of the companies; the reduced number of buyers and sellers in the market segment; the imperfect and incomplete knowledge of conditions regarding actual prices, payment procedures and the amounts offered; the administrative obligations (registrations, mortgages, etc.) and public interventions.

3.5 In a market segment, the degree of competition induces sellers to act on

the price (lacking competition, usually by raising it). These actions on the price may be discretionary or outright discriminatory. The latter occurs, for example, in near-monopoly conditions in the new buildings market in urban centres. It is seen in a milder form in the new properties market, where there are few building contractors operating and they support a collusive, non-explicit agreement.

3.6 The segmentation process identifies the real estate market segments in

which: properties have a high degree of substitutability and are


42

locationally and typologically similar; there is an interdependence between the supply and the demand; and a single form of market is defined. According to the definition, in the market segment the real estate units are negotiated individually in an independent manner and the prices are freely set (without government intervention).

3.7 The delimitation of the market segment is instrumental to the appraisal of

the property or properties being valuated. The market segment to which the property or properties to be valuated belong indicates: the commercial ratios of the secondary areas, the other commercial indices available and the prices of similar properties comparable to that or those being appraised.

3.8 In Italy, real estate quotations are often in reference to broad situations

and generic market areas, identified only by zone (central, semi-central, suburban, etc.), by use (residential, commercial, etc.) and by type (new, used, renovated, etc.). There may be many real estate quotations taken from different sources for the same market area, variously disaggregated and often contradictory. The market area is generally identified by zone, whereas the real estate market segment is identified by its parameters.

4.0 Application 1.1 The Italian Property Valuation Standard is concerned with the definition

of the real estate market segment for valuation purposes. 1.2 The identification of the market segment is in reference mainly to

market-oriented appraisal procedures (Chapter 8). 1.3 The market segment indicated for the property to be appraised or for the

mapping of the real estate market must be specified in its parameters: the location, type of contract, use, property type, building type, size, characteristics of the supply and demand, form of market and price level.

1.4 The market segment parameters must be expressed in words or

numerically. 1.5 The parameterisation of the market is carried out through an on-site

inspection.


43

1.6 For market-oriented appraisal procedures, the valuer must obligatorily

identify and define in the Valuation Report the market segment or segments of the property or properties to be valuated (Chapter 9). In this manner the market segment or segments of the comparison properties of known price and recently negotiated are identified (Chapter 8, Appendix D).


44

Chapter 4

Valuation Principles 1.0 Introduction 1.1 Valuation principles are the foundations upon which appraisal stands;

they cannot be contradicted. 1.2 The objective of the Italian Property Valuation Standard is to provide a

common definition of valuation principles and to indicate their fields of application.

1.3 The Italian Property Valuation Standard does not deal with appraisals of a

conventional nature (administrative, tax, legal, etc.). 2.0 Definitions 2.1 The valuation principle is an unproven proposition that is postulated to be

true, on the basis of real evidence, knowledge, experience, and common sense.

2.2 Valuation principles are represented by the following schematic

propositions:

2.2.1 the price is the foundation for the appraisal (price principle); 2.2.2 the forecast is the immanent characteristic of the appraisal

(forecast principle); 2.2.3 the value depends on the purpose or practical reason for the

appraisal (purpose principle);

2.2.4 the appraisal is ordinary (principle of ordinariness);


45

2.2.5 the appraisal is comparative (principle of comparison).

2.3 The price principle is a declarative postulate and states that the appraisal

is formulated in terms of price or, more generally, in monetary terms. 2.4 The forecast principle states that the appraisal is foreseeable and since it

is based on a price, it is a price forecast.

2.4.1 For forecasting purposes, the appraisal can be divided into ex ante appraisals and ex post appraisals. An ex ante (or prospective) appraisal regards the forecasting of value done in the present in reference to the same present and to future time periods. An ex post (or retrospective, or a posteriori) appraisal is done in the present, but refers to time periods previous to the date of appraisal.

2.5 The purpose principle states that the appraisal value depends on the

purpose for which the valuation was requested, as each valuation has its own purpose, motive or practical reason for being carried out.

2.5.1 The same property, in a broad sense, in reference to a given place

and time, can have different values at the same time, and it has precisely as many values as there are practical reasons that bring about the appraisal.

2.5.2 The appraisal methodology indicates at least five appraisal

criteria:

2.5.2.1 the market value.

2.5.2.2 the cost value. 2.5.2.3 the transformation value. 2.5.2.4 the complementary value. 2.5.2.5 the substitution value.


46

2.5.3 The market value refers conceptually to the market price, as the point at which the supply and demand meet.

2.5.4 The cost value represents the sum of the expenses that an

entrepreneur must bear at the time of the appraisal to make a product, through a given production process in relation to a given market of the productive means and a given production cycle.

2.5.5 The transformation value of a resource to which improvements

in form, functionality and use may be done is equal to the difference between the market value of the transformed resource and the relative transformation cost.

2.5.6 The complementary value of one part of a complex property,

which has a link of complementarity with the other parts, is equal to the difference between the market value of the entire complex property, including the part in consideration, and the market value of the property consisting of the other parts excluding the part in consideration.

2.5.6.1 The principle of complementarity states that the value of

one part making up a complex property is measured on the basis of its contribution to the value of the complex property, or on the basis of the capital loss induced in the value of the complex property as a result of its discorporation.

2.5.7 The substitution value is equal to the market value (or cost value)

of a substitute property for certain purposes of the property being appraised.

2.5.7.1 The principle of substitution states that a party is willing

to pay for a property (or part of a property) either: a) the market price; or b) and amount equal to the cost of producing an identical property (or part of a property); or c) the market price or cost of producing a property (or part of a property) equivalent for certain purposes to the property in consideration.


47

2.6 The principle of ordinariness states that the appraisal is ordinary.

2.6.1 From an appraisal perspective, the principle of ordinariness states that for a given use and a given appraisal criterion, the most probable value of a property is the average value of the normal (or Gaussian) statistical distribution of the appraisal values. According to this distribution, the appraisal value is the most frequent central value (mean, mode and median).

2.6.2 A property has a market value for the existing use (MVEU), and

as many transformation values as there are potential uses that are alternatives to the existing use (Figure 4.1).

Figure 4.1 Frequency distribution of the existing value and the transformation values

2.6.3 The highest and best use (HBU) is the use that gives the highest transformation or market value among the transformation and market values of the expected uses of a property. Thus the HBU indicates the most profitable use. This use may be the existing use of the property if the MVEU is higher than the transformation values of the alternative uses (Figure 4.2).


48

Figure 4.2 Frequency distribution of the existing use and alternative uses

2.6.4 The HBU may also regard the leasing of a property, choosing the use that brings the most profitability, i.e. the highest income among the existing income and the transformation incomes of expected alternative uses of the property.

2.6.5 The choosing of the HBU refers to uses:

– physically and technically possible (technical restriction); – legally permitted (legal restriction); – financially sustainable (budget restriction); – economically profitable (economic criterion).

2.6.6 The expected value, or average value, is the arithmetic mean of

the appraisal values for the respective probabilities (or frequencies).


49

2.6.7 In estimative terms, the expected value is the mean of the existing use value and of the transformation values of alternative uses, weighted for respective probabilities (or frequencies) (Figure 4.3).

Figure 4.3 Expected value and uses

2.6.8 From an appraisal perspective, the principle of ordinariness is based on the principle of economic fairness and the principle of equity. The principle of ordinariness regards the building and town-planning regulations pertaining to the allowed uses, typologies, buildable volumes, etc. and generally represents a restriction in the search for the ordinary use.

2.7 The principle of comparison states that the appraisal is comparative.

2.7.1 The appraisal methodology places the comparison between the property being valued (subject property) and other properties of known price with similar characteristics as the only logical foundation of the valuation.


50

2.7.2 The comparison takes place by means of comparative terms,

which in real estate valuation are mainly the technical and economic specifications of the properties.

3.0 Discussion 3.1 The appraisal method is basically of a forecasting nature, in the sense that

it forecasts or estimates a monetary value of a property, understood in a broad sense before: this property is sold on the market; the right can become effective; the damage is compensated; the expense is incurred; the offer is formulated. Otherwise the value being sought through the appraisal method would already be known and there would no longer be any purpose to the valuation. Nevertheless, the valuation may be requested for particular practical reasons even though there is an actual market price or compensation has already been paid; in these cases the valuation disregards the existence of the price or the compensation and follows the rules given by the appraisal methodology.

3.2 The identification of the purpose (or purposes) of the appraisal of a

property is preliminary to the valuation procedure. In relation to the way in which the appraisal request (i.e. the request the valuer must respond to) was formulated, the purpose may be explicit if it is unmistakably interpretable and translatable into the corresponding criterion (or criteria). The purpose is implicit if it is the valuer’s job to identify the purpose (or purposes) of the valuation; in this case the identification of the practical reason is part of the valuation procedure.

3.3 It should be noted that some properties may not have some appraisal

values; for example, a natural resource usually does not have a production cost. On the contrary, for properties or groups of properties with particular technical and economic characteristics, it is more often conducive or it is the only way to valuate them with some values instead of others; for example, in the appraisal of one part of a real estate complex, when this part contributes to the value of the complex in a manner more than proportional to its own presumed intrinsic value.

3.4 In current valuation practice, the appraisal of a property’s value is often

simplified with the existing use indicated as the ordinary use and with the


51

appraisal of the existing value. It is necessary to consider that the investigating of alternative uses, and not just of the use considered most frequent, is an essential condition for the appraisal.

3.5 The appraisal value of a property may have frequency distributions

different from normal distributions (multimodal and asymmetrical). 3.6 The uses of a property may have frequency distributions different from

the normal distribution, thus, for example, two or more uses may show the same frequency.

3.7 In real estate appraisals, a single value and a range of values, within

which the exact value likely falls, may be requested. 3.8 The range of values is produced in many situations: between the market

price of a property for the existing use and for the alternative uses; between the values of a property appraised using different valuation procedures.

3.9 The HBU is of interest also in real estate counseling, where it identifies

the most profitable use of a property. The HBU is separate from the frequency, thus for example: the HBU of a property may be represented by the least frequent (or probable) use; in innovative situations, the HBU of a property may be that of a forthcoming use expected by the market and which is likely about to be realized, but which at the current moment has a zero frequency.

4.0 Application 4.1 The Italian Property Valuation Standard is concerned with valuation

principles and appraisal criteria and examines their fields of application. 4.2 The time of appraisal indicates the moment in which the valuation is

carried out, apart from the date to which the valuation refers, which may be previous, coinciding or following the time of appraisal.

4.3 A preliminary examination of the case at hand and the identification of

the appraisal criteria mark the main path that the valuer must follow for the valuation procedure and in presenting the final valuation.


52

4.4 The application of the principle of ordinariness requires the finding of the

mean value for a given valuation criterion and for a given use of the property to be valued only if the distribution of appraisal values is normal.

4.5 For a given appraisal criterion, the ordinary use of a property is the most

frequent use only if the distribution of appraisal values is normal. 4.6 If there are uses that are alternatives to the existing use of the subject

property, the market value criterion is applied for the existing use and the transformation value criterion is applied for each of the alternative uses.

4.7 The application of the principle of ordinariness requires that once the

existing use of the property being appraised is established and the alternative uses are defined, the appraisal value of the property to be valued is the expected value, computed from the value for the existing use and from the transformation values for the alternative uses.

4.8 The HBU is the use which corresponds to the highest value among the

existing value and the transformation values for alternative uses anticipated for a property.

4.9 The single value of a property to which improvements may be done is

equal to the expected value of the existing use and of those of the improvements.

4.10 The range of values of a property to which improvements may be done

falls between the minimum value and the maximum value of the values for the existing use and of the transformation values for alternative uses.

4.11 The range of values is produced in many situations: between the market

price of a property in the existing use and in the alternative uses; between the values of a property appraised using different valuation procedures.

4.12 The principle of statistical normal distribution, the HBU and the legal

principle are integrated in real estate valuation.


53

4.13 In the Valuation Report, the valuer must indicate the intended use of the valuation and the assumptions upon valuation principles.

4.14 In the Valuation Report, the valuer must indicate the existing use and the

alternative uses, if any, of the property to be appraised.


54

Chapter 5

Appraisal Values and Criteria 1.0 Introduction 1.1 As a matter of principle a property has as many values as there are

purposes for its valuation. 1.2 Appraisal criteria are methodological rules upon which the distinguishing

of the object of the search for the appraisal value is based. The appraisal criteria derive from the purpose or practical reason for which the valuation is requested in actual circumstances (Chapter 4).

1.3 Appraisal criteria refer to economic phenomena and quantities. Thus for

example the market value criterion refers to the price understood as the meeting point between the market supply and demand. For valuation purposes, however, this definition does not indicate the circumstances and the exact measurement to be sought in the appraisal.

1.4 In actual circumstances the appraisal of operative values of an

accounting, legal, administrative, tax, credit, etc. nature may be requested. In these circumstances and for different aims other forms of appraisal values are necessary, which are defined according to the business procedures, valuation procedures, laws, uses and customs.

1.5 The international standards define some values of considerable interest in

appraisals, in business and in accounting. The International Valuation Standards indicate a series of significant values: the market value, value in use, investment value, special value, mortgage lending value, salvage value, liquidation value, insurable value, and assessed, rateable or taxable value.


55

1.6 The definitions of the value and the related valuation approaches have a deeply-rooted tradition in many countries, in following with national regulations and indications.

1.7 The main distinction in appraisal values considers the market value and

other than market values. 1.8 Properties may be valued according to the market value and on bases

other than the market value, and they may exchange hands at prices that do not reflect the market value. The valuation bases of the values regard appraisal methodology, the economic utility, the functions of a property other than its marketability, and unusual or non-market conditions (IVS 2 6.3).

1.9 The Italian valuation methodology defines a series of appraisal criteria

which derive from the purpose principle (Chapter 4) and which establish the rules for how to carry out the valuation.


common definition of the values and criteria and to indicate their fields of application.

2.0 Definitions 2.1 There are various definitions of market value in international valuation

and accounting standards. Some definitions of market value are commonly used in valuations; others are used in particular or special situations. These definitions are important as they provide exact indications of what should be understood by market value.

2.2 According to the International Valuation Standards and the European

Valuation Standards the market value is the most probable market price at which a specific property may be sold on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion (IVS 1 3.1 and EVS S4.10).

2.3 According to the Appraisal Institute, the market value represents the most

probable price, as of a specified date, in cash, or in term equivalent to


56

cash, or in other precisely revealed terms for which the specified property should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with buyer and seller each acting knowledgeable, prudently, and for self-interest, assuming that neither is under undue duress.

2.3.1 There are numerous definitions of market value, but many of

them are similar in content, though worded differently. 2.3.2 The definitions of market value assume that:

2.3.2.1 the price is expressed in cash on the date of the valuation;

or if paid in other ways, that it is translated into cash; or if extended, that it is given in cash in definite financing conditions; or if it is wholly or partially mortgaged, that it is discounted in cash in ordinary financing conditions according to the type of property, the borrower, and the lender;

2.3.2.2 the expenses for the transaction (deed of sale, surveys,

taxes, etc.) and brokerage fees are not computed in the market price;

2.3.2.3 the property has been placed on an open market for a

sufficiently long time frame, i.e. that it is available for an adequate number of possible buyers and for the seller’s close examination of the requests; the length of time depends obviously on the type of property and on the market dynamics;

2.3.2.4 the buyer and the seller are motivated by their own

interest (hedonistic principle); 2.3.2.5 the buyer and the seller are knowledgeable (principle of

transparency) and act prudently and independently.

2.3.3 The market value specifically excludes the estimating of a price for particular or special terms or circumstances, such as atypical


57

financing, sale and leaseback arrangements, or special concessions by anyone associated with the sale (IVS 1 3.2.1).

2.4 According to the International Accounting Standards/International

Financial Reporting Standards: the fair value is the amount for which a property could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction (IAS 16, paragraph 6).

2.5 In valuations for financial statements, the International Valuation

Standards provides a guide for valuers, accountants and business experts, as well as for the general public, as regards valuation standards concerning accounting (IVS IVA1).

2.5.1 The terms “market value” and “fair value” as they appear in

accounting standards are generally compatible, although they are not exactly equivalent concepts in all cases. The term fair value is used in financial statements in reference to both market values and non-market values. When the market value of an asset can be established, this value equates to the fair value (IVS 8.1 General Valuation Concepts and Principles).

2.6 The value in use expresses the value a property has for a specific use to a

specific user. This value type focuses on the value that specific property contributes to the entity of which it is a part, without regard to the property’s highest and best use or the monetary amount that might be realized upon its sale. The accounting definition of value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life (IVS 2 3.1).

2.6.1 The value in use is sometimes referred to as “value to a particular

user or owner.” This value is not correlated to market at large. 2.7 The investment value, or worth expresses the value of a property to a

particular investor, or class of investors, for investment objectives. It is a subjective concept that relates specific property to a specific investor, group of investors, or entity with identifiable investment objectives. The investment value is thus not to be confused with the market value of a


58

property. The investment value is associated with the special value (IVS 2 3.4).

2.7.1 When making investment choices, an investor tends to apply a

rate of return that is non-market and particular only to that investor. Consequently, in applying the income capitalization approach to determine the current net value of the investment, i.e. the amount the investor is willing to pay for the investment, if a valuer adopts the investor’s anticipated rate of return, the valuer arrives at an estimate of investment value or worth rather than the market value (Chapter 8, Appendix E) (IVS 9.3.3 General Valuation Concepts and Principles).

2.8 The special value refers to a condition that induces an increment of value

in a property that goes over and above the market value. The special value could arise, for example, by the physical, functional or economic association of a property with other properties, such as the uniting or annexing of adjoining properties (IVS 2 3.11). It is an increment of value that could be applicable to a particular owner or user rather than to the market at large.

2.8.1 The special value of a property may derive from a unique

location or from exceptional and temporary market conditions (IVS 2 6.6).

2.8.2 The marriage value or merged interests value refers to the value

increment resulting from the merger of two or more properties or parts of properties, or of interests in a property, and represents an example of special value.

2.8.3 The marriage value expresses the excess value, if any, produced

by the merging of two or more interests or user rights in a property, over and above the sum of the values of the individual interests or rights (IVS GN 2 3.1.10).

2.8.4 The special value could be associated with elements of the

investment value (IVS 2 3.11).


59

2.9 The mortgage lending value refers to the value of a property as determined by the valuer making a prudent assessment of the future marketability of the property, taking into account the long-term sustainable aspects, the normal and reference market conditions, the current use and the possible alternative appropriate uses of the property. Speculative elements and components may not be taken into account in the assessment of the mortgage lending value.

2.10 The insurable value or insurance replacement cost is the value of

property as defined in an insurance contract or policy (IVS 2 3.4).

2.10.1 The insurable value is sometimes defined by estimating the cost of reproducing a new property identical to the existing property, as defined in the insurance policy, less the reproduction cost of any elements or parts of the property, considered identical and new, specifically excluded from the policy.

2.11 The salvage value expresses the value of a building or structure,

excluding the value of the land, as if the building or structure were disposed of for the parts and materials they contain, rather than for continued use without having to make special repairs or adaptations. It may be given as gross or net of disposal costs, and in the latter case, it is referred to as the net realizable value (IVS 2 3.6).

2.11.1 The salvage value is normally used to express the current price of

a building or structure, without considering the land, that has reached or is near to reaching the end of its useful life expectancy. The building or structure are valued for disposal as salvage rather than for their original purpose. In this context the salvage value is also known in accountancy terminology as the net realizable value of the property that has no further use to an entity (IVS 2 6.8).

2.11.2 The salvage value does not imply that a property has no further

useful life or prolonging of the existing life or further utility. Property sold for salvage could be rebuilt, converted for similar or different uses, or may provide spare or replacement parts for other properties that are still serviceable (IVS 2 6.8.1).


60

2.12 The liquidation or forced sale value is equal to the amount that may reasonably be received from the sale of a property within a time period shorter than that required by the market value definition (IVS 2 3.7).

2.13 The assessed, rateable or taxable value is a conventional value based on

the applicable laws on assessment for tax purposes. Although some national laws may cite the market value as the assessment basis, the methods and procedures used to estimate the assessed value may produce results that differ from the market value. Therefore assessed, rateable or taxable value cannot be considered a priori to comply with the definition of market value (IVS 2 3.5).

2.14 The market rental value is the most probable gross market rent for which

a specific property should lease on the date of valuation, given that the lessor and lessee have operated in an arm’s length transaction after proper marketing wherein the parties had each have acted knowledgeably, prudently and without compulsion. The definition of the market rental value has the same form as the definition of market value, simply substituting the words “gross rent” for “price,” “leased” for “sold,” “lessee” and “lessor” for “buyer” and “seller” (IVS Introduction) (RICS, Chp. 3 PS3.4).

2.15 The contract rent is the rent specified by a lease contract. 2.16 The rent is the monetary amount, generally periodic, paid for the leasing

of a property, in free marketing conditions, excluding accessory expenses (condominium, heating, etc.) (OMI Agenzia Territorio - Tecnoborsa).

2.17 The ground rental is an atypical rent paid for the right to use and occupy

land according to the terms of the lease; or the portion of total rent allocated to the underlying land (Appraisal Institute, 1993: The Dictionary of Real Estate Appraisal).

2.18 The net income is the income of a property after deductions of expenses

born by the owner, usually calculated on an annual basis. The costs include the management, maintenance, insurance, amortization and amounts paid to third parties, according to the contract and the law. The annual cost includes the expenses to be paid at time intervals greater than one year (EVS, Appendix 7).


61

2.19 The depreciated replacement cost is composed of the market value for

the existing use (MVEU) or the highest and best use (HBU) of the land and of the gross replacement (or reproduction, or reconstruction) costs of the works or the building standing upon it, which has the same functional utility and the state of use as the existing structure, less an allowance for the physical deterioration, the various forms of obsolescence and the level of functional optimisation on the date of valuation.

2.19.1 In accountancy, the depreciated replacement cost is considered

an acceptable appraisal method used to arrive at a surrogate for the market value for properties located in specialized or limited markets, for which comparable data is not available.

2.20 The transformation value is a valuation criterion that values a property

subject to transformation by means of the difference between the anticipated market value of the transformed property and the transformation cost.

2.20.1 The transformation cost is understood as the cost of construction,

reconstruction, demolition, intervention, salvage, requalification, etc., according to the construction, work and intervention anticipated by the transformation.

2.20.2 The transformation value of a property is based on the following

theoretic requisites:

2.20.2.1 the use of the property being valued (subject property) may be transformed and/or varied;

2.20.2.2 the transformations and new uses are considered more

profitable compared to the de facto conditions at the time of the valuation, once all restrictions of a physical, technological, legal, institutional and financial nature are satisfied (Chapter 4);

2.20.2.3 the transformation and new use involve a non-null cost

for the transformation process.


62

2.20.3 The transformation value finds practical application in many valuations, such as, for example, in the appraisal of building ground, of properties that may be subject to urban or building renovation work, of semi-manufactures, of manufactures being processed, of works being installed, and so on.

2.20.4 In transformation processes for new construction, the

transformation value may be employed in the valuation of building ground, particularly when market prices are not available for similar areas of known price recently transferred.

2.20.5 In transformation processes for reconstruction, the transformation

value may be applied in appraisals of improved areas in the case of old buildings or deteriorated structures lacking quality. The only transformation possible for these buildings may be the regressive transformation of demolition and the subsequent reutilization of the area freed of previous constructions.

2.20.6 The transformation process may regard the demolition of the

existing structure and the subsequent construction of a new building.

2.20.7 The transformation process that provides for the building of a

work or an intervention is generally diachronic, in the sense that both the costs and the revenues of the transformation are distributed over time.

2.20.8 The transformation value is applied to economic problems of

choice between investment alternatives. 2.20.9 The transformation value may be used to express opinions

regarding the economic benefits of urban renovation and rehabilitation and requalification of the building heritage.

2.20.10 The transformation value therefore lends itself to being used as a

valuation opinion and as an economic opinion. The former opinion aims at forecasting an value valid for the majority of market operators; the latter pursues the objective of formulating a choice criterion for a particular operator. For investment choices


63

the transformation value must take into account the particular position of the investor.

2.20.11 The highest and best use considers the most profitable use for a

property, taking note that potential buyers are willing to pay a price that reflects their expectations regarding the most advantageous use of the property, chosen from the uses which are physically possible and legally permissible.

2.21 The complementary value of one part of a whole constituting a complex

property is equal to the difference between the market value of the complex property and the market value of the residual part or parts of the whole, once having considered separately the part to be valued. The complementary value is an appraisal criterion consisting of the combination of two market values: one for the complex property and one for the residual part or parts.

2.21.1 The economic complementarity ratio of one part in regard to the

complex property is the ratio between the complementary value of the part and the total value of the complex property.

2.21.2 One of the most important links of complementarity in the

building sector is the ratio between the value of the improved land and the value of the property, including the building and the land.

2.22 The substitution value of a property is equal to the price or cost of

another property, if the two properties are perfect substitutes for certain objectives. This appraisal criteria is based on the principle of substitution, which states that a property that is a perfect substitute for another for certain objectives may have an equal value. The substitution relationship may be of a technical, functional or economic nature.

3.0 Discussion 3.1 The definitions of market value and of other than market values in

valuation literature and international standards are integrated with the appraisal criteria of the Italian valuation methodology.


64

3.2 The list of the definitions of market value and other than market values is not exhaustive. Other definitions regard contracts, rights and interests on personal and real property in relation to the carrying out of business, legal provisions, accounting records, uses and customs.

3.3 The International Valuation Standards make a clear distinction between

valuations based on market value and valuations based on other than market values. The market value basis of valuation is a representation of value in exchange. The valuation bases other than market value are represented by value in use, for example the investment value regards the value that a property acquires in relation to a specific use to a specific user.

3.4 The market rental value refers exclusively to leases stipulated according

to the free agreements between the owner and the tenant in the corresponding market segment. It is a completely open contract possibility, where the rent is set freely by the parties, with the only restriction generally being the tenancy term.

3.5 In the valuation methodology the market price and the cost of production

are considered economically natural entities, which are spontaneously expressed by the market even before becoming conceptual entities. The origin of the market price is independent from the supply and the demand. The cost comes under the form of amounts actually paid or collected by the builder or by the owner.

3.6 There is a clear conceptual separation and autonomy of the market price

and the cost; however, in valuation practice the cost may become the procedure for estimating the market price of special properties with a limited market. In common parlance the terms “price” and “cost” often take on the same meaning and reflect the evident consideration by which the purchase of one or more assets at their market price represents a cost for the purchaser, especially one that is an entrepreneur.

3.7 Valuers and real estate experts occasionally feel that it is technically

impossible to estimate the market value of a property according to the indications given in the definitions of the valuation literature and international standards. These objections are based essentially on circumstances by which: in many transactions one or both parties are not


65

regular operators in the real estate market; the parties often find themselves in a situation in which they need to sell or to buy; the length of exposure time on the market is not always the normal time.

3.8 For valuations based on market evidence, the definition of market value

holds equally for the subject property and for the comparable properties observed in the market segment (Chapter 8, Appendix D). For the former, the definition is prescriptive and indicates to the valuer the standard with which the valuation must comply, and for the latter the definition regards the checking of prices negotiated for the properties used as comparable properties. If the definition of market value is not satisfied for the market prices of the comparable properties, the valuation comparison is falsified. This may happen, for example, if the (presumed) market price is taken from the deed of sale, when the deed is not faithful to the real negotiation, differing for various reasons; or the sale and relative price refer to properties under a special disposal regime; or when the price refers to fictitious sales.

3.9 In many situations the special motivations of the parties to the transaction

can affect the prices paid, and may even render some transactions as non-market. Examples of special conditions of sale include: a higher price paid by the buyer because the parcel had marriage value; a lower price paid because the seller was in a hurry to conclude the sale; a financial, business or family relationship between the parties involved in the transaction; unusual tax considerations; lack of exposure of the property in the (open) market; or the prospect of lengthy litigation proceedings (IVS GN 1 5.22.3).

3.10 The fair value is based on the assumption by which the values entered in

the balance sheet express exchange values. In international accounting principles, the objectives of the balance sheet aim at providing indications on the financial standing, the profit and loss result, and the flows of liquid assets of a company for the different users of the balance sheet.

3.11 In valuations for financial statements, the International Valuation

Standards, following the International Accounting Standards (IAS 16), indicate the apportionment of the property value as an operation that separately allocates a land value and a building value (IVS IVA 1, Paragraph 5.3). This derives from the need to calculate the depreciation


66

as an accounting procedure that aims at simulating the wearing out or consumption of the productive capacity of a property over its useful life. The parts of a property do not depreciate at an equal rate, and while the building is considered subject to depreciation, the land generally does not depreciate in value, except in situations such as mineral extraction or landfills. Thus valuers are asked to split the value estimate of real property and real property rights between improvements and land (IVS IVA 1, Addendum A A6.3.2).

3.12 IAS 16 “Property, Plant and Equipment” regards the accounting

treatment of these tangible assets used lastingly within the technical-productive system of a firm.

3.13 IAS 40 “Investment Property” regards the accounting treatment of

property investments, i.e. of properties possessed for making a profit and/or for the revaluations of the capital invested. The difference with the properties of the fixed assets regulated by IAS 16 consists in the fact that investment properties are held in order to obtain independent cash flows separate from those derived instead from properties included in firm production processes.

3.14 IAS 41 “Agriculture” regards the accounting treatment, entry on the

balance sheet and supplementary informative report to be submitted for agricultural activities. The need to estimate the fair value originates from the verification that some agricultural activities have a plurennial bioeconomic cycle (Explanatory Note 2).

3.15 The estimating of the depreciated reproduction cost is generally required

in the valuation of buildings, plants, equipment and machinery intended for instrumental purposes, for which an abstraction can be done of the reciprocal complementarity ratios and of the coordination in the enterprise activities.

4.0 Application 4.1 The Italian Property Valuation Standard is concerned with the definitions

of appraisal value and with appraisal criteria and examines their fields of application.


67

4.2 For the valuer, the appraisal criteria are methodologically more binding than the definitions of market value and other than market values. In practice, the valuer first identifies the definition of the appraisal value and then identifies the corresponding appraisal criterion in strict observance of the terms of the definition.

4.3 The Valuation Report must give the definition or definitions of the value

and the appraisal criterion or criteria of the subject property or properties, the right or rights, the interest or interests to be valued (Chapter 9).

4.4 Valuation according to the fair value is allowed only for some balance

sheet items, for which the fair value may be estimated in a more reliable manner. The use of the fair value is allowed for tangible assets and for specialized properties and it is mandatory for agricultural activities. The fair value of land and buildings is ordinarily represented by the market value, estimated by the assessment of qualified valuers.

4.5 The Valuation Report must properly disclose the matters concerning the

manner of offering, the time frame involved and location of the assets at the time of sale (IVS GN3 3.5.1).

4.6 The value in use is the net present value of the expected future cost and

revenue flows of a specific property at the date of valuation, where the positive and negative cash flows represent the continuing use of the property for a specific time period.

4.7 The investment value is the value or worth of a property to a particular

investor. If it is a property investment project, the net present value of the expected cash flow is discounted at the rate of return set by the investor.

4.8 The assumptions and valuation conditions of the special value of a

property must be indicated in a clear and detailed manner in the Valuation Report (Chapter 9).

4.9 The estimating of the mortgage lending value is defined by the

contractual relationship between the lender and the client. The assumptions and valuation conditions of the mortgage lending value must be documented in a clear and detailed manner in the Valuation Report (Chapters 9 and 12).


68

4.10 The insurable value (or insurance replacement cost) is defined in the

insurance contract or policy. The assumptions and valuation conditions of the insurable value must be documented in a clear and detailed manner in the Valuation Report (Chapter 9).

4.11 The depreciated reconstruction cost is equal to the new reproduction cost

decreased by the accrued depreciation of the property at the time of valuation.

4.11.1 The cost of reconstruction of an existing structure produced in

the past represents the sum of the expenses on the date of valuation that a builder must bear to build an equal or equivalent structure or intervention through a hypothetical building process, in reference to a given market of productive means and a given construction schedule. In other words, the cost of reconstruction is the cost of building anew a pre-existing work.

4.11.2 The depreciated reproduction cost represents the cost of

production of an existing asset, decreased by the depreciation for physical deterioration and functional and economic obsolescence at the date of valuation. This depreciation may correspond to the cost of the operations necessary for making the asset virtually identical to that which is supposed to be reproduced.

4.12 In the transformation value of a property, the financial calculation

operation aims at reporting the costs and revenues at the time of the valuation and determining their net present value.

4.12.1 In valuation operations the discount rate is set equal to the

capitalization rate (Chapter 8, Appendix E). In investment operations, the discount rate is equalized with entrepreneur’s subjective rate of return.

4.12.2 The application of the transformation value in the appraisal of

buildable areas is subject to a number of assumptions regarding the estimating of incomes and expenses (EVS, Appendix 1 A1.87) (IVS GN 1 5.25.6).


69

4.12.3 The identification of the actual HBU regards the utilization of the resource that provides the highest net present value of the cash flow for the transformation project.

4.13 The link of complementarity for the complementary value of a part of a

complex property must be documented in a clear and detailed manner in the Valuation Report (Chapter 9).

4.14 The link of substitution for the substitution value must be defined in

relation to the valuation objectives and must be indicated in a clear and detailed manner in the Valuation Report (Chapter 9).

4.15 Larger valuation assignments may include the valuation of personal

property. The definition of value by which the personal property is valued must be consistent with the purpose of the valuation (IVS, Property Types 3.0).


70

Chapter 6

Property Prices and Characteristics 1.0 Introduction 1.1 The collection of the market price and of the property characteristics

precedes the economic and statistical analyses and the valuations. 1.2 The objective of the Italian Property Valuation Standard is to provide a

definition of the property data, composed of the market price and the property characteristics, and to indicate their fields of application.

2.0 Definitions 2.1 The total price expresses in currency the total amount paid (or collected)

for a property on a certain date. 2.2 The average unit price of a property characteristic is calculated by

dividing the total price by the characteristic of the property in question; normally this characteristic is represented by the commercial area.

2.2.1 The average unit price of a property characteristic is always

positive. 2.3 The marginal price of a property characteristic expresses the variation of

the total price with the varying of the characteristic.

2.3.1 The marginal price of a property characteristic may have: positive values in the case in which an increased variation in the characteristic corresponds to an increase in the total price; negative values in the case in which an increased variation in the characteristic corresponds to a decrease in the total price; and a


71

null value in the case in which a variation in the characteristic produces no variation in the total price.

2.4 The marginal price is an instrumental quantity which has important

implications in market-oriented real estate appraisal procedures. 2.5 In the real estate sector the market price refers to properties with multiple,

heterogeneous characteristics, sometimes atypical and unique. There are numerous ways to classify the property characteristics for appraisal purposes.

2.5.1 The intrinsic characteristics regard the distinctive elements and

the specific details of the property considered by itself; 2.5.2 The extrinsic characteristics regard the territorial and

environmental setting where the property is located. 2.6 The property characteristics may be classified in a more detailed manner

into: locational characteristics, positional characteristics, typological characteristics, economic characteristics and institutional characteristics.

2.6.1 The locational characteristics regard the location of the property

within the urban setting (in relation to the infrastructures, services, etc.) and territorial setting;

2.6.2 The positional characteristics regard the placement of the

property within the building (floor, exposure, etc.) or in the subdivision;

2.6.3 The typological characteristics regard the classification situation

of the property buildings (maintenance, systems, etc.); 2.6.4 The economic characteristics regard the conditions and

limitations for the use of the property (free or leased, easements, etc.) and the financing conditions;

2.6.5 The institutional characteristics regard the regulatory framework

(benefits/relief/facilities, etc.)


72

2.7 In regard to the measurement, the characteristics are divided into quantitative and qualitative characteristics:

2.7.1 The quantitative characteristics can be measured on a cardinal

scale by means of technical and economic units (area, systems, etc.);

2.7.2 The qualitative characteristics can be measured on nominal and

ordinal scales (floor level, scenic quality, pollution, etc.). The latter qualitative characteristics are particularly significant in the appraisal of properties of architectural, historical, cultural and environmental importance.

2.8 The characteristics that contribute to the establishing of the price are

numerous, and thus of great importance in property valuations. 2.9 The area characteristics (main area and secondary areas) are

characteristics of primary importance, because they regard the size of the property. Area characteristic measurements are done using the cardinal scale. In appraisals based on a single parameter, these characteristics aim at taking on their own role and that of all the others, such that the unit of area becomes a fictitious unit.

2.10 The area characteristics can be divided into:

2.10.1 main area regarding the area of the most important rooms making up the property;

2.10.2 secondary areas concerning:

2.10.2.1 the annexed areas, including the area of balconies,

terraces, etc.;

2.10.2.2 the connected areas, including the area of attics, lofts, basements, etc.

2.10.3 Other area characteristics belonging to the property are the

external areas (yard, condominium space, outside area, etc.).


73

2.11 The qualitative property characteristics can be measured on an ordinal scale, which assigns a place to each level presented by the characteristic in an ordered series. For example, the property’s “maintenance” characteristic is a typological characteristic that aims at representing mainly the degree of physical deterioration of a property. Its task is to take into account the effect of the maintenance conditions on the market price. The maintenance characteristic uses an ordinal scale of measurement, and the unit of measure is the point or the interval (1, 2, 3 or good, average, poor).

2.12 The qualitative property characteristics can be measured on a nominal

scale, which assigns a name to a characteristic that is neither orderable nor measurable. The nominal scale of measurement can be represented by the binary condition of “present” or “absent,” or in a relative sense comparatively more or less. For example, the “view” characteristic is a typological and environmental characteristic that aims at representing the quality of the environmental setting where the property is located. Its task is to take into account the effect of the view from the property on the market price. The scale of measurement of the view may be the presence or absence, or in a relative sense comparatively of a greater or lesser level, as usually happens in the perception of the buyers and sellers.

2.13 The measurement of the qualitative property elements is preliminary to

the appraisal of their marginal price, for purposes of comparison between properties having different levels for that characteristic, so as to establish the value of the subject property, which in turn has a given level of the qualitative characteristic.

2.14 The property data is made up of the true market price and the technical-

economic characteristics of the property. 3.0 Discussion 3.1 The unit price expresses the constant average price paid for the purchase

of one unit of area of the property, even if the property was purchased in block. Generally, the average price of larger properties is lower than the average price of smaller properties. This is true for both land and areas as well as for buildings and parts of buildings.


74

3.2 The computing of the average price tends to lose concrete significance if it refers to characteristics other than those of area, such as, for example, the floor level of a condominium apartment, where there is little practical sense in knowing how much was paid for each floor below it.

3.3 The main advantage offered by the marginal price compared to the

average price is the fact that it can be computed and it has a practical meaning for all property characteristics. Thus in the case of the floor level, the marginal price expresses the increase or decrease in value of an apartment when moving up a floor, with other conditions being equal.

3.4 It is advisable to measure property areas according to metric

measurement standards. However, if metric measurements are not available, for purposes of comparison one may resort to practical criteria, making sure to keep the same criterion (uniform criterion) for measuring the property being valued (subject property) and the comparable properties, thus ensuring essentially equal conditions for the appraisal comparison.

3.5 The external areas of properties are a property characteristic to be taken

into consideration in the appraisal, both for single-owned areas and for joint-owned areas. Their marginal price regards the variation in price variation of a property caused by a variation in its external areas.

3.6 For external areas, the principle of the uniform criterion of measurement

is used for the subject property and for the comparable properties. The uniform criterion for measuring external areas may regard the total area of the lot upon which the building stands or the free area around the building. As a rule this depends on the ratio between the area occupied by the building and the total area, the geometric shape and the position of the area upon which the building stands.

3.7 When the qualitative characteristics are entered in the appraisal analysis,

they must all be given using the cardinal scale. The conversion from the nominal scale to the cardinal scale is generally done by attributing 0 and 1 values respectively for the absence or presence of the characteristic, or by agreeing to assign 0 to the one and 1 to the other of two qualitative attributes. The conversion from the ordinal scale to the cardinal scale is


75

obtained by assigning points for the places occupied by the different levels into which the characteristic is ordered.

4.0 Application 4.1 The Italian Property Valuation Standard is concerned with the property

prices and characteristics, in the consideration by which the price of a property depends on its characteristics, understood as independent variables.

4.2 The property data is made up of the market price and the technical-

economic characteristics of a property. The collection of the market price and of the property characteristics comes before the valuation and the economic and statistical analyses.

4.3 The property data finds application in professional appraisals, in mass

appraisals, in the drawing up of detailed statistics and in the constructing of indices and coefficients to be applied in the property appraisal.

4.4 In appraisal operations, the unit price of a property characteristic finds

application in single-parameter appraisal procedures, based on only one term of comparison, usually a unit of size (Chapter 8).

4.5 In appraisal operations, the marginal price of a property characteristic

finds application in market-oriented appraisal procedures, in which it serves to adjust the market price of comparables to achieve the final value (Chapter 8, Appendix D).

4.6 The property characteristics are noted by the valuer, together with the

market price, in the collecting of property data for comparison purposes. The property characteristics are used in all stages of the appraisal analysis, which interprets the price according to the characteristics and the relationships between them.

4.7 The property characteristics are classified into quantitative and

qualitative: the former are measured using a number (cardinal) scale, and the latter using the other scales (nominal and ordinal).


76

4.8 The collection of property characteristics is done using natural measurement scales, which for the purposes of the appraisal analysis are converted into the cardinal number scale.

4.9 The estimating of the marginal price of the quantitative and qualitative

property characteristics is done on the basis of the commercial ratios and of the other market information and of the appraisal methodology (Chapter 8, Appendix D).

4.10 The estimating of the marginal price of the qualitative property

characteristics is done by assigning a marginal price to each score or level on the basis of the market information and of the appraisal methodology.


77

Chapter 7

Property Data Collection 1.0 Introduction 1.1 The real estate market data collected are used for the purposes of

investigation objectives, the analysis tools and models, the time and means available, the concrete conditions of the data collection and of the customer’s requests.

1.2 The observation of the real estate market for valuation purposes calls for

the determining of the market segments and the collecting of property data.


common definition of the market segment data form, and a common definition of the property data form, and to indicate their fields of application.

2.0 Definitions 2.1 The collecting of property market data should be preceded by the

defining of: – the type of data collection; – the sources of collection and data and their makeup; – the data form or questionnaire; – the procedures for the appraisal and statistical-economic processing

of the data; – the system of inspections and the quality standards; – the ways of filing data; – the ways of presenting the results.


78

2.2 The collecting of property market data must have the following requisites: – the veracity of the property data, in the presence of the widespread

practice of concealing the prices actually negotiated; – the completeness of all the elements making up the property data; the

property data is made up of an economic part regarding the price actually paid, and a technical part regarding the positional, structural, typological, and technological characteristics of the property (Chapter 6);

– the accuracy in regard to the diligence, competence and precision of the data collection.

2.3 Some circumstances concur in achieving the objectives of the

investigation and fulfilling the requisites: – the finding, checking and rotation of the sources of data and

information; – the defining of a data collection standard and the defining of the data

quality control procedures; – the preparing of a data form, with the task of directly relating the

collection operations with the processing procedures, with filing systems and with the presentation of the results;

– the clear and definite purpose of the investigation. 2.4 The summarized real estate market segment data form gives the

numerical and worded parameters of the market segment, the commercial ratios found and all other information considered useful for the purposes of the appraisal. Besides this summarized form, the market segment data form can be further detailed according to the particular urban, real estate and building situations, and the collection and filing procedures (Chapter 3).

2.4.1 The market segment form includes one or more photos that are

representative of the market segment (building type, infrastructures and services, roads, etc.) along with any other maps or plans (Chapter 7, Appendix B).

2.5 The property data is composed of the true market prices and the

technical-economic characteristics of the property; for example, in the case of the sale of an apartment in a condominium, the property data


79

includes the price negotiated, the date of the sale, the main area, the area of the balconies, the number of bathrooms, the floor level, and so on (Chapter 6).

2.6 Property data are collected by means of the property data form, which is

a document made up of a written part, a graphic part, and a photographic part.

2.6.1 The summarized property data form gives: – the market price and the date; – the locational, positional, typological, economic and institutional

characteristics; – the segment parameters and commercial ratios, if not given in the

segment data form; – the location plan with the property identified; – the plan of the building or lot of land; – the plan of the real estate unit; – the photographs of the building or lot of land (Chapter 7, Appendix

C). 3.0 Discussion 3.1 It is well-known that in Italy the veracity of data is a complex problem,

which concerns a widespread behaviour among declarants, who tend to indicate in deeds of sale a lower price than that actually negotiated.

3.2 The true market data are known to buyers and sellers, to tenants and

landlords, to real estate agents, to notary publics, to accountants, to tax consultants, to bank officers who work with real estate credit, to building contractor technicians, to freelance experts, to condominium administrators, and so on.

3.3 The collecting of veracious property data is done from official deeds,

regarding those that are reliable, and from trustworthy sources, represented by those directly involved (buyers and sellers, landlords and tenants), by market operators and by professional experts.

3.4 In the real estate sector, the main problem in the appraisal methodology

consists of the availability of the prices actually negotiated, upon which


80

the forecast of future prices and the appraisal of the present value can be based. In order to make a truthful appraisal, there is no other way than that of finding and collecting the true prices wherever they are found.

3.5 The finding and the collecting of property data and other market

information are aimed at guaranteeing conditions of transparency and fairness in the real estate market, making it possible to achieve an assumption of efficiency and the limiting of distorting effects.

3.6 In property data collection operations, it is necessary to have a standard

for evaluating the quality of the property data, as concerns the requisites and the veracity of the property data and the procedures for collecting, filing and consulting these data. The proposal of a property data standard derives from the lack of any primitive property standard and from the importance of the evolution of the Italian real estate market towards integration with the securities market.

3.7 In property data collection operations, it is necessary to have a code of

self-regulation, i.e. a set of rules of conduct which one follows voluntarily. The data collection standard and the code of conduct are preliminary to the definition of the real estate appraisal standards of quality.

3.8 A real estate market data collection system aims first of all at the finding

and collecting of parameters for the market segments and for property data, so as to support professional activities for real estate valuation and management and to prepare economic-appraisal indices and statistics.

3.9 The data and information collected by the collection system may

constitute a databank. 3.10 The databank generally gathers together:

– precise, complete property data; – the map of market segments (parameters); – real estate market indices and statistics; – methodological and applicative studies in the real estate sector.

3.11 The databank uses collection standards, uniform methodological

approaches, quality controls and a code of conduct.


81

4.0 Application 4.1 The Italian Property Valuation Standard is concerned with operations for

the collection of data and information regarding the real estate market. 4.2 The collection and analysis of market segment information, property data,

and market information aim at the describing, forecasting and interpreting of the real estate market, in all its diversity and complexity.

4.3 In practice, the collection of property data and market information may

regard a broad spectrum of applicative purposes, which must be defined for each occasion.

4.4 The collection of market segment information and property data is done

using the data forms. The data form is used to copy down data and notes in the order most appropriate for consultation and with the degree of detail required for the purposes of the investigation, so that they may be available for subsequent analyses in an ordered collection.

4.5 There are a number of purposes for collecting data on the real estate

market. The general purposes regard mainly: – the description and representation of the real estate market, – the prospects for the development of the market and its dimensions; – the interpretation of the causative and genetic aspects of the market

and prices; – indications for the investment choices; – indications for the economic policy and territorial planning. The particular purposes regard mainly: – the appraisal of the properties; – the drawing up of sample statistics, market indices, segment

parameters, etc.; – the carrying out of studies and research in the real estate sector.

4.6 The investigation of market segment parameters is done in the field with

on-site inspections and gathering the information from sector operators and, where available, the collecting of information on commercial uses and customs in the real estate sector.


82

4.7 The collection of market segment information is done primarily for the

subsequent operations for the valuation of property falling within the market segment, for the appraisal on a large scale of part or all of the properties in the segment, for the systematic mapping of the market segments, and for the establishing of a market segments databank.

4.8 In market-oriented procedures, the Valuation Report includes the

property data forms and the attachments regarding the properties used for the valuation (Chapters 8 and 9).


83

APPENDIX B

Market Segment Data Form (sale of condominium apartments) 0. DATA FORM NUMBER 1. LOCATION

Infrastructures and services 2. EXISTING USE 3. PROPERTY TYPE 4. BUILDING TYPE 5. APARTMENT SIZES AND CHARACTERISTICSMain and secondary areas

Covered and open external condominium areas State of preservation of buildings State of repair of the apartments Systems and installations Other characteristics

6. SUPPLY AND DEMAND CHARACTERISTICS Buyers and reasons for purchasing Sellers and reasons for selling

7. MARKET FORM Form Degree of competition

8. COMMERCIAL RATIOS Area ratios Other commercial ratios

9. PRICE Average unit price Phase of real estate cycle

10. PLACE AND DATE OF DATA COLLECTION AND SIGNATURE 11. ATTACHMENTS

Photo of standard building Approximate map of location (scale 1:200 – 1:2000)


84

APPENDIX C

Summarized Property Data Form (condominium apartment) Data form number Collection general data Neighbourhood or area data Location Property locational characteristics Cadastral data Use Building and real estate type Market segment parameters Building specifications Real estate unit positional and typological characteristics Economic characteristics Subjective characteristics of the buyer and seller Sale characteristics Market price and date Place, date of collection and signature Attachments: – Location plan with property identified – Building plan – Apartment plan – Photographs of the building types in the area – Photographs of the building – Photographs of the real estate unit


85

Detailed Property Data Form (condominium apartment) 1. DATA FORM NUMBER 2. LOCATION CHARACTERISTICS

2.1 Loactiont 2.2 Town

2.3 Neighbourhood 2.4 Public services 2.5 Infrastructures 2.6 Environmental conditions 2.7 Other

3. POSITIONAL CHARACTERISTICS

3.1 Building: Period of construction. Period of additions. Period of other works. Number of floors (levels). Yards and condominium areas. Structural characteristics. Plants, systems and installations. State of repair. Other.

3.2 Real estate unit: Street and building number. Interior. Internal areas.

Balcony areas. Terrace areas. External areas. Basements. Attics. Garages. Boxes. Car parking spaces. Other additional rooms. Level or


86

floor above ground. Main exposure. View. Scenic quality. Luminosity. Technological installations. State of repair. Other.

3.3 Cadastral data: Rooms. Parcel (and sub-parcel). Sheet. Category.

Class. Other identification data. Assessed income. 4. ECONOMIC CHARACTERISTICS

4.1 Lease situation: Units vacant. Units rented. Rent amounts. Periodicity. Other.

4.2 Partial interest on the real estate unit.

4.3 Other easements.

4.4 Other.

5. SUBJECTIVE CHARACTERISTICS

5.1 Seller: Manner of possession. Reason for selling. Other. 5.2 Buyer: Reason for purchasing. Other. 5.3 Possessor: Reason for possession. Type of contract. 5.4 Other.

6. SALE CHARACTERISTICS

6.1 Sale: Date of preliminary contract. Date of deed of sale. Actual price negotiated. Payment method. Other.

6.2 Brokerage: Professional figure. Other.

7. FINANCIAL CHARACTERISTICS

7.1 Loan: Contract date. Loan amount. Term. Interest rate. Level annuity. Other.


87

7.2 Other forms of financing. 7.3 Purchase facilities. 7.4 Other facilities/benefits/concessions.

8. DATE AND PLACE OF DATA COLLECTION 9. SIGNATURE OF DATA COLLECTOR 10. ATTACHMENTS

10.1 Area location plan (scale 1:2000)

10.2 Building plan (scale 1:100–500)

10.3 Plan of the real estate unit (scale 1:100)

10.4 Photographs of the building type

10.5 Photographs of the building

10.6 Photographs of the real estate unit


88

Chapter 8

Appraisal Methodologies 1.0 Introduction 1.1 The appraisal methodologies represent the way in which an appraisal

operation is conducted so as to arrive at a solution to the problem or at a result. By means of appraisal methodologies one arrives at the quantitative formulation of the valuation.

1.2 The appraisal methodologies currently applied in Italy are classified into

syntetic (or direct) appraisal procedures and analytic appraisal procedures (by capitalization of income). Other methodologies are considered separately, such as for example the appraisal methodology for typical values.

1.3 The application of empirical methodologies is widespread in both

professional and non-professional appraisals, under the form of speedy techniques or, simply, practical indications. These procedures generally have limited field of application, often furnishing at the same time results that are plausible and that clash with each other.

1.4 Commercial handbooks advocate appraisal methodologies based on

market quotations, suitably corrected for a series of coefficients. School handbooks instead refer to the division between syntetic and analytic appraisal procedures.

1.5 For empirical methodologies, there are no formal outlines that can be

consulted, and often there are not even any logical rules. At best the experts avail themselves of their own skills and experience to arrive at the formulation of the appraisal.


89

1.6 In syntetic procedures, the appraisal procedure most often applied in property valuation is the single-parameter appraisal method.

1.7 According to the valuation literature and the international valuation

standards, the appraisal methodologies for property valuation are: – the market approach; – the income approach in its many variations and in its adaptations to

the real estate situation in different countries; – the cost approach.

1.8 The International Valuation Standards consider that the most commonly

used approaches for appraising the market value of a property are: – the sales comparison approach or market approach; – the income capitalization approach or income approach; – the cost approach or cost method (of depreciated reproduction).

1.9 The objective of the Italian Property Valuation Standard is to provide the

definitions of the principal appraisal methodologies applied in Italy and the definitions of appraisal methodologies according to the appraisal literature and international standards.

2.0 Definitions 2.1 The single-parameter approach is a method for estimating the market

price, the income and the cost of personal or real property, which is based on the use of a single parameter of technical or economic comparison, taken as a term of comparison, and of a relation of direct proportionality between the appraisal value and the parameter of the property being valued.

2.2 The income capitalization appraisal approach (or analytic procedure or

income appraisal) is a method for estimating the market price of properties which is based on the simulation of the market through the determining of the income of the properties and the seeking of the capitalization rate.

2.3 The sales comparison approach is a method for appraising the market

price or income of personal or real property which is done by means of a comparison between the property being valued (subject property) and a


90

set of similar comparable properties, recently negotiated and having known prices or incomes and belonging to the same market segment.

2.3.1 The main and most important comparison approach is the market

comparison approach (MCA), which is based on the collecting of property data; the property characteristics as terms of comparison for the appraisal.

2.3.2 The appraisal system is a method for estimating the market price

or income of properties based on a system of linear equations regarding the comparison between the subject property and a set of similar comparable properties, recently negotiated and having known prices or incomes and belonging to the same market segment.

2.3.3 The allotment system is an appraisal method based on a system of

linear equations regarding the spread of the total price of a set of comparable properties similar in the unit prices of the property characteristics taken into consideration in the market segment. The allotment system proposes a partition of the total price into the average unit prices of the characteristics (Chapter 6).

2.3.4 The multiple regression analysis (MRA) is a multivariate

statistical procedure that supposes a cause-effect type functional relationship between the property price and the various property characteristics that influence it. The regression analysis is based on the collecting of a sample of property data. This model is based on a single equation that appraises the property or properties being valued by means of the interpolation of the regression function. The MRA finds application in the independent appraisal of the marginal prices of property characteristics and of the market segment commercial ratios.

2.4 The income capitalization approach includes the income capitalization

procedures, which arrive at the market value considering the capacity of the properties to generate monetary benefits. The income approach is based on the transformation of a property’s income into capital value by means of the capitalization rate.


91

2.5 The income capitalization approach is divided into: the direct capitalization; the yield capitalization; the discounted cash flow analysis.

2.5.1 The direct capitalization is a capitalization procedure that directly

converts the income of a property into the value, dividing the annual income by a capitalization rate, or multiplying by a factor (the gross rent multiplier).

2.5.2 The yield capitalization (in the proper sense) is an capitalization

procedure that converts future yields into the present value of the property by means of a financial calculation.

2.5.3 The discounted cash flow analysis is a capitalization procedure

that considers the stream of expenses and incomes of a property, from the time of purchase to the time of reselling.

2.6 The cost approach is an appraisal method aimed at determining the value

of a property through the sum of the value of the ground built upon as if it were suitable for building and of the cost of reproduction of the building, depreciated if necessary. It is also called the depreciated reproduction (or reconstruction) method. The conditions for applying this method regard the appraisals of the value of the area, of the cost of reconstruction like new and of the building depreciation. The cost approach finds application in an independent manner in estimating the construction cost and the cost of building works and interventions. The cost approach is also used to appraises the marginal price of the property characteristics that, when considered on their own, show depreciation.

2.7 Mass appraisal of property regards a universe of properties valued on a

definite date, employing common data and using the standard valuation procedures in a regular, systematic manner, and analysing the results with valuation and statistical tests (IVS GN13 3.3 and Appraisal Institute 27).

3.0 Discussion 3.1 The methodological framework of property valuations in Italy is in large

part the result of the lack of knowledge in the real estate market, generally due to the lack of systematic collections of veracious property data. For this reason, empirical criteria, summary data and appraisal


92

methodologies based on simplified theoretic and methodological hypotheses are often used in professional practice.

3.2 The biggest external obstacle to the development of the methodology is

the relative lack of transparency in the real estate market and the scarce amount of information: in practice, a lack of market data precludes a quantitative appraisal analysis. Thus an information base of reliable, detailed and objective data on the segments of the real estate market appears necessary and urgent.

3.3 The single-parameter appraisal method is based on the use of a single

parameter of comparison between the property to be appraised and properties of known price in the same market segment. The parameter is usually a unit of size (square meter, cubic meter, etc.). The value is calculated by multiplying the average unit price, expressed in regard to the unit of size, of the sample of properties surveyed for the size of the property to be valued. Thus it is a method that comes within the market approach, done with a single parameter or property characteristic.

3.4 The empirical appraisal methodologies may be presented in the form of a

simplification of the single-parameter appraisal method, i.e. doing away with the hypotheses on which the method is based and introducing other arbitrary hypotheses to make it a multiple-parameter method.

3.4.1 Eliminating the fundamental stage of the collecting of

comparable property prices in the market segment, the average unit price is substituted by the subjective opinion expressed by the expert’s conviction in regard to the unit value to be assigned to the property. The conviction was formed by the expert’s professional skills and experience.

3.4.2 Eliminating the knowledge of the expert’s subjective opinion, the

average unit price is obtained in the form of an average quotation listed in sector publications (Chapter 3). Given that it is an average quotation referring in general to a market area or a zone (for use and typology), it is considered to be within the expert’s authority to make use of a series of multiplicative coefficients that are able to take into consideration the variance between the generic quotation and the supposed value of the property being


93

appraised. For many properties, in practice it means multiplying the average quotation by a series of coefficients appropriate for the property to be appraised. These are taken from handbooks or adapted arbitrarily by the expert.

3.4.3 Obviously these are theoretic and practical degenerations of the

single-parameter appraisal methodology. At best, when the average unit price is calculated by collecting data on property sales for which the market price is known, the single-parameter appraisal method rightfully comes within the market approach method advocated by the international standards. The collecting of market prices makes the valuation probable especially if the negotiations were carried out on the basis of a single parameter.

3.5 The principle upon which the market approach is based consists in the

consideration by which: “the market will set the price for a property in the same way in which it has already determined the price of similar properties.” In fact a buyer will not pay more for a property which can be substituted by other similar properties than the purchase price of another property with the same characteristics in the same market.

3.6 The income approach is based on the transformation of the income of a

property into capital value through the capitalization rate. When there are no properties in a market segment that are similar to the one to be appraised, to which it can be compared, or if data is lacking on recent property sales, it is necessary to resort to the simulation of the market through the income approach. The simulation takes place through an economic-financial formula, by which the future incomes of the property, the capitalization rate and the time period are forecast. The income approach is also called the “analytic procedure” because the income to be capitalized can be determined through the drawing up of a detailed balance.

3.7 Yield capitalization branches into two principle directions. The first

direction intends the value of a property of repeated utility as the sum of generate incomes. The second derives from the problem of the capitalization of income by a discount rate. In the first direction, the income is transformed into capital value by a multiplier that comes from the number of years of enjoyment of the asset. In the second direction, the


94

income is transformed into capital value through the capitalization rate, which opens the way to the implications on the financial profitability of the real estate investment.

3.8 In Italy, the valuation procedure based on the income multiplier is little

used in property appraisal, whereas it finds application in the transfer of commercial or services activities, where it is regulated by exchange and valuation practices. The operating income constitutes the basis for the appraisal of capital value.

3.9 The principle upon which the cost approach is founded states that a buyer

is not willing to pay a greater amount for a property than the cost of building a replacement property that has the same functional utility; therefore the buyer is willing to pay an amount equal to the value of the building land and the cost of reconstruction decreased by the depreciation level reached by the existing building.

3.10 The depreciated reconstruction cost is a different value than the market

value and regards properties with buildings for a special use, with a limited market or no market, for a series of purposes regarding accounting appraisals, insurance appraisals, bankruptcy proceedings, damage assessments and so on.

4.0 Application 4.1 The Italian Property Valuation Standard is concerned with appraisal

methodologies according to the principles and criteria given in the valuation literature and in international valuation standards.

4.2 The Italian Property Valuation Standard advises against the application of

empirical appraisal methodologies, because: they are not based on the collecting of market data and information; they do not comply with the scientific appraisal methodology; their implementation and results can be neither proved nor verified; they do not observe the rules of conduct regarding the responsibilities of the valuer and provide no guarantees to the client; they are not subject to uniform, generally shared regulations; they conflict with the international valuation standards.


95

4.3 In the sales comparison approach, the application of the single-parameter appraisal method, based on the collecting of market data and the use of a single parameter, is suggested in the valuation of personal and real property especially when the commercial negotiations are based on this single parameter, and this parameter sums up or represents the effects of the other property characteristics implicitly included in the parameter.

4.4 In the sales comparison approach, the MCA is applied to all types of

properties for which a sufficient number of recent and reliable transactions are available. The approach is used in the market appraisals of individual properties, or property complexes, and in mass appraisals.

4.5 In the sales comparison approach, the appraisal system is applied to all

types of properties for which a sufficient number of recent and reliable transactions are available. The MCA and the appraisal system form an integrated approach for the appraisal of property market prices or incomes. The MCA estimates the marginal prices of the characteristics which have a reference or indication in the market, the appraisal system calculates the marginal prices of the characteristics which have no reference in the market or for which the appraisal is complex or imprecise. These characteristics include the qualitative characteristics.

4.6 In the sales comparison approach, the allotment system is applied to all

types of properties for which a sufficient number of recent and reliable transactions are available. The allotment system calculates the average unit prices of the individual property characteristics.

4.7 In the sales comparison approach, the multiple regression analysis is used

in market appraisals of individual properties, or of property complexes, and in mass appraisals. The regression analysis requires the collecting of a sufficient number of property data and processing with a statistical procedure.

4.8 The income capitalization approach is applied in sectors where the

importance of profitability is pre-eminent, especially for investors in choosing investments and more in general regarding investments in new real estate sectors and in innovative activities with a real estate component.


96

4.9 The direct capitalization method can be applied by dividing the income of the property to be valued by the capitalization rate or by multiplying the income of the property to be valued by the gross rent multiplier.

4.10 The yield capitalization method is applied to the income of the property

to be valued for the expected duration of the income. 4.11 The discounted cash flow analysis is applied by determining the costs and

revenues cash flow of the property to be valued, for the expected duration of the property investment, at the end of which a resale value is anticipated.

4.12 Use of the cost approach is suggested for the valuation of capital

properties and special properties, and of secondary properties and accessory parts of complex properties. In these circumstances the appraisal criterion is represented by the depreciated reconstruction cost. The method is widely used in accounting assessments of assets.

4.13 Use of the depreciated reconstruction cost is required in the valuation of

buildings, plants, equipment and machinery intended for instrumental purposes, for which abstractions can be done of the land complementarity ratios and of the coordination in the enterprise activities.

4.14 The cost approach is applied independently in the appraisal of the

construction costs and of building works and intervention costs. The approach is used independently in the assessment of partial and total damages to personal and real property.

4.15 The valuer must indicate in the Valuation Report the appraisal method or

methods applied in the valuation (Chapter 9).


97

APPENDIX D

Market Comparison Approach 1.0 Introduction 1.1 The market comparison approach (MCA) is the property valuation

method most widely known and used in the world. 1.2 The MCA is a method for estimating the market price of properties

through the comparison between the property to be valued (subject property) and a set of similar comparable properties recently sold and of known sale price.

1.3 The MCA is based on the elementary assumption by which the market

will establish the price of the property to be valued in the same manner of the prices already set for the comparable properties.

2.0 Definitions 2.1 The MCA is a systematic comparison procedure applied to the valuation

of properties, which uses the technical-economic characteristics as terms of comparison (main and secondary areas, state of repair, technological plants and systems, etc.). Therefore the MCA is based on the collecting of property data (market prices and property characteristics).

2.2 The application of the MCA calls for systematic adjustments to the

market prices collected, on the basis of the characteristics of the comparable properties in comparison to the corresponding characteristics of the subject.

2.3 The adjustments consist of the marginal prices of the property

characteristics and may be estimated using the traditional appraisal


98

criteria (price, cost, transformation value, complementary value and substitution value (Chapter 5).

3.0 Discussion 3.1 The MCA is divided into stages and is composed of documents:

3.1.1 market analysis for finding recent contracts of properties belonging to the same market segment as the property being valued;

3.1.2 the collecting of complete property data (area maps, plans,

photos, etc.); 3.1.3 the choosing of elements of comparison; 3.1.4 the compiling of the sales summary grid; 3.1.5 the analysis of adjustments (marginal prices); 3.1.6 the drawing up of the sales adjustment grid; 3.1.7 the reconciliation and presentation of the results.

3.2 The analysis of the real estate market segment is done on the basis of the

characteristics of the subject, collecting the segment parameters and in particular the quantitative parameters necessary for the appraisal objectives (commercial ratios) (Chapter 7 - Appendix 7.P.1).

3.3 The collecting of complete property data is done using the Property

Information Form and the compilation of the appendices (Chapter 7, Appendix C).

3.4 The criterion for choosing the elements of comparison is based on:

– the characteristics of the subject; – the characteristics taken into consideration by the buyers and sellers

in the market segment; – the characteristics in which the similar comparable properties and the

subject differ in amount within the sample collected.


99

3.5 Given that it is a quantitative analysis of the data, it must be kept in mind

that choosing the elements of comparison to be entered in the MCA depends also on the carrying out of the valuation analysis, which aims at explaining the differences in price with the differences among the characteristics.

3.6 In the appraisal of a property, the property data collected are ordered in

the sales summary grid, which gives the market prices collected, the characteristics of the comparable properties and the characteristics of the subject. The characteristics are entered in the rows of the sales summary grid according to a conventional order. The order reflects the succession of the valuation operations.

3.7 The analysis of adjustments applies the principle of substitution and the

principle of complementarity (Chapter 4). 3.8 The appraisal criteria for marginal prices are: price, cost, transformation

value, complementary value and substitution value (Chapter 5). The marginal price of a characteristic represents the adjustment in the MCA. The adjustments may be applied to comparable properties in terms of value and in terms of adjustment percentage.

3.9 The sales adjustment grid gives the market price collected and the

property characteristics of the comparable properties. 3.10 The calculation of the corresponding adjustment to be made to the price

of the comparable property is given in each cell of the sales adjustment grid, alongside the characteristics. The adjusted price is calculated for each comparable property.

3.11 The adjusted price represents the hypothetical price of the property to be

valued as it derives from the corresponding comparison with the comparable property.

3.12 The reconciliation regards the adjusted prices of the comparable

properties in the sales adjustment grid. The adjusted prices represent a like number of appraisal values for the subject property, to which the principle of ordinariness is applied (Chapter 4).


100

3.13 The range of adjusted prices represents in itself the range of the value of

the subject property. 3.14 The appraisal system is a system of equations regarding the comparisons

between the individual property collected and the subject. The elementary equation states that the difference in price between the two properties depends on the differences in their characteristics.

3.14.1 The system can be resolved for the value being sought and for the

marginal prices of the property characteristics considered. The appraisal system is the exact mathematical formulation of the MCA and thus it can be applied in combination with this method.

3.14.2 The benefits of the appraisal system are particularly tangible in

the estimating of the marginal prices of qualitative characteristics (views, scenic quality, etc.), for which there is no reference in the market and in the appraisal criteria (Chapter 5). For small samples, where the statistical analysis cannot be applied due to insufficient data, the appraisal system is the only way of estimating the marginal prices of qualitative characteristics.

3.14.3 The application of the appraisal system in combination with the

MCA is done in two stages: first the MCA is applied for the appraisal of the quantitative characteristics; then the appraisal system is applied in sequence for the appraisal of qualitative characteristics.

3.15 In Italy, the application of the MCA has been delayed by the shortage of

available market data and the absence of property databanks, from which data on individual appraisals can be obtained. However, appraisal methodologies such as the MCA, which make use of single property data, are the only possible route towards progress in property valuations, as is amply demonstrated in the countries more advanced in this sector.


101

4.0 Application 4.1 The Italian Property Valuation Standard applies the market approach. 4.2 The MCA can be applied to all types of properties for which a sufficient

number of recent and reliable transactions are available. The approach is used in market appraisals of individual properties, or of property complexes, and in mass appraisals. It can be easily verified that the more data there is in the valuation sample, the better are the appraisal conditions and the probability of the results. In real estate sectors where the method is applied regularly it is generally considered that 3 or 4 veracious data are sufficient for a professionally acceptable result.

4.3 The MCA can be applied to all types of properties when there is at least

one transaction for comparison found in the same market segment of the property to be valued. Naturally, the more transactions are found, the better are the conditions for carrying out the appraisal.

4.4 The theoretic and practical validity of the market approach is fully

recognized by valuation experts, by the scientific literature and by international standards, mainly because it allows checking against facts and the demonstrating of the appraisal results.

4.5 The valuer must copy down in order the individual stages of the MCA,

refer to the documents provided for by the appraisal approach and report the data forms and attachments of the property being valued and the comparable properties in the Valuation Report (Chapter 9).


102

APPENDIX E

Income Capitalization Approach 1.0 Introduction 1.1 The income approach is based on the income capitalization approach,

which provides for the simulation of the market through the construction of the series of incomes of the property being valued and the seeking of the capitalization rate.

1.2 The income capitalization approach (or analytic procedure or income

approach) is a based on the capitalization of the income of a specific property.

1.3 The income capitalization approach includes the methods, techniques and

procedures for analysing a property’s capacity to generate monetary benefits and the possibility of converting these benefits into capital value.

1.4 The income capitalization approach may be used to estimate the

investment value of a property, i.e. the value that a particular investor attributes rationally to the property according to the investor’s rate of return (Chapter 5).

1.5 The income capitalization approach is divided into: direct capitalization,

yield capitalization and the discounted cash flow analysis.

1.5.1 Direct capitalization directly converts the yield of a property into the appraisal value, dividing the annual yield by a capitalization rate, or multiplying by a factor (the gross rent multiplier) that expresses the number of times by which the value is greater than the property income.


103

1.5.2 Yield capitalization converts the property’s future incomes into the present value using a financial discount procedure. The method refers to the incomes of an investment plan or a contract, generally with constant, regular annuities.

1.5.3 The discounted cash flow analysis considers the cash flows of a

complete real estate investment, calculating the net present value of the cash flow and of the final reversion value.

2.0 Definitions 2.1 Direct capitalization instantly converts the expected income of a single

year into the value of a property. The income is multiplied by a factor (such as the gross rent multiplier) or divided by a rate.

2.2 Yield capitalization applies a financial calculation to the series of

annuities of the property to be valued. It is the present value of the constant or variable incomes.

2.2.1 The present value can be calculated before or after taxes and on

the net or gross income. 2.2.2 The present value may refer to the entire property or to one of its

parts or to rights and interests on the property. 2.3 The discounted cash flow analysis (DCF) considers the pattern of costs

and revenues from the time of purchase to the time of resale of the property being valued, forecasting a final market value.

2.3.1 The DCF aims at simulating a complete cycle of the real estate

investment, from the time of purchase to that of the final sale, when a capital gain or loss can be determined.

2.3.2 The forecasting of the resale price is necessary for taking into

account the medium- and long-term increase or decrease of the value of the property. The cash flow also takes into account the increasing or decreasing annuity and periodic expirations of leases.


104

3.0 Discussion 3.1 Direct capitalization is separate from the financial considerations

regarding the income stream and the holding period of the investment, thus presenting itself in the simplest, most immediately applicable form.

3.1.1 In property valuation the income multiplication factor is not used

in Italian professional valuation practice, which prefers to divide by the rate rather than apply the gross rent multiplier.

3.1.2 The estimating of income is done in the real estate market where

contracts of similar properties are found for the purpose of estimating the income to be capitalized (Chapter 8, Appendix D).

3.2 The income to be capitalized can be calculated net or gross of expenses. 3.3 Net income is determined with a balance sheet: the balance is in advance,

annual, average and ordinary. 3.4 The balance sheet provides the analysis of the annual operating costs and

revenues of the owner of a property, in order to determine the income to be capitalized.

3.5 The seeking of the capitalization rate is correlated to the income to be

capitalized, consequently the net income corresponds to the net capitalization rate and the gross income to the gross capitalization rate.

3.6 The capitalization rate is not a natural quantity expressed spontaneously

by the market, such as, for example, the interest rate; rather, it is a quantity derived from the ratio between the rent and the price of a property (or the opposite for the multiplier): the former is realized in the property leasing market segment, the latter in the property sales market segment. However, its numerical expression and the tasks performed in the income approach put it in direct relation with the interest rate and other rates of return.

3.7 The concept of income to be capitalized is extended to the cash flow, i.e.

the succession of the costs and incomes of the property to be valued.


105

3.8 In the cash flow analysis, the initial expenses (construction cost, plant

cost, transformation cost, etc.) are calculated using the cost approach (Chapter 8, Appendix F).

3.9 In the cash flow analysis, the initial incomes can be calculated: on gross

incomes, taking into account the operating costs; and on net income, drawing up a valuation balance.

3.10 In the cash flow analysis, the incomes and expenses stream can be annual

or fractional. 3.11 In Italian valuation practice, the cases in which the valuers appraises the

capitalization rate at a certain level with no other justification than a valuation commonplace is anything but rare. This is a practice of the so-called empirical valuation, which cannot be proved or verified (Chapter 8).

4.0 Applications 4.1 The Italian Property Valuation Standard applies the income approach. 4.2 The income approach is used in the valuation when sufficient data cannot

be found in the market for setting up a market-oriented appraisal, or for verifying the appraisal value obtained using other approaches.

4.3 The application of appraisal approaches for income capitalization has its

own life in real estate counseling activities. The investor may be more interested in knowing the investment cash flow rather than its present value or future value.

4.4 In counseling, the capitalization value becomes the subjective investment

value in capital terms to be attributed to a cash flow, once the rate of return is set. The income capitalization approach may in fact be used to calculate the value of a real estate investment for a specific investor (Chapter 5).

4.5 In direct capitalization and in yield capitalization, the gross income and

the net income of the property being valued can be applied, making sure


106

to find the corresponding gross or net capitalization rate. The income multiplier is applied to the gross income.

4.6 In yield capitalization, the value is the present value of a typical level

annuity. 4.7 The income level is subject to the contract conditions regarding the

revisions and renegotiation upon expiration of the contract. 4.8 The DCF prefigures a real estate investment that provides variable

incomes from the time of purchase until the time of resale, forecasting a final market value.

4.9 The purpose of the DCF is to forecast the value by carefully and

accurately setting up a corresponding real estate investment. For this reason it may be necessary to consider the incomes and costs stream by fractions of the year.

4.10 The DCF is used in the appraisal of properties to which improvements

may be done, such as building ground and properties to be requalified. 4.11 The cash flow of properties to be improved generally provides for a

succession of costs and revenues, where the former usually precede the latter.

4.12 For appraisal purposes, the DCF calculates the transformation value of

the property to be improved (Chapter 5). 4.13 Prior to the estimating of the transformation value, the internal rate of

return of the cash flow estimated for the property to be improved (critical capitalization rate) must be calculated. This rate expresses: the profitability of the real estate investment by the management of the property; and at the same time the property’s maximum capitalization rate, by which the appraisal value would be cancelled. At higher critical capitalization rate amounts, the appraisal value would be negative.

4.14 The capitalization rate also takes into account the intrinsic, extrinsic,

qualitative and quantitative conditions that influence the value and do not influence the income.


107

4.15 The valuer must indicate in the Valuation Report the capitalization

approach or procedures used in the appraisal of the subject property. (Chapter 9).


108

APPENDIX F

Cost Approach 1.0 Introduction 1.1 The cost approach is based on the elementary assumption by which a

buyer is not willing to pay for a property an amount greater than the value of the building land and of the cost of construction of another property which has the same functional utility as the existing one, considered in its state of use.

1.2 The cost approach is an appraisal methodology aimed at determining the

value of a property by means of the sum of the value of the ground and the cost of reconstructing the building, depreciated if necessary.

1.3 The cost approach method is applied independently in estimating the

production cost and the construction cost. 2.0 Definitions 2.1 The cost approach is based on the appraisal of the market value of the

land and the cost of reconstruction of the structure or building, taking into account the degree of accrued depreciation. The appraisal method is thus composed of two elements: – the value of the land; – the depreciated reconstruction cost.

2.2 The cost approach has a many objectives, including that of valuation

interest which regards the approximate and detailed cost estimating. 2.3 The quantity survey method is a summarized accounting report which

makes it possible to estimate the cost of a work or intervention, by


109

summing the products of the quantities (dimensions) of the work units surveyed and the respective unit prices.

2.4 In use (fruition) and production processes, properties are subject to a

process of depreciation, i.e. a process of progressive loss of the intrinsic economic value, excluding monetary influences.

2.5 In the real estate sector, the main causes of building depreciation are

classified into: – physical deterioration; – functional obsolescence; – economic obsolescence.

2.6 One fundamental concept in the measuring of depreciation is book

depreciation. Depreciation is a continuous phenomenon to which an asset is subject; book depreciation consists of a procedure for apportioning the total depreciation suffered by an asset over the number of years of its economic life.

2.7 For the purposes of estimating the depreciated construction cost,

reference is made exclusively to the annual depreciation and the total depreciation of an asset at a specific year of its economic life.

2.8 The depreciation for accounting purposes establishes a rule for

calculating the depreciation rate (constant, increasing, decreasing and mixed) that is able to provide a measure of the annual and total depreciation.

2.9 For cases in which the depreciation regards a complex building made up

of typologically, functionally and technologically diverse parts, the estimating of the depreciated cost is done by dividing the work into its parts and grouping them in homogeneous categories on the basis of the depreciation trend.

2.10 At times a direct estimate of the depreciation might be required, apart

from its use in the reconstruction cost. In these circumstances the intention is to estimate the variations in the depreciation, for example in relation to the state of repair of a property. Normally this regards the estimate of the marginal price of the corresponding property


110

characteristic, which expresses the variation in price of the property with the varying of the characteristic (Chapter 6).

2.11 The direct estimate of the depreciation is generally based on the cause of

depreciation. 3.0 Discussion 3.1 In the cost approach, the appraisal of the land value is done using the

market comparison approach and/or the income capitalization approach (Chapter 8, Appendices D and E).

3.2 The main methodologies for land appraisal are, in short: market-oriented

approaches, the transformation value, the apportionment of the property value according to the complementary ratio of the land, and the residual techniques or methods.

3.3 Market-oriented methods provide for the direct comparison of the subject

land and similar land parcels, for which actual data on recent market transactions are available (IVS GN 1 5.25.1).

3.4 The transformation value of a site that is buildable or ready for rebuilding

or of land in parcels considers respectively a building or rebuilding process or division in parcels, estimating the incomes and expenses connected with the real estate process (EVS, Appendix 1 A 1.87).

3.5 When it is not possible to apply the preceding methods, the allocation of

the property value according to the complementary ratio of the land (IVS GN 1 5.25.3) and the residual techniques or residual method can be applied.

3.5.1 The residual techniques are little known or unknown in Italy.

Residual techniques are appraisal methods that are based on the assumption by which the land and the building can be appraised separately, and consequently the property value (land and building) can be obtained from the sum of their values (IVS GN 1 – 5.25.5 and EVS Appendix 1 A 1.83 – A 1.89).


111

3.5.2 The elementary technique makes a preliminary appraisal of the property’s overall income and the appraisal of one of the two parts (land or building), then it calculates the income of this part applying an opportunity rate of the corresponding investment (land or building). The income of the other part of unknown value is determined by subtracting the income of the part of known value from the income of the property. The unknown value of the other part is then obtained by capitalizing its income at the opportunity rate of the corresponding investment (land or building). Thus the property value is set equal to the sum of the value of the first part appraised and of the value of the other part appraised using the residual technique.

3.5.2.1 The land residual technique aims at appraising the value

of the land, on the basis of the preliminary appraisals of the property income and of the building value.

3.5.2.2 The building residual technique aims at appraising the

value of the building, and is based on the preliminary appraisals of the property income and of the land value. The land value is appraised on the basis of buildable land prices.

3.6 In economic calculations, land is not considered subject to depreciation.

With other conditions being equal, agricultural land regains its fertility over time through a natural process, which in practice keeps the value for agricultural purposes constant. In the process of development in urban settlements and in the completely built-up central areas, urban land usually increases its value as a result of the pressures of the demand.

3.7 In the case of the depreciated reconstruction cost estimated from the

replacement cost instead of from the reconstruction cost, the costs for functional shortages and/or surpluses must not be included in the depreciation calculation, because the replacement cost regards a manufacture that has a utility and functions equivalent to that taken as a reference.

3.8 For interventions dealing with functional obsolescence, the appraisal of

depreciation regards:


112

3.8.1 shortages that require the addition of parts, components or

elements whose economic measure is equal to the cost of the addition;

3.8.2 shortages that require the replacement or modernization of parts,

components or elements whose economic measure is equal to the cost to replace, possibly decreased by the depreciated value of the part replaced;

3.8.3 the superfetations and oversizing of parts, components or

elements whose economic measure is equal to the cost of the adaptation work (including any demolition) or to the cost of installing a component proportional to what is needed in the place of the excessive component.

3.9 For curable physical deterioration and curable functional obsolescence

that is able to bring, in a figurative sense, the building back into its original conditions, the depreciation appraisal is set equal to the cost of the repair or restoration.

3.10 For incurable physical deterioration and incurable functional

obsolescence, the depreciation appraisal follows the criterion of the depreciation rates, net of any cost of the curable part.

3.11 For incurable functional obsolescence and economic obsolescence, the

depreciation appraisal may be done on the basis of the loss of income induced in the leasing of the property.

3.12 The cost approach applied in the appraisal of plants, equipment and

machinery does not take into consideration the value of the land. 4.0 Application 4.1 The Italian Property Valuation Standard applies the cost approach

method.


113

4.2 The conditions for applying this approach regard the appraisals of the land, of the cost of reconstruction like new and of the level of depreciation.

4.3 The land value is done: with the market approach method; the income

approach method; the apportionment of the property value according to the complementary ratio of the land; the residual techniques.

4.4 The complementary ratio of the land is one of the most important links of

complementarity, and it is represented by the ratio between the value of the land and the value of the property, composed of the building and the land.

4.4.1 The complementary ratio of the land can be calculated in two

ways:

4.4.1.1 in the first way the land value and the property value are considered;

4.4.1.2 in the second way the depreciated reconstruction cost of

the building – obtained from the difference between the cost of reconstruction like new and the depreciation – and the property value are considered.

4.5 The land residual techniques aim at appraising the land value, based on

the preliminary appraisals of the property income and of the building value. The building value is set equal to the depreciated reconstruction cost. This method calculates the building income by applying a building opportunity rate relative to the corresponding investment in the building; the land income is then determined by subtracting the building income from the property income. The land value is obtained by capitalizing the land income at the land opportunity rate.

4.6 The appraisal of the cost of reconstruction like new can be done in a

summarized and a detailed way. 4.7 The cost of construction and the cost of reconstruction can be determined

either in a summarized comparative manner or in a detailed manner.


114

4.7.1 The summarized procedures is based on the comparison with other buildings of the same type, or similar, and for which the relative values of recent construction are known. After choosing the technical parameter to be used, the average unit cost is calculated, and then multiplied by the amount of the parameter of the building being appraised.

4.7.2 Using the detailed procedure, the construction or reconstruction

value is determined on the basis of the quantity survey method. 4.8 The estimating of the accrued depreciation regards the physical

deterioration, the functional obsolescence and the economic obsolescence of the building.

4.9 The use of the cost approach is suggested in the appraisal of special and

specialized properties, secondary properties and accessory parts of complex properties. These are usually properties and plants that are rarely sold separately from the rest of the property or production complex of which they are a part, that have a limited market and that often have a shape and size specific to their intended use. This procedure is widely used in the accounting appraisal of assets.

4.10 The depreciated reconstruction cost is a different value than the market

value and regards properties with buildings for a special use, with a limited market or no market, for a series of purposes regarding accounting appraisals, insurance appraisals, bankruptcy proceeding, damage assessments and so on.

4.11 The appraisal of the depreciated reconstruction cost is required in the

valuation of buildings, plants, equipment and machinery intended for instrumental purposes, for which abstractions can be done of the land complementarity ratios and of the coordination in the enterprise activities.

4.12 The cost approach is applied independently in the appraisal of the

construction costs and intervention costs. The cost approach is also used to assess the marginal price of the property characteristics that, when considered on their own, show depreciation. The approach is used independently in the assessment of partial and total damages to personal and real property.


115

4.13 In the Valuation Report, the valuer must value the land and the building

separately and indicate the appraisal approaches and procedures used (Chapter 9).


116

Chapter 9

Valuation Report 1.0 Introduction 1.1 The Valuation Report (appraisal report, appraisal expertise) aims at:

communicating to the reader the value, confirming the objectives of the valuation, outlining the procedure and indicating any assumptions at the basis of the valuation and the limiting conditions. The Valuation Report gives the analytical processes and data utilized for the appraisal of the final value, so as to guide the reader through the procedure and tests used by the valuer in carrying out the valuation.

1.2 The Valuation Report identifies the property being valued, the basis or

bases of the reported values and the intended use of the valuation. The Valuation Report presents the assumptions and limiting conditions of the valuation; it describes the surveys and inspections; it reports all other indications required for the appraisal. The Valuation Report contains the name of the valuer, the date of appraisal, the date on which the valuation was carried out and the report was prepared, and the valuer’s signature.

1.3 The objective of the Italian Property Valuation Standard is to identify the

essential elements to be included in the Valuation Report to indicate the fields of its application.

2.0 Definitions 2.1 The Italian Property Valuation Standard applies a definition of the real

estate market segment for valuation purposes. The identification of the market segment is necessary mainly for property appraisals based on the collecting of market data (Chapter 3).


117

2.2 The Italian Property Valuation Standard is concerned with valuation principles and appraisal criteria of appraisal methodologies (Chapter 4).

2.3 The Italian Property Valuation Standard is concerned with the definitions

of appraisal value and with the appraisal criteria in the valuation literature and in international standards (Chapter 5). The values are based on the market value and on other than market values.

2.4 The Italian Property Valuation Standard is concerned with operations for

the collection of data and information regarding the real estate market. The units of real estate market surveying and collection are the property datum and the market segment (Chapters 6 and 7).

2.5 The Italian Property Valuation Standard is concerned with appraisal

methodologies according to the principles and criteria given in the valuation literature and in international valuation standards (Chapter 8).

2.6 The appraisal approaches proposed by the Italian Property Valuation

Standard are: – the market approach; – the income approach; – the cost approach (Chapter 8, Appendices D, E and F).

2.7 The Italian Property Valuation Standard defines common, consistent

criteria for the accurate metric measurement of properties. The types of area measurement are established with reference to the Italian real estate situation and the criteria adopted in Europe (Chapter 2).

2.8 The Valuation Report is a document that records the instructions for the

assignment, the purpose of the valuation, the appraisal procedure, and results of the analysis that led to the opinion of value. The Valuation Report presents the meaningful information used in the valuation analysis. The Valuation Report may be written or oral. The type, content and length of a report depends on the end user, the legal requirements, the type of property valued, and the nature and complexity of the assignment (IVS 3 3.1).

2.9 In a Valuation Report in oral form, the results of the valuation are

communicated verbally to a client or authority. A Valuation Report


118

communicated orally to a client must be supported by a work file and at a minimum followed up by a written summary of the valuation.

2.10 In a Valuation Report in written form, the results of the valuation are

communicated to a client in writing, which includes electronic communication. A written Valuation Report may be a detailed document containing the materials examined and the analyses performed to arrive a value conclusion.

2.11 The Valuation Report considers the following operations (IVS 3 3.4):

2.11.1 the identification of properties, rights and real estate interests, and of personal properties (plant and machinery, furniture, fixtures and equipment) included in the valuation;

2.11.2 the intended use of the valuation and any of its limitations; 2.11.3 the definition of the basis or type of value sought; 2.11.4 the date of valuation; 2.11.5 the identification of the field of application of the valuation and

the Valuation Report; 2.11.6 the identification of every and any contingent and limiting

condition upon which the valuation is based; 2.11.7 a statement of conformity, which attests that the valuer has

followed the ethical and professional requirements of the ethical-deontological Code of Conduct in performing the assignment (Chapter 11).

2.12 Assumptions are suppositions taken to be true for certain purposes.

Assumptions involve facts, conditions or situations affecting the subject of, or approach to, a valuation but which may not be capable or worthy of verification. They are matters that, once declared, are to be accepted in understanding the valuation. All assumptions underlying a valuation should be reasonable (IVS Code of Conduct 3.1).


119

2.13 Special or extraordinary assumptions include additional assumptions relating to matters covered in the due diligence process, or may relate to other issues, such as the identity of the purchaser, the physical state of the property, the presence of environmental pollutants, or the ability to redevelop the property (IVS 3 3.6).

2.14 An internal valuer is a valuer who is in the employ of the entity that owns

the assets or is the owner of the rights to be valued, or of the accounting firm responsible for preparing the enterprise’s financial records and/or reports. An internal valuer is generally capable of meeting all the requirements of independence and professional objectivity required under the Code of Conduct, but for reasons of public presentation and regulation may not always be able to fill the role of independent valuer in the performing of specific assignments (IVS Code of Conduct 3.4).

2.15 An external valuer is a valuer who, together with any associates, has no

material links with the client, with a subject acting on behalf of the client, or with the subject of the assignment (IVS Code of Conduct 3.5).

3.0 Discussion 3.1 The Valuation Report aims at leading the reader to a clear understanding

of the opinions expressed by the valuer. The Valuation Report responds to the valuation request in a manner so as to allow the user to understand the processes followed and their importance for the conclusions.

3.2 The Valuation Report must be comprehensible also to those who do not

know the property or the properties to be valued. 3.3 The Valuation Report defines the assignment, the context and the field of

application, resolving any ambiguity involving the valuation issue. The valuer ensures that the analyses, information and conclusions presented in the Valuation Report fit the specifications provided at the time of the assignment (IVS 3 3.4).

3.4 The Italian Property Valuation Standard advises against and discourages

the application of empirical appraisal methodologies, for the follow reasons:


120

– empirical appraisal methodologies are not based on the direct and explicit collecting of market data and information;

– empirical appraisal methodologies do not comply with the scientific appraisal methodology;

– the carrying out of empirical appraisal methodologies and their results can be neither proved nor verified;

– empirical appraisal methodologies do not observe the rules of conduct regarding the responsibilities of the valuer and provide no guarantees to the client;

– empirical appraisal methodologies are not subject to uniform, generally shared regulations;

– empirical appraisal methodologies conflict with the principles and concepts of international valuation standards (Chapter 8).

3.5 Some instructions applicable to valuations regarding specific purposes

and specific types of properties, rights, or interests, such as financial reports and the granting of loans and mortgages, may differ from those given for other assignments.

4.0 Application 4.1 The Italian Property Valuation Standard is concerned with the preparation

of the Valuation Report and its fields of application. 4.2 In the Valuation Report, the valuer must indicate the intended use of the

valuation and the assumptions upon valuation principles (Chapter 4). 4.3 In the Valuation Report, the valuer must indicate the existing use and the

alternative uses, if any, of the property to be appraised (Chapter 4). 4.4 The Valuation Report must give the definition or definitions of the value

and the appraisal criterion or criteria of the subject property, the right, or the interest to be valued (Chapter 5).

4.5 The assumptions and valuation conditions of the special value of a

property must be indicated in a clear and detailed manner in the Valuation Report (Chapter 5).


121

4.6 The estimating of the mortgage lending value is defined by the contractual relationship between the lender and the client. The assumptions and valuation conditions of the mortgage lending value must be documented in a clear and detailed manner in the Valuation Report (Chapters 5 and 12).

4.7 The assumptions and valuation conditions of the insurable value must be

documented in a clear and detailed manner in the Valuation Report (Chapter 5).

4.8 The link of complementarity for the complementary value of a part of a

complex property must be documented in a clear and detailed manner in the Valuation Report (Chapter 9).

4.9 The link of substitution for the substitution value must be defined in

relation to the valuation objectives and must be indicated in a clear and detailed manner in the Valuation Report (Chapter 5).

4.10 In the Valuation Report, the valuer must specify if the measurement of

the size of a property was computed from a metric survey or deduced from the graphic measurement of the plans (Chapter 2). In the latter case, the type of plan used must be stated, if it was furnished by the Client, and if that method was requested by the Client.

4.11 For market-oriented appraisal procedures, the valuer must obligatorily

identify and define in the Valuation Report the market segment or segments of the property or properties to be valued (Chapter 3). The market segment indicated for the property to be appraised or for the mapping of the real estate market must be specified in its parameters (Chapter 3).

4.12 The market segment data and property data are collected using special

forms prepared by the valuer (Chapter 7, Appendices B and C) . 4.13 The valuer must indicate in the Valuation Report the appraisal approach

or approaches applied in the valuation (Chapter 8).


122

4.14 In market-oriented procedures, the Valuation Report includes the property data forms and the attachments regarding the properties used for the valuation (Chapters 7, Appendix C).

4.15 In the sales comparison approach, the application of the single-parameter

appraisal method, based on the collecting of market data and the use of a single parameter, is suggested for the valuation of personal and real property, especially when the commercial negotiations are based on this single parameter, and this parameter sums up or represents the effects of the other property characteristics not explicitly included in the parameter (Chapter 8).

4.16 In the market comparison approach, the valuer must copy down in order

the individual stages, refer to the documents provided for by the appraisal approach and report the data forms and attachments of the property being valued and the comparable properties in the Valuation Report (Chapter 8, Appendix D).

4.17 For the income capitalization approach, the valuer must indicate in the

Valuation Report the capitalization method or methods used in the appraisal of the subject property (Chapter 8, Appendix E).

4.18 For the cost approach, in the Valuation Report the valuer must value the

land and the building separately and indicate the appraisal methods and procedures used (Chapter 8, Appendix F).

4.19 If the valuation is done by an internal valuer, the Valuation Report must

specifically refer to the existence and nature of the relationship between the valuer and the client or entity controlling the asset, right or interest being valued.

4.20 The Valuation Report must (IVS 3 5.1):

4.20.1 clearly and accurately set forth the conclusions of the valuation in a manner that is not misleading;

4.20.2 identify the client, the intended use of the valuation, and the

following dates:


123

4.20.2.1 the date of the appraisal,

4.20.2.2 the date of the Valuation Report, and

4.20.2.3 the date of the inspection and the data collection;

4.20.3 specify the basis of the valuation, with the definition of the value;

4.20.3.1 the market value and non-market value shall be reported separately;

4.20.4 identify and describe:

4.20.4.1 the properties, rights and interests to be valued, 4.20.4.2 the physical and legal characteristics of the properties,

rights and interests valued;

4.20.5 describe the field of application of the work used to develop the valuation;

4.20.6 specify all assumptions and limiting conditions upon which the

valuation conclusion is contingent; 4.20.7 identify the special or extraordinary assumptions and address the

probability that such conditions will occur; 4.20.8 include a description of the information and data examined, the

market analysis performed, the valuation approaches and procedures followed, and the reasoning that supports the analyses, opinions and conclusions in the Valuation Report;

4.20.9 contain a clause specifically prohibiting the publication of the

Valuation Report in whole or in part, or any reference thereto, or to the valuation figures contained therein, or to the names and professional affiliations of the valuers, without the written approval of the valuer;


124

4.20.10 include a compliance statement attesting that the valuation has been performed in accordance with the Italian Property Valuation Standard, disclosing any departure from its requirements and providing an explanation for such departure;

4.20.10.1 the compliance statement shall attest that:

– statements of fact presented in the Valuation Report are correct to the best of the valuer’s knowledge;

– the analyses and conclusions are limited only by the reported assumptions and conditions;

– the valuer has no interest in the subject property (or if so, the interest must be specified);

– the valuer acted in accordance with ethical and professional standards;

– the valuer possesses the educational requirements necessary for practicing the profession;

– the valuer has experience and competence in the local market where the asset or property is located and in the category of the asset or property being valued;

– the valuer has (or has not) made a personal inspection of the property;

– no one, except those specified in the report, has provided professional assistance in preparing the report;

4.20.11 include the name, professional qualifications, and signature of the

valuer. 4.21 When Valuation Reports are transmitted electronically, the valuer shall

take reasonable steps to protect the integrity of the data and text in the Report and to ensure that no errors occur in transmission. The valuer should have software that provides security of transmission (IVS 3 5.2).

4.21.1 The origin, date and time of the sending of the Report, as well as

the destination, date and time of receipt should be identified. Software should allow confirmation that the quantity of data and


125

text corresponds to that received. The valuer must also render the Valuation Report as a “read-only” document (IVS 3 5.2.1).

4.21.2 The valuer shall ensure that the digital signature(s) is/are

protected and fully under the valuer’s control by means of passwords (PIN numbers), hardware devices (secure cards), or other means (IVS 3 5.2.2).

4.21.3 A true electronic and/or paper copy of the electronically

transmitted Valuation Report must be retained by the valuer for the period required by law, in any event not less than five years. Files of the records of electronically transmitted Valuation Reports may be kept on electronic, magnetic or other media (IVS 3 5.2.3).

4.22 The manner of presentation of a Valuation Report is established by the

valuer and the client, based on the instructions or specifications for the assignment (IVS 3 5.3).

4.23 The type, content and length of the Valuation Report depend on the end

user, legal requirements, the type of property, right or interest valued, and the nature and complexity of the valuation issue or problem (IVS 3 5.4).

4.24 For all Valuation Reports, the valuer must retain sufficient documentation

in the work file to support the results and conclusions of the valuation. This documentation must be held for a period of not less than five years after the completion of the assignment (IVS 3 5.5).


126

Chapter 10

Reviewing Valuations 1.0 Introduction 1.1 The review of a valuation consists in the review of a Valuation Report

done in an impartial manner by another valuer. 1.2 The valuation review aims at ensuring accuracy, diligence,

appropriateness and quality of the valuations, and thus it has become an integral part of professional practice (IVS GN 11 1.2).

1.3 The objective of the Italian Property Valuation Standard is to identify the

elements essential to valuation reviews and to indicate their fields of application.

1.4 The valuation review checks mainly:

1.4.1 the veracity and relevance to the valuation problem of the data used and the enquiries made;

1.4.2 the correct application of the valuation methodologies employed

in the analysis; 1.4.3 whether the analysis, opinions, observations and conclusions

given in the Valuation Report are appropriate and reasonable. 2.0 Definitions 2.1 The valuation review is the review of a Valuation Report carried out by a

valuer other than the first compiler of the report. The reviewer may agree with the final result of the valuation or may be in disagreement due to a divergence of opinions, to errors in the application of the methods and the


127

determining of the results, and to superficiality in the conclusions. The principal characteristic all types of valuation reviews have in common is the impartiality of the valuer in judging the work of another valuer. The valuation review is a cornerstone in the quality control of appraisals (IVS GN 11 3.1).

2.2 Depending on the comprehensiveness of the review, the different types of

reviews include: administrative reviews; technical reviews, desk reviews, and field reviews (IVS GN 11 3.1).

2.2.1 The administrative review of the valuation is performed by the

client or user of the valuation services as an exercise in due diligence when the valuation is done for decision-making purposes, such as the leasing or selling of a property. The administrative review may also be done by a valuer who assists the client with these functions. The administrative review is also undertaken to verify that the valuation meets the regulations in force and conforms to accounting standards (IVS GN 11 3.2).

2.2.2 The technical review is performed by the reviewing valuer to

form an opinion on the adequacy of the procedures and methods used and of the analyses carried out, and on the correctness of the results and conclusions formulated in the Valuation Report (IVS GN 11 3.3).

2.2.3 The desk review considers only the data presented in the

Valuation Report, which may be confirmed or contradicted. The reviewer checks the veracity of the data, the appropriateness of the methodology, the accuracy of the calculations and the compliance with the client guidelines, regulatory requirements and professional standards (IVS GN 11 3.4).

2.2.4 The field review provides for the possibility of direct inspections

to confirm the consistency and veracity of the information and data collected. The field review also includes: the possibility of inspections of the interior and exterior of the subject property and of comparable properties; research to gather other market data as additional information; and it may also include the verification of the correct use of the software used in preparing the Valuation


128

Report (IVS GN 11 3.5). 2.3 Depending on the circumstances and the practical reason for the

valuation, appraisals are divided into summary (or approximate) appraisals and detailed (or exact) appraisals.

2.3.1 Summary appraisals are requested in the initial stages of the

building process and real estate process and in professional practice, for example in formulating requests as an introduction to a further investigation. Summary appraisals generally refer to a limited number of principle elements and thus they are insufficient, but they allow a quick response when an approximate value is required and precision is not essential.

2.3.2 Detailed appraisals are required in all other circumstances other

than those of summary appraisals. In detailed appraisals the valuation is clarified in detail and a conclusive point in the valuation process is presented; for example, in the stipulation of contracts, in the assessment of compensation, in the cost valuation for definite and executive projects, in legal assessments, etc.

2.4 In the valuation of simple assets (usually personal property) with a

widespread market, the valuation is called empirical as it is based on a summary judgment formulated by a valuer on the basis of direct market experience. This judgment is generally compatible and verifiable with the judgments made by other valuers for the same asset in the same situation.

2.5 In the valuation of complex assets (usually real property) with a limited

market, the valuation is called scientific and makes full use of the principles and regulations established by valuation methodologies and valuation standards.

3.0 Discussion 3.1 Subjectivity is a characteristic that cannot be eliminated in valuation

forecasting, that knows no bounds in empirical judgments and may result in arbitration, and that persists in rational judgments even when formal, mathematical and statistical models are used. In rational valuations the


129

valuer’s subjective judgment is essential to the choice of criteria and the appraisal methodology and in the formulation of the final judgment. The objective of the valuation method is to reduce the incidence of subjectivity, knowing that it is impossible to eliminate it.

3.2 In Italy many appraisal methodologies are of an empirical character, in

the form of operative techniques, indications and suggestions developed or improvised in contact with the innumerable and widely varying case encountered in practice. If employed properly, these procedures may resolve secondary problems efficiently or may be applied to summary appraisals for establishing the magnitude or approximate range of the appraisal (Chapter 8).

3.3 There are no formal guidelines, and often not even any practical rules, for

empirical valuations, leaving the expert the power to make use of his or her own skill and experience in the field of appraisals.

3.4 For the review of scientific valuations, the check can be carried out on

deductive bases with the same theoretical, practical and methodological tools employed in the valuation itself.

3.5 For the review of empirical valuations, the check can be carried out

inductively with the summarized appraisals expressed individually by other valuers.

3.6 In the field of professional valuations, it is generally not possible to

separate the appraisal judgment from the technical knowledge of the asset (understood in the broad sense) being valued. In these valuations, the technical aspects may prevail over the valuational aspects.

3.7 Every case of appraisal is unique and unrepeatable; nevertheless, certain

uniformities of exemplary value can be found in the various cases. Valuation review is performed using these examples, also so as to comprehend the ethical and scientific aspects of valuation practice in professional experience. In Italy, property valuations are done by many types of professionals (engineers, architects, agronomists, surveyors, notaries, accountants, brokers, administrators, etc.) and valuation review stands at the crossroads of divergent professional activities. Thus the problem of defining valuation quality controls is placed in relation to the


130

practicing of diverse professions. The professionals who carry out property valuations are primarily subject to deontological and disciplinary controls and the performance standards of the professional order to which they belong.

3.8 The quality of the valuation service provided to the client lies within

whole of the characteristics that allow the estimative consultation to satisfy the expressed and implicit needs. Quality is linked to the context within which the estimative process is conceived, realized and utilized. The reviewing of valuations is a cornerstone in appraisal quality control.

3.9 Therefore it is important to take into consideration the necessity to pursue

an objective of valuation quality in the service offered to clients. 3.10 The main check for the appraisal value given in the Valuation Report is

the estimate error measured by the difference between the anticipated value and the price or cost expressed on the market. This is an ex-post check of the divergence between the forecast and the value obtained. The estimate error can be measured with various absolute and percentage indices.

3.11 The maximum thresholds admissible for the percentage error in the price

and cost estimate are traditionally indicated in valuation practice. Generally, the error maximum threshold for valuations done using the single-parameter method is higher than that for valuations done using multiple-parameter methods, such as the MCA (Chapter 8, Appendix D).

3.12 The concept of estimate error aims at giving the valuer greater awareness

of the consequences of acts of appraisal. 3.13 The measure of the estimate can be applied between two or three

appraisals obtained with different appraisal methods. 3.14 In statistical-estimative models that provide for the collecting of samples

of technical and economic-estimative data, the error regards the observed data and the data obtained using the appraisal models.

3.15 The appraisal provides a forecast. Usually the forecasting of a given

phenomenon regards the future values that the phenomenon may take on.


131

This forecast is generally formulated on the basis of past and present values of the phenomenon, interpreted according to a logical plan or a model. In the case of valuations, there is a circular process between the price and the price forecast (appraisal): the valuation of an asset is based on past and present prices of other similar comparable assets; the price of an asset is based in turn on the preceding valuation. The cost estimate for a project is based on past and present costs of past and present works and interventions, and the offer price for a project is based in turn on the detailed cost estimate.

3.16 When a market price or bid price are generated by the valuation in the

circular process, the valuation review cannot use the measure of estimate error, which is null.

3.17 The collecting of data represents the discriminant between the new and

the old valuation procedure, between approximate appraisals and rational appraisals. The collecting of data promotes the method in the perfecting of rational procedures based on calculation, verification and controls, and more precise, provable and documentable appraisals.

3.18 A valuation review may call for input from expert consultants in specific

valuation sectors, such as for the determining of construction costs and property income and for legal, tax and administrative aspects (IVS GN 11 1.2.1).

4.0 Application 4.1 Valuation reviews are applied to detailed appraisals (as opposed to

summary appraisals). 4.2 A valuation review may be required: to verify the due diligence of

financial reportings and asset management; as a fundamental basis for business decisions; to verify whether a Valuation Report complies with regulatory requirements, in the case of bank mortgages and loans insured or regulated by the government; to ascertain whether the Valuation Report complies with the regulatory standards and requirements in force; as expert testimony in legal proceedings and circumstances.

4.3 In developing a valuation review, the review valuer must (IVS GN 11 5.1):


132

4.3.1 identify the client and intended users of the valuation review, the

intended use of the review valuer’s opinions and conclusions, and the purpose of the assignment;

4.3.2 identify the property, right or interest valued in the Valuation

Report, the date of the valuation review, the date of the Valuation Report under review, and the valuer(s) who completed the Report under review;

4.3.3 identify the type of review to be performed; 4.3.4 identify the assumptions and limiting conditions in the valuation

review; 4.3.5 develop an opinion as to:

4.3.5.1 the completeness of the Valuation Report under review

within the scope of the work applicable to the assignment;

4.3.5.2 the apparent adequacy and relevance of the data and any adjustments;

4.3.5.3 the appropriateness of the methods and techniques used, indicating the reasons for agreement or any disagreement with the Valuation Report under review;

4.3.5.4 whether the analyses, opinions and conclusions in the work under review are appropriate, reasonable and supportable.

4.4 In reporting the results of a valuation review, the review valuer must (IVS

GN 11 5.2):

4.4.1 state the nature, extent and details of the review process undertaken;

4.4.2 indicate whether all known pertinent information is included;


133

4.4.3 include a signed compliance statement in the review report.

4.5 The review valuer shall not consider events affecting the property or

market subsequent to the valuation, but only information that was available on the date of the valuation (IVS GN 11 5.3).

4.6 The review valuer must fully explain the reasons for agreement or

disagreement with the conclusions of the Valuation Report under review (IVS GN 11 5.4).

4.6.1 Where the review valuer is not in possession of all the facts and

information on which the valuer relied previously in the Valuation Report under review, the review valuer must indicate the limits of his or her conclusions (IVS GN 11 5.4.3).

4.6.2 Where the scope of the work undertaken is sufficient to constitute

a new valuation, such valuation must conform to the requirements of the Italian Property Valuation Standard.


134

Chapter 11

Valuer’s Ethical-Deontological Code 1.0 Introduction 1.1 In order for the Italian Property Valuation Standard to be appropriately

applied it is essential that the valuations be carried out by reliable organizations or by competent, honest valuers acting independently and without conflicting interests, whose Valuation Reports are clear, unambiguous and contain all the elements necessary for the correct interpretation of the valuation.

1.2 Valuers are obligated to promote and safeguard the public’s trust in the

valuer’s profession. 1.3 The objective of Code of Conduct is to establish a set of principles that

govern the valuer’s activities in the many various cases and in the complex professional procedures.

1.4 Any avoidance of the rules provided for in this ethical code cannot

constitute grounds for civil suits or proceedings with the supposition or proof that a legal duty has been violated, nor shall it give rise to particular relationships between the valuer and third parties.

1.5 The Code of Conduct was established to constitute an ethical guide and to

serve as a reference of conduct for the professional activities of valuers. 2.0 Definitions 2.1 The activities of the valuer must be carried out in compliance with the

laws of the State and must constitute an activity of general interest. Valuers must consider themselves directly responsible for their work in regard to the both the client and the community.


135

2.2 Whoever practices the profession of valuer in Italy, even if a foreign

citizen or a valuation company registered in another country, must consider themselves bound to comply with this Code of Conduct, the purpose of which is to defend the dignity and decorum of the profession of valuer.

2.3 These ethical-deontological principles apply to valuation activities

whether performed regularly or occasionally. 3.0 Discussion 3.1 The valuer adopts, as the basic foundation of his or her professional

activities, the principles, rules and regulations set forth in the Italian Property Valuation Standard.

3.2 Valuers shall fulfill the commitments undertaken with care and diligence,

and shall not carry out professional services in conditions incompatible with their own legal status, nor when their own interests or those of the client are in conflict with their professional duties. Valuers shall refuse to accept appointments for which they do not feel to be adequately prepared and/or those for which they do not feel to have adequate potential for the fulfilling of the commitments undertaken.

3.3 The valuer shall sign only those professional services which he or she has

personally carried out or directed. The valuer shall sign professional services in a collective form only when the limits of professional competence and responsibility of the individual members of the valuation group or organization have been observed and specified. These limits must be declared at the beginning of the collaboration.

3.4 The valuer must constantly improve and update his or her ability to

satisfy the needs of the individual clients and of the community in order to achieve the best results correlated with the costs and conditions of performance.


136

4.0 Application

Relations with Orders, Boards, and Rolls 4.1 The membership of the valuer in professional orders, boards, or rolls

implies the observing of the regulations of these bodies. 4.2 The valuer is expected to conform to the decisions of the Council of the

Order or Board if adopted in the practicing of the relative institutional capacities.

Relations with Colleagues

4.3 The relations of each valuer with his or her colleagues must be

characterized by the maximum loyalty, fairness and honesty, toward the goal of asserting a common professional culture and identity.

4.4 This form of loyalty, fairness and honesty must be extended and expected

also in regard to colleagues and particularly to all those who have connections with the profession of valuer.

Relations with the Client

4.5 The relationship with the client is one of trust and must be characterized

by the utmost fairness, honesty, and transparency. 4.6 The valuer is obliged to professional secrecy; therefore the valuer may

not divulge any information which has come to his or her knowledge in the carrying out of his or her professional services without the explicit authorization of the client.

4.7 The valuer must establish the contents and terms of the professional

appointment granted with the client in advance and in a transparent manner.

4.8 The valuer shall be compensated fairly for his or her appraising activities,

on the basis of the free determination of the fees in advance with the client. In the event that there exist rates previously established by orders or boards which constitute mandatory minimums, the valuer shall be


137

obliged to observe these policies, save in the case of exceptions provided for by law.

4.9 The valuer may not accept from third parties direct or indirect fees other

than those owed by the client without communicating to the client the nature, reason, and extent of these fees and without receiving written authorization for collecting said fees.

4.10 The valuer shall also be obliged to inform the client regarding all cases of

a potential conflict of interest or in circumstances in which the activities carried out may generate suspicions of professional partiality or the violation of the ethical-deontological standards.


138

Chapter 12

Guidelines for Valuation for the Extension of Credit 1.0 Introduction 1.1 Valuations made for extension of credit are of interest to banks and other

credit institutions granting loans secured by specific real property. In these cases the banks either directly or indirectly mandate valuers to appraise the real property pledged as security.

1.2 The Italian Property Valuation Standard aims, among other things, at

providing – in a better organised and more comprehensive way than in the previous edition - specific guidelines for valuers assigned to appraise property pledged as security for the extension of credit.

1.3 In Italy property valuation for extension of credit relates to the mortgage

lending value, which is based on a conservative estimate of the property pledged as security taking into account the aspects of long-term sustainability and normal market conditions while disregarding speculative elements (Chapter 5).

1.4 It must be pointed out that generally in Italy professional valuers appraise

the mortgage lending value empirically, without complying with the relevant European directives.

1.5 Internationally, the International Valuation Standards 2005 and the Royal

Institution of Chartered Surveyors, in line with the indications provided at the national level in the Italian Property Valuation Standard, consider mortgage lending value one of the many risk analysis techniques to be used to calculate the long-term rating linked to a loan in accordance with specific indications provided by the bank (IVS 2 3.9 and RICS PS6.2.3).


139

1.6 According to the Italian Property Valuation Standard, appraisals based on the mortgage lending value may apply when this is expressly requested by the Bank.

2.0 Definitions 2.1 Valuations for real-estate related extension of credit concern:

2.1.1 valuations made for real-estate related extension of credit, whether or not secured by mortgage, and especially in the context of land credit transactions;

2.1.2 valuations made to recover the above credit; 2.1.3 valuations made for the purpose of monitoring mortgaged

collateral. 2.2 The market value represents the basis for the valuer’s work (IVS IVA 2

3.1). 2.3 “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 proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion” (IVS 1 3.1 and EVS S4.10).

2.4 Property valuation for extension of credit refers to:

– the valuation principles representing the basis for appraisal; – the appraisal values, which define the main values of interest in

appraisals, in commercial practice and in accounting; – the appraisal criteria, which dictate the methodological rules for

identifying the estimated value; – the appraisal methodologies by which the valuation amount is

established; appraisal procedures may involve the market approach method, the income approach and the cost approach.

2.5 The market approach is a procedure to estimate the market price or

income of a property which is carried out by comparing the property to be appraised with a similar set of properties recently bought or sold and with


140

a known price or yield and falling within the same market segment. The market approach includes several procedures which are of special interest to the credit sector, the main ones being the following: – the single-parameter appraisal method, which is based on the use of

a single technical or economic comparison parameter (Chapter 8 2.1);

– the market comparison approach (MCA), based on the collecting of the actual market data and of property characteristics (Chapter 8, Appendix D);

– the appraisal system, based on a system of linear equations regarding the comparison between the property being valued and a set of comparable properties having similar characteristics (Chapter 8 2.3.2).

2.6 The income capitalization approach involves income capitalization

procedures which arrive at the market price by considering the property’s capacity to generate monetary benefits. The income approach is based on the conversion of a property’s income into capital value using the capitalization rate (Chapter 8, Appendix E).

2.6.1 The income capitalization approach is divided into: the appraisal

by direct capitalization; the appraisal by yield capitalization; the discounted cash flow analysis.


of a property through the sum of the developed land and of the cost of rebuilding the work or building, depreciated if necessary. It is also called the depreciated reproduction (or reconstruction) method (Chapter 8, Appendix F).

2.8 The market value methods, techniques, and procedures will, if applicable

and if appropriately and correctly applied, lead to a common expression of the market value when based on market-derived criteria (IVS IVA 2 3.3).

2.9 The market approach is applied directly through observation of the

market. The cost approach is based on observation of the buildable areas market for land and of the contracts market for construction costs. The income capitalization approach relies on the cash flow forecast based on


141

the observation of different real estate market segments and on the rate of return found in the property market (IVS IVA 2 3.3).

2.9.1 Those seeking security for financing or attempting to evaluate the

status of that security will sometimes request valuations on a basis other than market value. In these cases, valuers must have definitions of the value to be appraised on a basis other than the market value, only if that valuation is not in contradiction with applicable or regulations and is not otherwise misleading. Under such circumstances, it is suggested that valuers include a market value estimate or other appropriate information, to show to what extent a non-market value estimate differs from that one based on market value (IVS IVA 2 3.5).

2.10 Valuers must be careful to avoid any situation in which non-market value

estimates might be confused with market value estimates. In some situations the non-market value may be appropriate, however those who use such valuations should be aware that such values may not be, and generally are not, realizable on the market (IVS IVA 2 3.6).

2.11 In valuations for extension of credit, specific considerations are made

depending on the various property types to be assessed (IVS IVA 2 6): – investment properties, – specialized properties, – properties normally valued as trading entities, – development properties, – wasting assets, – forced sale or liquidation.

Investment properties

2.12 Revenue-producing properties are normally valued individually, but

banks may wish to know the value of a property as part of a real estate portfolio. In these cases, the distinction between the potentially different purposes of a valuation must be clearly expressed (IVS IVA 2 6.2.1).

2.13 Lenders are interested in knowing the valuer’s opinion as to the security

on a loan, or the property’s ability to meet interest payments and repayment of principle (when repayment is gradual) over the term of the


142

loan (IVS IVA 2 6.2.2). 2.14 As to property, it is recommended that valuers distinguish between

leveraged and unleveraged property yields. Valuers must indicate and explain any special treatment of taxes on the property being valued (IVS IVA 2 6.2.3).

2.15 Owner-occupied property should be valued as being immediately vacant.

If valuers are asked to make their valuation on a basis other than if the property were to be considered vacant, the Valuation Report must include also a valuation based on a market comparison approach with similar properties with vacant possession. (IVS IVA 2 6.3.1).

Specialized Properties

2.16 Special properties have limited marketability and derive value from being

part of a business. 2.17 Special properties may not be suitable as separate security for loans and

mortgages. If they are to be pledged as security, individually or collectively, their valuation must presume vacant possession. Valuers must fully explain the assumptions made. (IVS IVA 2 6.4.1).

Properties normally valued as trading entities

2.18 Properties normally valued as trading entities commercial property is

generally assessed on the basis of the corporate activity for which it is used. In these situations, the valuation must include the property’s commercial potential, but should not take into account any immaterial value of a personal or entrepreneurial nature linked to the manager of the business.

2.19 For specialized properties, the valuation must take into account also the

following risk factors (EVS 2003 S6.26):

2.19.1 that the business carried out on the premises might close down; 2.19.2 that inventoried equipment might be removed;


143

2.19.3 that business licenses, franchising agreements and other permits might be revoked or are in jeopardy;

2.19.4 possible acts of vandalism; 2.19.5 other circumstances which might impair future financial

performance.

Development properties 2.20 A request for financing could apply to property which is to be the object

of development (transformation). Development assets may be considered intermediate assets in the process of production and transformation. On principle, in the building process buildable land, developed property that may undergo improvements (renovation, restoration, etc.) and building works during the construction phase are considered development properties.

2.20.1 Properties held because they are intended for construction, such

as buildable land or upgradeable areas, as for example buildings to be renovated, must be appraised taking into account the conditions acquired and the checks on the current and potential development process. Any assumption concerning the planned improvements must be reasonable and explicitly stated in the Valuation Report (IVS IVA 2 6.6.1).

2.20.2 Periodic valuations must be made during the property

development cycle (IVS IVA 2 6.6.2). 2.20.3 The valuation of property intended for development processes

depends on the state of development of the property being appraised on the valuation date.

2.20.4 The valuation of a property which is being developed must in any

case consider the value on the date of completion of the work, since the institution granting the loan must know the value of property to be completed which has been pledged as security.

2.20.5 In case of partial disbursement linked to the progress made in the


144

work, it is advisable to provide a valuation of the property based on conservative and precautionary criteria.

2.20.6 For the purpose of a partial disbursement of the funds, i.e. linked

to “progress in the work,” valuers must appraise the value of the property which is being developed at an intermediate stage in the building cycle based on cost, i.e. of the sum of the costs borne from the beginning of the cycle up to the time of valuation and of the request for partial disbursement.

2.20.7 To this end, valuers will draw up a report which must include the

following: – a description of the work carried out at the time of valuation; – the value of the land if the building is new or the value of the

building being upgraded in case of transformation; – the costs borne since the beginning of the construction cycle

up to the time of valuation; – an indication of the probable deadline for completion of the

work. Wasting assets

2.21 Special problems arise in the valuation of wasting assets, such as

quarries. Special attention must be given to the duration and profile of the loan, including interest and capital repayment dates, in relation to the wasting asset the established program for its extraction or use (IVS IVA 2 6.7.1).

Forced sale or liquidation

2.22 Banks may ask that a valuation be made in connection with a forced sale

or liquidation of the property pledged as security, and they can indicate the timeframe within which it may be assumed that the property will be sold. It is to be noted that these valuations do not conform to the definition of market value, therefore valuers must include an assessment of the market value or other appropriate information showing to what extent the appraisal of the non-market value differs from the market value.


145

2.23 Considering the opportunities provided to banks by national and international regulations, as to the weighting of credit in order to establish minimum capital, it is essential to refer to the definitions of mortgage lending value and the future market price.

2.24 The mortgage lending value refers to the value of a property as

determined by the valuer making a prudent assessment of the future marketability of the property, taking into account the long-term sustainable aspects, the normal and reference market conditions, the current use and the possible alternative appropriate uses of the property. Speculative elements and components may not be taken into account in the assessment of the mortgage lending value. (Chapter 5).

2.24.1 The definition of the mortgage lending value is provided by

European Union directive 89/647/ECC as amended by directive 98/32/EC. The mortgage lending value is a concept of risk value used in many European countries for real estate loans; it is based on the sustainable aspects of profitability and binds the appraisal of the property value to permanent economic conditions and to the income any leaseholder might obtain through normal management.

2.24.2 The definition of the mortgage lending value introduces, among

other things, a notion that might be described as mitigation of the market trends, rents and capitalization rates. The sustainability of the mortgage lending value might require that adjustments be made: to the actual yield of the property, to the real discount or capitalization rates, and to property management and administration costs (EVS 2003, S6.09).

2.24.3 To avoid doubts as to whether the market value or the mortgage

lending value should be applied, it should be noted that the mortgage lending value cannot be calculated through a simple percentage cut on the market value (EVS 2003 S6.11 xi).

2.25 The future market value is a forecasted market value for a property at a

future date indicated by the valuer, that should reflect the time needed for the property to be adequately marketed and fully negotiated (RICS UK PS3.3.1). This date will come after the valuation date, but the future


146

market value is assessed at this latter date. The future market price represents the valuer’s opinion as to expected changes in the market in the time leading up to the date indicated (RICS UK PS3.3.3). The future market price reflects the events, attitudes, behaviour and generally known information existing on the valuation date (RICS UKPS3.3.3).

2.25.1 The purpose of providing a future market value is simply to

illustrate the valuer’s opinion on future trends in the market in the time needed to complete the sale. The value can change rapidly following unforeseeable events, and an estimate given of a future market value cannot replace the current market value (RICS UKPS3.3.5).

2.26 Property pledged as security is insured against the risk of lightning, gas

explosions and fire for the duration of the mortgage. This insurance aims at covering the value of the property pledged as security should any such event reduce its value.

2.27 The insurable value or insurance replacement cost represents the value of

a property recognized in the clause of an insurance policy (IVS 2005, 2.3.4) (Chapter 5).

2.28 The concept of security (mortgage lending) is a fundamental aspect in

valuations made for credit. The principle of mortgage lending refers to the problem of appraising the value of a property so as to safeguard a credit that lasts through time, in medium- and long-term operations. When adopted by the valuer, this principle leads to establishing a sustainable value, i.e. a value that can represent security for the Bank for an adequate amount of time.

3.0 Discussion 3.1 The Italian Property Valuation Standard holds the view that the principle

of mortgage lending is a principle that should be applied in long-term risk analysis techniques for loans secured by property.

3.2 An analysis of the principle of mortgage lending aims at providing banks

and valuers with the concepts and tools by which to rationalize the valuation techniques and methods currently applied in appraising


147

property pledged as security. 3.3 The principle of mortgage lending is applied to:

– the mortgage lending value; – the construction and intervention costs.

Mortgage Lending Value

3.4 The principle of mortgage lending introduces a series of requirements in

valuation (EVS 3 S6.08): – a conservative estimate of future marketability; – identification and elimination of speculative factors; – reference to normal and local market conditions; – primary attention to the property’s long term (sustainable)

characteristics; – the current use and suitable alternative uses of the property; – valuation procedures, methods and techniques to be defined clearly

and transparently; – appraisals to be made by valuers with an adequate level of

competence and in compliance with current regulations. 3.5 The assumptions made in appraising the mortgage lending value must be

arise from an in-depth knowledge of the historical real estate market trends and from a critical study of current conditions and trends mainly in connection with risk. Assumptions refer to the conditions of an intermediate situation between an active market and a depressed market. An active market (or sellers’ market) reflects a sustained level of demand, increasing price levels and a considerable volume of transactions. A depressed market (or buyers’ market) reflects low demand and declining price levels.

3.6 In assessing the mortgage lending value, it is necessary to emphasize the

property’s characteristics which present a high degree of sustainability over time, for the longest period of time for which a forecast can be made.

3.7 An appraisal of the mortgage lending value cannot disregard market

evidence.


148

3.8 Information and data about the property must be equivalent to what is effectively found in the market segment of the property to be appraised (Chapter 3).

3.9 The single-parameter appraisal method is a general procedure which is

applied in an innumerable series of circumstances. The procedure is based on a single parameter, normally of size, and it is applied in property appraisal when there are no other characteristics by which the market prices of the comparable properties differ with each other and with the property to be appraised (Chapter 8).

3.9.1 In valuation for extension of credit, valuers are encouraged to use

the appraisal procedure based on the different property characteristics.

3.9.2 In the market approach, as regards the properties comparable to

the property to be valued, the characteristics to be considered are: the date of the market price for the comparable properties; the characteristics in terms of the commercial size of the property with the detail of the physical units of size which form it; the quantitative and qualitative characteristics of the property in terms of position, type, architecture, culture and environment.

3.10 For the sake of providing comprehensive documentation only, to

supplement the Valuation Report, when available, real-estate quotations may be referred to as well as supply-side price lists for the market context in which the market segment of the property to be valued falls (IVS 2005, General Valuation Concepts and Principles 9.2.1.1).

3.10.1 In any case, the mortgage lending value cannot be based on real

estate quotations and on the price lists of real estate agencies and firms.

3.10.2 Available real estate quotations and price lists are to be

mentioned in the Valuation Report with an indication of the market context closest to the market segment of the property to be appraised and with a clear citation of the source.

3.11 The specific purpose of a valuation for extension of credit, i.e. its


149

implications based on the principle of mortgage lending, must be clear to the Bank’s customer. Should the valuation lead to an outcome which does not meet the customer’s expectations, there could be a misunderstanding between the customer and the Bank because of a lack of clarity about the primary purpose of the valuation itself.

3.12 Assessing the mortgage lending value implies the methodological

problem of its quantitative measurement, since this is more a risk analysis technique than an estimate opinion. It is up to the lending institutes to indicate the general criteria and the methodological procedure by which to establish the mortgage lending value on the basis of market value or to assess it independently. In other words, valuers must be aware of the general and specific circumstances and of which factors should be analysed or disregarded in calculating the mortgage lending value.

3.12.1 The mortgage lending value for property intended for

development can be established through a sensitivity analysis (EVS 2003 S6.25). Volatility in the outcome of each hypothesis on income, rents, costs and duration and execution time, must be explained to the Bank as being part of the risk assessment service.

3.12.2 If no indication of method is provided by the bank, valuers

should apply the procedures and methods to assess market value, introducing specific assumptions. These assumptions must be indicated and illustrated in the Valuation Report.

3.13 In the context of analysing the principle of mortgage lending, special

attention must be given to the property’s zoning situation. Valuers are required to analyse the compliance of the property they are appraising in terms of authorizations, i.e. construction (or other works) method and compliance. In particular, any kind of valuation that disregards a description of the zoning situation cannot be accepted for extension of credit. The kind of analysis to be carried out can be defined in the brief and must appropriate to the size of the property and the connected risks.

3.14 In order to obtain a total metric measurement of the property which can

be used easily in the context of the Bank’s internal credit analysis, valuers can be asked to define a conventional measurement, called mortgage


150

lending area (or security area).

3.14.1 The mortgage lending area is the area used in the analyses carried out by banks. The mortgage lending area includes all the different kinds of property and buildings, the different uses and different kinds of main and secondary areas which form a complex property.

3.14.2 The units of area forming a complex property are initially

assembled, according to an accounting criterion and in compliance with the banks’ provisions, in homogeneous classes by type and destination, and then the following procedures are adopted: – for each property unit in the homogeneous class, a

commercial area is calculated on the basis of trading relations;

– the sum of the commercial areas of the property units in the same class leads to the total commercial area of the homogeneous class;

– the property units in the homogeneous classes are valued individually according to the appraisal methodologies envisaged by the Italian Property Valuation Standard III and recorded by valuers in the Valuation report;

– the sum of the values of the property units in the same class leads to the total value of the homogeneous class;

– the relation between the total value and the total commercial value of the property units in the homogeneous class expresses the average unit value of the class.

3.14.3 The mortgage lending area of a complex property is calculated

by dividing the total value of the complex property by the average unit value of the class to which the mortgage lending area is to be referred (for example the residential area, or the greater area or the area with the highest value). Symbolically, by indicating as n the number of homogeneous classes forming the complex property, as Sj the commercial surface of the j-nth class with j=1, 2, … , n , as pj the unit value of the j-nth class, the total value of complex property V is calculated by adding the total values of the homogeneous classes as follows:


151

mortgage lending area Sc is calculated by dividing the total value of the complex property by unit value p of the class to which the mortgage lending area is to be referred (basic price), chosen among the different classes taking into account the following: on principle it is possible to calculate as many mortgage lending areas as the uses included in the complex property.

3.14.4 In calculating the mortgage lending area the use of synthetic and

subjective weighting coefficients is not permitted. 3.15 A Bank may need to classify properties pledged as security on the loan in

order to carry out appropriate activities in connection with real estate portfolio management. To this end it may introduce a property rating, i.e. a codified quantification of the qualitative characteristics of the property itself. The standard for this classification is not yet univocal in the international standards. A Bank may require that parameters to be specified by the bank itself be applied, in order to quantify the rating in question.

Construction and remodelling cost

3.16 For the financing of property under construction, regulations on land

credit proportion the amount to be granted to the construction cost.

3.17 The Construction and remodelling cost is defined as the sum of the following factors: – the market value for the area; – urbanization charges (primary and secondary urbanization charges

and charges on the construction cost); – construction costs; – design and site management expenses;


152

– other expenses (external layout, marketing activities, contingencies, etc.).

3.18 In providing loans for buildings under construction, should disbursements

be made during construction work, the Bank must be informed of the size of the investment made up to that given stage in the progress of the construction work. The construction and remodelling cost refers to the different deadlines: – the market price of the area being built or of the building which is

being upgraded; – the realization charges to the extent of actual payment; – the construction cost and other expenses to the extent of the

investment actually made. 3.19 Valuation of construction and remodelling costs is done in a summarized

comparative manner and in a detailed manner (Chapter 8, Appendix F).

3.19.1 The summarized procedure is based on a comparison with other completed projects of the same kind or similar to the one to be appraised and for which recently established values are known. It is a question of analysing contract prices and quotes provided by building firms.

3.19.2 According to the detailed method, the construction and

remodelling cost is established on the basis of the so-called bill of quantities. The bill of quantities should be used in assessing estimated costs for construction work and remodelling of a special or extraordinary nature.

3.20 So as to complete documentation, it is possible to refer, when they are

available, to the price list for construction work and the lists of costs for recurring types of buildings in the real estate sector and local market context identified for the project to be appraised.

3.21 The price lists for construction work and the lists of costs by type of

building must be reported in the Valuation Report with an indication of the property sector and market context and with an explicit citation of the source.


153

4.0 Application 4.1 In valuations for extension of credit, the Italian Property Valuation

Standard expresses the view that market price should represent the basis for valuation.

4.2 The Italian Property Valuation Standard considers the mortgage lending

value one of the many long-term risk analysis techniques for property secured loans.

4.3 The Italian Property Valuation Standard acknowledges that a common

use of mortgage lending values in the professional practice is in many ways inadequate and that the modes of operation are often empirical and lead to misleading outcomes.

4.4 The Italian Property Valuation Standard considers that it is up to banks to

provide valuers with directives for appraising the mortgage lending value. 4.5 The Italian Property Valuation Standard provides valuers with the notion

of the principle of mortgage lending, with a definition for the mortgage lending value and with rational concepts for applying risk analysis techniques.

4.6 In appraising the mortgage lending value, valuers must explicitly mention

the directives imparted by the Bank in the Valuation Report. 4.7 When the estimate of the mortgage lending value differs from the

estimate of the market price for the property to be appraised, valuers must include both estimate values in the Valuation Report, or supply data and information explaining why the two values are different.

4.8 The importance of the Valuation Report lies in communicating the

market value and/or the mortgage lending value of the property pledged as security and in specifying the valuation process, the aims and possible assumptions or conditions limiting the valuation.

4.9 The Valuation Report is the tool by which professionals fulfil the


154

obligation of knowledge stipulated with the Client. The content of the Valuation Report must be: a) exhaustive, according to the expectations of the institution granting the loan; b) understandable, given that this is a technical subject and the user might not be an expert in technical terminology; and, lastly c) easy to consult (Chapter 9).

4.10 International valuation standards require that a distinction be made

between a valuation and a Valuation Report. The valuation is comprised of all the surveys, data, reasoning, analyses and the conclusions needed to provide an estimate of the market value and of the other than market values. The Valuation Report describes these processes and conclusions (Chapter 9).

4.11 In valuations for extension of credit, the Valuation report must indicate

first of all: – the expert’s/valuer’s identity – the identity of the Bank or lending institution; – the date that assignment was conferred; – the valuation’s reference date; – the date the property was inspected; – identification of the property, in particular:

– location; – method of access to the property; – description and size, with an indication of measurement type and

criterion; – indication of neighbouring properties; – cadastral description; – building and zoning compliance with current regulations; – indication of the title deed and analysis of the cadastral

identification and of possible easements (apparent or resulting from the title deed) affecting the property;

– a description of the property’s characteristics and state of repair – a description of the property’s extrinsic characteristics.

4.12 In valuations for extension of credit, the Valuation report must include:

– the Bank’s assignment and directives; should no directives have been provided, the valuation is to be based on the market value;

– for finished buildings, an indication whether the valuation refers to the individual property or to the value of the property in the context


155

of a real estate portfolio (2.12 and 3.15); – for property intended for development, that state of development on

the date of valuation and the appraisal method agreed upon with the lender (2.20.3);

– the explicit definition of market value and/or mortgage lending value and the valuation date;

– the appraisal methodology or methodologies adopted, followed by an explanation of why the choice was made;

– the data and information on property market segments collected in assessing the market value according to the method or methods applied;

– when no directives as to method are imparted by the banks, valuers will apply market value assessment procedures and methods, introducing specific assumptions in establishing the mortgage lending value (3.12.2);

– an exhaustive explanation of all assumptions and conditions limiting the valuation;

– a description of the reasoning supporting the analysis, the opinions, the results and conclusions;

– the complete documentation of property data and professional attachments.

4.13 In valuations for extension of credit, valuers must state:

– that the Valuation Report is reserved to the lending institution and valuers cannot in any way be held responsible should third parties use the Valuation report;

– that the complete and partial publication of the Valuation Report is expressly prohibited as is any reference to the Report or to the amounts indicated within it and to the valuer’s name without his or her written consent;

– that the Valuation report has been drawn up according to the current best practice, avoiding any deviation, and in particular: – that the content of the report is correct and to the valuer’s best

knowledge; – that analyses and conclusions are limited only to the reported

assumptions and conditions; – that the valuer has no interest whatsoever in the property which

is being appraised;


156

– that the valuer has inspected personally the property being appraised;

– that no one, expect the individuals specified in the Report, has provided professional assistance in drawing up the Report;

– the valuer’s qualifications. 4.14 Upon request, valuers must express the property rating, according to

specifically provided instructions. 4.15 Valuers must inform the Bank should there by any possible conflict of

interests.


157

Chapter 13

Guidelines for Agricultural Property Valuations 1.0 Introduction 1.1 Agriculture is characterised by different types of commodities and

different production systems. Agricultural production is conditioned by location, by geo-pedo-agronomic factors and soil fertility, by the presence of irrigation water, by climate and by other specific environmental conditions. Factors external to agricultural production are the availability of infrastructures and of a road system and facilities for storage, processing and transporting the commodities. Other factors that affect the productivity of agriculture are the supply, distribution and sales markets.

1.2 Farms can be made up of various combinations of land, buildings,

equipment and agricultural crops. 1.3 In agriculture, bio-technological conditions determine the length of the

production cycle. Basically, the length of the production cycle depends on the type of crop grown. Indicatively, for herbaceous plants it is one year or less, for trees it is several years (fruit, woody plants and woodlands). For plants that are grown for several years, the yearly production may vary from one year to another depending on the age of the plants, as is the case with fruit-bearing plants, or may be deferred until the end of the multi-year cycle, as in the case of woodlands.

1.4 The objective of the Italian Property Valuation Standard is to provide

guidelines for agricultural property valuations and to indicate their fields of application.


158

2.0 Definitions 2.1 The term farm refers to the technical and economic unit where the

production of agricultural commodities and goods takes place as a result of entrepreneurial decisions. A farm originates from the physical combination of its production factors. The elementary production factors of a farm with reference to its appraisal are: – the agricultural capital, consisting of the natural resource (land) and

of the improvements of various kinds made to it (buildings, road system, plantations) enabling farming to be practiced (agricultural investments);

– the working capital, consisting of the stock instruments (livestock, machines, etc.), of the stock of products (seeds, manure, etc.) and of the circulating capital (for advance expenses);

– the work; – the enterprise.

2.2 Livestock farms engage in rearing and feeding animals, such as cattle,

sheep, pigs, goats, horses, or combinations thereof. The production activity of these farms may take many forms (rearing, breeding, etc.). Feed for the animals may be produced on the property and/or imported. Properties used for the production and feeding of livestock have significant capital investment in structural improvements (pens, silos, fencing, shelters, etc.) and in livestock, which may or may not be depreciable depending on local laws and regulations (IVS GN 10 3.5).

2.3 Dairy farms produce cow’s or ewe’s milk and/or other dairy products.

These properties usually have extensive structural improvements (cowsheds, milking sheds, silos) and equipment (feed bins, milking machines, etc.). Feed may be produced on the property, imported, or supplied by both sources (IVS GN 10 3.6).

2.4 Timber farms grow non-orchard trees that are periodically harvested

over extended growing periods. They are considered farms in that they produce a crop, i.e. wood, although it may require a long growth period (IVS GN 10 3.7).


159

2.5 Specialised properties are those farms that do not typically produce a crop,

but are used for handling, processing or storing crops once they been harvested. These properties usually have a limited land base, which is often extensively developed by means of agricultural investments, plant, machinery and equipment (IVS GN 10 3.8).

2.6 Special-purpose properties are farms classified on the basis of the

special nature of the commodity produced. Examples are truck farms, poultry farms, those that produce certified crop seeds or fresh cut flowers, and stables for breeding or training racehorses (IVS GN 10 3.8).

2.7 The land base of a farm may be broken down into several separate

pieces of land (land fragmentation). These may even be small and have subsidiary functions (land pulverisation) (EVS GN 5.16).

2.8 Agricultural land may be used to grow commodities that are typically

sown or transplanted and harvested in an annual cycle. Some commodities are annual crops that may be left in the ground beyond a twelve-month cycle, per contract provisions or when market conditions are unfavourable sale (IVS GN 10 3.1).

2.9 Agricultural land may be used to grow plants having a life-cycle or

harvesting cycle longer than one year. Plantations of this type require substantial capital investment and are depreciable assets (IVS GN 10 3.3).

2.10 Agricultural crops may concern plants other than for food, e.g. for

pharmaceutical use.. A farm may have at the same time environmental and recreational purposes (agritourism), that can be sources of value (EVS GN 5.03).

Accounting Standards

2.11 According to International Accounting Standard 41, Agriculture (IAS 41),

agricultural activities concern the management of a business for the biological transformation of live animals or plants (biological resources) intended for sale, in the form of agricultural commodities or biological resources.


160

2.11.1 Biological resources consist of the live animals being bred or of

plants grown for sale or for transformation into agricultural commodities or into additional biological resources (IAS 41).

2.12 For accounting purposes, property can be classified as tangible assets

(IAS 16, Property, plant and equipment), as investment property (IAS 40, Investment Property) and as property owned for sale (IAS 2, Inventories).

2.12.1 For accounting purposes, property included in tangible assets is

intended for lasting use as instrumental to production (used directly in the production of goods and services, for business administration purposes or for rental) in that it is part of the technical production system (OIC).

2.12.2 For accounting purposes, property included in investment

properties as real-estate property (land or a building or part of a building) is held (by the owner or by the lessee under a finance lease) for the purpose of earning rentals or for capital appreciation or for both purposes. The criterion for classing a property as a property investment or as an tangible asset is its speculative purpose (OIC).

2.12.3 For accounting purposes, property owned for sale is intended for

normal performance of the entrepreneurial activity and used in production processes for sale (OIC).

3.0 Discussion 3.1 Agricultural property is valued with reference to the property market

segment, defined on the basis of its parameters (Chapter 3). 3.2 Agricultural property is valued with reference to:

– valuation principles, which are the foundations underlying the appraisal;

– appraisal values, which define the values of significant interest in the estimates, in commercial practice and in the accounts; the appraisal


161

values are the market value and other than market values; – appraisal criteria, which dictate the methodological rules for working

out the appraisal value; – appraisal methodologies, by means of which the quantitative

formulation of the valuation is reached; appraisal methodologies are classified into the market approach, the income approach and the cost approach.

3.3 In appraising agricultural assets, the market approach is a method for

estimating the market price or the income of a personal or real property. It is applied by comparing the property being valued with a set of similar comparable properties, sold recently and the price or income of which are known and fall within the same market segment. The market approach includes mainly: – the single-parameter appraisal method, based on the use of a single

parameter for a technical or economic comparison (Chapter 8 2.1); – the market comparison approach (MCA), based on determining the

actual market data and the characteristics of the property (Chapter 8, Appendix D);

– -the estimation system, based on a system of linear equations concerning comparisons between the property being appraised and a set of comparable properties similar to it in terms of characteristics (Chapter 8 2.3.2);

– the allocation system, [spread, distribution system] based on a system of linear equations referred to the allocation of the price or of the income or of the total cost of comparable similar properties, based on uniform characteristics (Charter 8 2.3.3);

– multiple-regression analysis, based on a single equation interpolated onto real market data measured on the basis of the characteristics of the properties (Chapter 8 2.3.4).

3.4 In appraising farm assets, the income capitalization approach includes

income capitalization procedures, which arrive at the market value considering the capacity of the land and of the agricultural investments to generate profit in monetary terms. The income approach is based on transformation of the income from a property or from an agricultural investment into capital value by means of the capitalisation rate (Chapter 8, Appendix E).


162

3.4.1 The income capitalization approach is divided into: the appraisal

by direct capitalization; the appraisal by yield capitalization; the discounted cash flow analysis. The income capitalization approach applies to appraisals of properties, of capital goods and of agricultural production.

3.5 In the valuation of agricultural properties, the cost approach is an

appraisal methodology aimed at determining the value of a property by calculating the sum of the value of the land as if it were building land plus the cost of reconstruction of the work or of the building, depreciated if appropriate. It is also known as the depreciated reproduction (or reconstruction) cost. In appraising the plant and machines, the cost approach is applied separately for estimating the cost of reproduction. In appraising agricultural investments the cost approach is applied separately for estimating the construction cost and the costs of the works of the activities in agriculture (Chapter 8, Appendix F).

3.6 Farms intended for the production of foodstuffs presumably have no

goodwill value (EVS GN 5.18). 3.7 Agricultural land may be subject to improvements regarding building,

recreational or sports activities, etc.

Accounting Standards 3.8 International Accounting Standard 16, (Property, Plant and Equipment),

40 (Investment Property) and 41 (Agriculture) apply to the valuation of properties and of agricultural commodities. Depending on which standard is more appropriate in the circumstances, IAS 16 or IAS 40 are followed.

3.9 According to IAS 16, the land has to be valued on the basis either of the

cost model net of depreciation accrued and of devaluation due to losses in value or of the cost revaluation (re-determination) procedure. The difference between these two models consists of the fact that the book value of the asset must be re-determined at regular intervals in order to take the changes that have taken place in its fair value into account. The frequency of these revaluations depends on the characteristics of the assets


163

and may be at yearly intervals or longer (3 to 5 years). This operation concerns revaluation and devaluation equally. IAS 40 calls for revaluation on an annual basis.

3.9.1 To estimate the fair value, IAS 16 indicates a hierarchy of the

sources to be drawn from for valuation. The most appropriate reference is the market value of the assets certified by means of an appraisal prepared by qualified experts. The first, if there is an active market, refers to the prices that can be observed in the market segment of the property to be appraised. The second source, lacking an active market, refers to recent market transactions at normal values. The third source refers to valuation procedures based on income flows and on the depreciated reconstruction (or replacement) cost.

3.10 An active market is characterised by the following conditions:

– the products placed on the market are homogeneous; – the available buyers and sellers can normally be found in any period; – the prices are at the disposal of the public (OIC).

3.11 According to IAS 40, the land, considered a property investment, is

valued at its fair value or at the cost less accrued depreciation and less the losses due to accumulated deterioration.

3.11.1 For estimating the fair value, IAS 40 indicates a hierarchy of the

sources to be drawn from for the valuation. The most appropriate reference consists of the current prices on an active market for property similar to the one being valued and falling within the same market segment. In the absence of current prices on an active market, reference is made: to the current prices of properties in other market segments in terms of location and intended use, but adjusted to take the differences into account; to the recent prices of similar properties in other market segments that are less active in view of their location and intended use, but adjusted to take the differences – including the different date - into account; to valuation procedures based on reliable estimates of the expected income flow, backed by knowledge of rentals, and updated by applying updating rates


164

that take the current market valuations into account with reference to the uncertainty of the figures, of the duration in time and of the due dates.

3.11.2 IAS 40 does not require a compulsory appraisal of the fair value

of investment properties by an independent expert, although it is desirable for the appraisal to be carried out by an independent valuer. The expert must be an outside professional with recognised and pertinent professional qualifications and with recent experience of the market segment to which the property investment being valued belongs.

3.12 IAS 41 defines the accounting treatment, the drafting of the balance

sheet and the information to be provided for agricultural activities. Agricultural activities concern the biological transformation of live animals and plants for their sale either as agricultural commodities or as intermediate products for subsequent processing.

3.12.1 IAS 41 states that the biological activities must be valued on the

basis of the fair value net of the estimated costs at the point of sale at the time of harvesting. The estimated costs for selling the produce include, by way of example, commissions for agents and middlemen and taxes and charges connected with transferring the produce, while they exclude the cost of transport to the place of sale. An exception is made in those cases in which the fair value cannot be reliably evaluated.

3.12.2 Biological products are valued at the initial moment, during the

course of their growth, development and transformation and until the time harvesting, on the basis of the fair value according to IAS 41, with the exception of those cases in which the fair value cannot be valued reliably. After the harvest, biological products are valued on the basis of IAS 2, Inventories, or on the basis of another principle found to be appropriate for the specific case.

3.12.3 The principle of IAS 2 maintains that the valuation is to be

carried out on the basis of the cost (according to the mean weighted cost approach or the FiFo - First in–First out –


165

method) and the net cash value, whichever is the lowest.

3.12.3.1 The cost includes production, conversion and other costs, where deemed appropriate, incurred in order to bring the inventories to their current location and condition.

3.12.3.2 The net cash value is calculated as the difference

between the estimated sale price of the produce and the estimated cost of completion and the estimated costs of selling it.

3.12.4 For estimating the fair value, IAS 2 defines a hierarchy of the

sources from which to draw for the valuation. The first source, in the case of a plurality of active markets, refers to the price available on the market expected to be the destination market of the produce. In the absence of an active market, the second source refers to recent market transactions, provided no significant changes have occurred in the economic circumstances between the date of the transactions and the date of the balance sheet. The third source refers to the market prices of similar activities, considering the adjustments needed to take the differences into account. The fourth source refers to the typical parameters for the sector concerned. The fifth source is based on the current value of the financial flows expected of the produce, brought up to date at a current market rate before taxes.

3.12.4.1 The financial flow must not include the components

connected with financing of the activity, taxation and restarting of activities after the harvest.

3.12.5 According to IAS 41, plantations physically associated with the

land (such as the trees of a wood) should be valued separately from the land, subtracting the estimated sale costs from their fair value. IAS 41, as is also the case for IAS 40 for investment property, requires separate indication in the statement of assets and liabilities of biological assets and particularly detailed information (OIC).


166

3.12.6 IAS 41 recognizes that there may not be separate markets for the

plantations associated with the land, but an active market may exist for the combination of resources, that is to say a combination of the plantations, of the bare ground and of the agricultural investments considered as a business. It is therefore possible to use the information concerning the business to determine the fair value of the biological resources. The fair value of the bare ground and of the agricultural investments can be deducted from the fair value of the business as a whole, to reach the fair value of the plantations. IAS 41 also provides indications concerning the determination of the fair value of a plantation or of an agricultural commodity, both if there is and if there is not an active market.

4.0 Applications 4.1 The valuer must have competence in valuing the various assets making up

the agricultural properties (IVS GN 10 5.1.1). 4.2 The market value must be recognised as the fundamental basis for

valuation (IVS GN 10 5.2). 4.3 Where other bases have been used for valuation, these must be

distinguished from the market value basis (IVS GN 10 5.3). 4.4 For the financial statements, the valuer must apportion the market value in

accordance with the requirements of the IAS (IVS GN 10 5.2.2). 4.5 When an agricultural property is valued that may include non-realty

elements such as livestock, stored crops and equipment, the valuer needs to understand when a crop or other commodity is to be considered real property and when it becomes personal property. Timber, for example, is part of the real property while the trees are growing, but becomes personal property when it is removed from the land (IVS GN 10 5.4.1).

4.6 In keeping with the definition of market value, an analysis of the highest

and best use of the property should always be carried out in order to:


167

1) warrant that the agricultural use will continue in time, especially when it appears that another land use appears likely, such as subdivision development following urban or suburban expansion;

2) determine whether the agricultural use should be continued. If the valuer is specifically instructed to ignore uses other than the current agricultural use, the valuation will not necessarily indicate the market value of the agricultural property.

Such circumstances must be full disclosed (IVS GN 10 5.5.2 and 5.5.3). 4.7 The estimate of stabilised income of agricultural properties must be based

on crop patterns and cycles in the market area (IVS GN 10 5.6). 4.8 The cash flow to agricultural properties is a function of both the

production cycle followed and on the cyclical forces of the commodities markets. The valuer must consider the impact of these cycles on the cash flows. The valuation of agricultural properties must be based on a stabilized pattern of income plan that is consistent with the productive cycles commonly practiced in the area where the agricultural property is located (IVS GN 10 5.6.1).

4.9 The valuer of an agricultural property that has more than one physical

component or class of agricultural use must state clearly whether the value of each component or each type of use corresponds to its contribution to the farm as a whole, or to its value as a separate, free-standing component. The valuer must determine whether each component of the agricultural property is to be valued individually or as part of the whole property or of the farm (IVS GN 10 5.7.1).

4.10 Agricultural use of the property may require extensive building

improvement in the form of buildings, e.g. barns and storage bins. These improvements, which are essential for proper operation of the farm, are often secondary to the main asset, which is the land. Their value must be based on their contribution to the total value of the property or of the farm, regardless of their cost or other measure (IVS GN 10 5.7.3).

4.11 The valuer must established first and foremost whether the agricultural

property has to be valued whole or in lots or in single parcels of land (EVS GN 5.39).


168

4.12 For the purpose of valuing properties, capital goods and agricultural

production can be classified as follows (EVS GN 5)(IVS GN 10 4.3): – farms as a whole, – agricultural land, – woodlands and logging woods, – vegetation, – agricultural investments, – plant and machinery associated with the land, – machines and tools, – livestock, – existing commodities, – commodities being stored.

Farms

4.13 Farms can be considered complex properties made up of the original land

and of their associated property, infrastructures, temporary or permanent crops, plant and machinery, farm animals and agricultural industries for processing the farm produce. The common element consists of the enterprise that organises and activates the production factors as a consequence of entrepreneurial decisions. In this respect, a farm, in which the production factors are combined, constitutes an overall unit for valuation purposes. The farm as such becomes the subject matter of purchase and sale and of leases.

4.13.1 The farm market segment considers the production unit

objectively and is characterised according to: location, form of contract, intended agricultural production, typology of investment properties and buildings and other immovable items, size, characteristics of the supply and demand, market system and price level.

4.13.2 In appraising farms, the complementary relationships between the

various components are considered implicitly. 4.13.3 Valuation of farms is based on their market value.


169

4.13.4 Valuation of farms takes place by means of:

– the market approach, based on a process of single-parameter appraisal, on the MCA understood to be a process of multi-parameter appraisal and on the allocation system;

– the income capitalization approach, which is based on the farm’s income capitalization.

4.13.4.1 In the market approach, the single-parameter appraisal

method, based on collecting the market data and on the use of a single parameter, is applied to appraisals of farms when there are no other characteristics in terms of which the market prices of the comparable farms observed differ from one another and from the farm being valued.

4.13.4.2 The market approach based on the MCA is based on the

collection of the prices of similar farms, negotiated recently in the same market segment. The property characteristics of significant interest for valuing farms consist indicatively of the surface area broken down according to the intended crops; location-related characteristics, such as the location and the distance from the nearest town and/or from the facilities for valorising/processing the agricultural commodities; the position-related characteristics in terms of the altitude, slope, lie and exposure of the land; typological characteristics concerning fertility of the soil, the presence of irrigation water, the relevant agricultural investments, the number, size and the state of the buildings, the vegetation, the presence of animal rearing and of processing industries; and economic characteristics.

4.13.4.3 In appraising farms for growing mixed crops, the

market approach can be based on the allocation system, applied to the surface areas on which the various crops are grown.


170

4.13.4.4 The income capitalization approach is based mainly on

the determination of the farm income to be capitalised. The farm income refers to the yield of the land and to any yields from agricultural investments (agricultural capital). The level of income is connected to the market of leasehold farms. For a farm the level of yearly income depends on agricultural commodity trends, on the prices of the products sold, on the costs of the production factors and on their market cycles.

4.13.5 The farm income to be capitalised may be understood as: the price

for use of the agricultural capital by the farm as collected on the market; the farm income associated with the agricultural capital contributed to the production process by the owning farm.

4.13.5.1 Starting out from the market rental, the gross farm

income is estimated using the market approach.

4.13.5.1.1 The single-parameter appraisal method is based on determination of the market data and on use of a single parameter, usually the surface area, and is applied for estimating the value of farms when there are no other characteristics in terms of which the market rental of the farms observed differ from one another and from the farm being values.

4.13.5.1.2 The MCA is based on determination of the

market rentals for similar farms, negotiated recently in the same market segment.

4.13.5.1.3 The net farm income is determined by

drafting the balance sheet for the period of the owning enterprise, for the purpose of estimating the income to be capitalised.

4.13.5.2 Starting out from the farm’s production, the net income


171

to be capitalised is determined by drafting the balance sheet of the farm.

4.13.6 If, in determining the income of the farm to be capitalised, the

cash flow can be indicated by a foreseeable constant yearly item, then the direct capitalization and yield capitalization methods can be applied (Chapter 8, Appendix E).

4.13.7 In appraising farms intended for crops with production cycles lasting several years, it is necessary to make a distinction between even-aged plantations, uneven-aged plantations and uneven-aged plantations with an annual management cycle.

4.13.8 Farms intended for crops with a production cycle lasting several years, usually fruit–trees and bushes, with even-aged plants, are valued using: – the market approach, which is based on the single-parameter

appraisal method and on the MCA; – the income capitalization approach, based on the farm’s

income capitalization.

4.13.8.1 With the market approach, the single-parameter appraisal method, based on the collecting of market data and on use of a single parameter, is used for appraising farms when there are no other characteristics in terms of which the market prices of the comparable farms observed differ from one another and from the farm being valued.

4.13.8.1.1 The market approach is based on

determination of the prices of similar farms, sold recently in the same market segment. The property characteristics of significant interest consist indicatively: of the surface area; of location-related characteristics, such as location and distance from the nearest town and/or from the facilities for processing/processing the agricultural


172

commodities; of position-related characteristics relative to the altitude, slope, lie and exposure of the land; of typological characteristics referred to fertility, to irrigation, to the species and cultivar grown, to their age, to the planting layout; and of economic characteristics.

4.13.8.1.2 Crops with a life cycle of several years

consisting of even-aged permanent plants produce a variable yearly income. The income capitalization approach is based first and foremost on determination of the cash flow of the agricultural income of the multi-year bio-agronomic cycle (discounted cash flow analysis).

4.13.9 Valuation of farms intended for crops having a multi-year

production cycle, usually fruit-trees and bushes, with uneven-aged plants is carried out using: – the market approach, which is based on the single-parameter

appraisal method and on the MCA; – the income capitalization approach, which is based on the

farm’s income capitalization.

4.13.9.1 With the market approach, the single-parameter appraisal method, based on collection of market data and on use of a single parameter, is applied for appraising farms when there are no other characteristics in terms of which the market prices of the comparable farms measured differ from one another and from the farm being valued.

4.13.9.1.1 The market approach is based on

determination of the market prices of similar farms, sold recently in the same market segment. The property characteristics of significant interest consist, indicatively of:


173

the surface area; location-related characteristics, such as location and distance from the nearest town and/or from the facilities for transforming/transforming the agricultural commodities; position with reference to the slope, altitude, lie and exposure of the land; typological characteristics referred to fertility, to irrigation, to the species and cultivar grown, to the composition of the plants in terms of age, of the planting layout; and economic characteristics.

4.13.9.1.2 If the crops are uneven-aged but arranged in

such a way that they provide a practically constant annual production, in determining the income of agricultural land to be capitalised it is possible to apply the direct capitalization and the yield capitalization methods.

4.13.9.1.3 If multi-year crops with unevenly distributed

unevenly aged permanent plants produce a variable yearly income, the income capitalization approach calls first and foremost for determination of the cash flow of the expected agricultural income in relation to the breakdown of plants according to age (discounted cash flow analysis).

4.13.10 In groves subject to annual management, the surface area of the

farm is split up into the same number of parcels of land as the years of the bio-agronomic cycle of the crop. In this way, the various parcels contain plants of different ages, while the plants within each parcel are evenly aged. This means that the annual production of the farm tends to settle and become constant.


174

4.13.11 Farms intended for crops with multi-year production cycles, usually fruit-trees and bushes, with plants arranged for annual management, is carried out using: – the market approach, which is based on the single-parameter



4.13.11.1 With the market approach, the single-parameter appraisal method, based on collection of market data and on use of a single parameter, is applied for appraising farms when there are no other characteristics in terms of which the market prices of the comparable farms measured differ from one another and from the farm being valued.

4.13.11.2 The market approach is based on determination of the

prices of similar farms, sold recently in the same market segment.

4.13.11.3 In determining the income of agricultural land to be

capitalised, it is possible to apply the direct capitalization and the yield capitalization methods.

Agricultural land

4.14 The valuation of agricultural land is based on its market value. 4.15 Agricultural land intended for crops with an annual production cycle,

usually herbaceous plants, with main crops and possible intercrops, is valued using: – the market approach; – the income capitalization approach.

4.15.1 With the market approach, the single-parameter appraisal

method, based on collection of market data and on use of a single parameter, is applied for appraising land when there are no other characteristics in terms of which the market prices of


175

the comparable land measured differ from one another and from the land being valued.

4.15.2 The market approach based on the MCA is based on

determination of the prices of similar agricultural land, negotiated recently in the same market segment.

4.15.3 In appraising agricultural land intended for multi-year crops,

subject to crop rotation and alternation in accordance with agronomic techniques, the market approach can be based on the allocation system, applied to the surface areas on which the various crops are grown.

4.15.4 The income capitalization approach is based first and foremost

on determination of the agricultural income to be capitalised. The income is referred to the yield of the land and to the almost-yield of the agricultural investments relating to the land. The level of annual income depends on agricultural production trends, on the prices of the produce and on the costs of the production factors and the relevant market cycles.

4.15.5 The gross income is estimated using the market approach. The

income is understood as the price for use of the land by the farm.

4.15.5.1 The single-parameter appraisal method is based on

collection of the market data and on use of a single parameter, usually the surface area, and is applied for appraising land, when there are no other characteristics in terms of which the market prices of the land measured differ from one another and from the land being valued.

4.15.5.2 The MCA is based on determination of the prices of

similar agricultural land, sold recently in the same market segment.

4.15.6 The net income is determined by drafting the balance sheet for the


176

period of the owning enterprise, in order to estimate the income to be capitalised.

4.15.7 If, in determining the income from the agricultural land to be

capitalised, the cash flow can be shown in the form of a foreseeable and constant yearly item, then the direct capitalization and yield capitalization methods can be applied.

4.16 Agricultural land intended for crops with production cycles lasting more

than one year, usually fruit-trees and bushes, usually require greater agricultural investments than annual crops, and entail higher costs for removing the plants at the end of their cycle.

4.16.1 When valuing agricultural land intended for crops with production

cycles lasting more than one year it is necessary to distinguish between the growing of even-aged plants and that of uneven-aged plants.

4.16.2 Valuation of agricultural land intended for crops with

production cycles lasting more than one year, usually fruit-trees and bushes, with even-aged plants is carried out using: – the market approach, which is based on the single-parameter



4.16.2.1 With the market approach, the single-parameter appraisal method, based on collection of market data and on use of a single parameter, is applied for appraising agricultural land when there are no other characteristics in terms of which the market prices of the comparable land measured differ from one another and from the agricultural land being valued.

4.16.2.2 The market approach is based on the single-parameter

appraisal methodology and on MCA, understood to mean a multi-parameter appraisal methodology. The market approach is based on collecting the prices of


177

similar agricultural land sold recently in the same market segment.

4.16.2.3 Cultivation of multi-year crops with even-aged

permanent plants gives rise to a variable yearly income. The income capitalization approach is based first and foremost on determination of the cash flow of the agricultural income from the multi-year bio-agronomic cycle (discounted cash flow analysis).

4.16.3 Valuation of agricultural land intended for crops with

production cycles lasting more than one year, usually fruit-trees and bushes, with uneven-aged plants is carried out using: – the market approach, which is based on the single-parameter



4.16.3.1 With the market approach, the single-parameter appraisal method, based on collection of market data and on use of a single parameter, is applied for appraising agricultural land when there are no other characteristics in terms of which the market prices of the comparable land measured differ from one another and from the agricultural land being valued.

4.16.3.2 The market approach is based on the single-parameter

appraisal methodology and the MCA understood as a multi-parameter appraisal methodology. The market approach is based on collection of the prices of similar agricultural land, negotiated recently in the same market segment.

4.16.3.3 If the plants are uniformly uneven-aged plants and the

income to be capitalised can be shown in the form of a foreseeable and constant yearly item, then the direct capitalization and yield capitalization methods can be applied.


178

4.16.3.4 If multi-year crops of unevenly distributed uneven-

aged permanent plants provide a variable yearly income, the income capitalization approach determines first and foremost the cash flow of the expected agricultural income in relation to the breakdown of the plants according to age (discounted cash flow analysis).

Woods and logging groves

4.17 Agricultural land on which woods and groves for the production of

timber and other secondary products are grown have a multi-year production cycle, and the ecological system consisting of the soil and vegetation has a strictly complementary nature.

4.18 In appraising woods and logging groves it is necessary to distinguish

between even-aged plant populations featuring periodic production, uneven-aged populations featuring periodic production and even and uneven-aged populations stabilised for yearly production (Merlo). An even-aged population refers to an even-aged wooded parcel. A stabilised population refers to whole farms or stabilised management units called felling series.

4.19 Even-aged wooded populations are valued using:

– the market approach; – the income capitalization approach.

4.19.1 The market approach is based on the single-parameter appraisal

method and on the MCA understood to be a multi-parameter appraisal methodology.

4.19.1.1 The single-parameter appraisal method, based on

collection of market data and on use of a single parameter, is applied for appraising parcels, woods or felling series when there are no other characteristics in terms of which the market prices of the comparable populations measured differ from one another and from


179

the population being valued. 4.19.1.2 The MCA is based on determination of the prices of

similar parcels, woods or felling series, sold recently in the same market segment. The property characteristics of significant interest consist indicatively: of the surface area; of location-related characteristics, such as location and distance from the nearest town and/or from the facilities for processing/processing the agricultural commodities; of position with reference to practicability, to the altitude, slope, lie and exposure of the land; of typological characteristics referred to fertility, to the tree species, to age and to the forestry technique; and of economic characteristics.

4.19.2 Even-aged wooded populations provide a variable yearly income.

The income capitalization approach is based first and foremost on determination of the cash flow of the agricultural income of the multi-year bio-forestry cycle (discounted cash flow analysis).

4.20 In uneven-aged forestry, the soil is constantly covered with plants of

various sizes and ages. Felling or cutting for thinning purposes is carried out periodically. When cutting, those plants that have exceeded the cutting diameter limit are cut down, as well as a certain number of plants of smaller diameters, the number of which exceeds the standard distribution of diameter classes within the uneven-aged population.

4.21 Uneven-aged wooded populations are valued using:

– the market approach; – the income capitalization approach.

4.21.1 The market approach is based on the single-parameter appraisal

method and on the MCA understood as multi-parameter appraisal methodology.

4.21.1.1 the single-parameter appraisal method, based on

collection of market data and on use of a single parameter, is applied for appraising parcels, woods or


180

felling series when there are no other characteristics in terms of which the market prices of the comparable populations measured differ from one another and from the population being valued.

4.21.1.2 the MCA is based on determination of the prices of

similar parcels, woods or felling series sold recently in the same market segment. The property characteristics of significant interest consist indicatively of: the surface area; location-related characteristics, such as location and distance from the nearest town and/or from the facilities for processing/processing the agricultural commodities; position with reference to the practicability, to the altitude, slope, lie and exposure of the land; typological characteristics referred to fertility, to the tree species, to the different ages of the plants, to the forestry technique; and economic characteristics.

4.21.2 The income capitalization approach is based first and foremost

on determination of the cash flow of the agricultural income, taking composition in terms of age classes and diameters of the plants, the periodic felling, the growing stock of the mass remaining after felling and the proceeds and yearly expenses into account (discounted cash flow analysis).

Vegetation

4.22 The vegetation of land cultivated with trees for fruit and logging consists

of the trees considered as such, that is to say separately from the ground. In even-aged wooded populations, the vegetation consists of the trees. For valuation purposes, in uneven-aged wooded populations the vegetation of the wood forming during the felling period beyond growing stock is considered.

4.23 Valuation of the vegetation may be required for various practical

purposes, in spite of the fact that the trees cannot be sold separately from the land. They are valued, for example, when appraising damages, for accounting purposes, etc.


181

4.24 The fair value of the plantations consists of the added value they

contribute to the land. According to IAS 41, the plantations must be valued at the time of initial planting and at the time of drafting the statement of assets and liabilities.

4.25 The value of the bare earth is the value of the agricultural land capable

of being cultivated with trees in relation to the relevant agricultural investments, to local vocation, to fertility, to the availability of irrigation water and drainage systems and to the general agricultural context. Land capable of being cultivated with trees belongs to a different real-estate market segment, separate from that of other land even if it has the same assets or is in similar conditions but which cannot be used to grow trees.

4.26 The value of bare woodland soil is the value of the land just after cutting

and before replacement. Sometimes the bare soil, in the case of forests of tall trees treated with successive cuts and of coppices with the leaving of saplings, includes the plants left according to the forestry technique used.

4.27 Estimation of the value of the bare ground and of the value of bare

woodland soil is carried out using: – the market approach, which is based on the single-parameter appraisal

method and on the MCA; – the income capitalization approach, which is based on the income

capitalization (EVS GN 5.82).

4.27.1 The single-parameter appraisal method is based on collection of the market data and on the use of a single parameter, usually the surface area, and is applied in estimating the value of the bare ground and the value of the bare soil when there are no other characteristics in terms of which the market prices of bare land measured differ from one another and from the bare ground being valued.

4.27.2 The market approach is based on collection of the prices of bare

agricultural land capable of being cultivated with trees and of the prices of soil to be reforested, negotiated recently in the same market segment.


182

4.27.3 In estimating the value of bare ground the income capitalization

approach is based first and foremost on determination of the cash flow of the costs of the unproductive period and of the net proceeds of the other phases of the multi-year bio-agronomic cycle (discounted cash flow analysis).

4.27.4 In estimating the value of the bare woodland soil, the income

capitalization approach is based first and foremost on determining the cash flow, made up of the cost of initial implantation, of the subsequent renewals and of the end-of-cycle product, and of the proceeds and yearly expenses (discounted cash flow analysis).

4.28 The value of the vegetation of fruit-tree crops is calculated according to

the criterion of appraisal of the complementary value, understood to be the difference between the value of the treed land and the value of the bare earth (Chapter 2.21).

4.29 The value of the vegetation of a wood is calculated according to the

criterion of appraisal of the complementary value, understood to be the difference between the value of the treed land and the value of the bare soil.

4.30 The procedures for appraising the value of even-aged vegetation are

applied to groves, to woods, to groups of plants of a parcel, to plantations of trees and to single plants.

Agricultural investments

4.31 Agricultural investments consist of capital stably invested and tied up in

the soil in order to increase its productivity. There are various kinds of agricultural investments and they include different works, constructions and activities such as, by way of example, buildings, roads, drainage works, windbreak plants, fencing, terracing, embankments, removal of stones and soil improvement. Generally speaking, they are works, constructions and activities incorporated into the land that either cannot be separated from it or, once they have been separated, lose their technical (static and structural or morphological and functional) and


183

economic effectiveness, that is to say they have no alternative use and therefore cannot be sold or are unable to generate income.

4.32 Agricultural investments are valued using:

– the market approach if there is market evidence for the works or planting;

– the income capitalization approach, for investments for which construction of the income flow is possible and conclusive;

– the depreciated reproduction or replacement cost, for agricultural investments subject to depreciation;

– the reproduction or replacement cost, for agricultural investments not subject to depreciation.

4.33 Agricultural investments can also be valued on the basis of their

contribution to the value of the agricultural land or to the value of the farm.

Plant and machinery associated with the land

4.34 Agricultural activities make use of plant and machinery that cannot be

removed from the land, since once they have been separated from it they lose their technical (static and structural or morphological and functional) and economic effectiveness, that is to say they have no alternative use and therefore cannot be sold or are unable to generate income. Plants and machinery are often built according to specific design indications suiting the specific farm context and incorporated into suitable building works.

4.35 Immovable plant and machinery are valued using:

– the market approach when there is a specific market or similar market evidence, taking the costs of deactivation, of removal and of reuse and the residual or functional characteristics or those that can be recovered elsewhere into account;

– the depreciated reproduction or replacement cost approach, when there is no specific or reference market, or if they cannot be separated or sold separately without altering their functions or if separation is not economically viable (the costs of separation exceed the sale price);

– in terms of their contribution to the value of the agricultural land or to


184

the value of the farm.

Machines and tools 4.36 Machines and tools can be appraised on the basis of their market value

(resale value), if there is no reason for the incoming owner to pay a higher amount for them. If they are legally attached to the agricultural property, they must be appraised at the value they add to the property and, generally speaking, in the same manner as the other investments (EVS GN 5.61). It is pointed out that this measure originates from the difference in complementary value between the value of the party’s private property and the value of the property as a whole.

Livestock

4.37 In agricultural activities, the livestock is used mainly for the production of

milk and meat, and for breeding purposes. Livestock is appraised mainly on market evidence if the animals can be sold either alive or dead. The appraisal takes the productive aptitude, the age, the living conditions, the state of health, the pedigree and other breeding factors into account (EVS GN 5.56). If there is little market evidence, the appraisal can plausibly consider sale of the product or of the offspring and compare these with products, goods and services for which there is market evidence.

4.38 Livestock can be appraised through capitalisation of the flow of future

income. This approach aims to consider the increase in meat yield, the daily production of milk, the breeding performance and the production of fibre and, for animals at the end of their productive lives, the salvage value, if any (EVS GN 5.57). The valuation of livestock can be carried out using the production cost of such livestock. At times the values indicated using the income capitalization approach may differ from those obtained using the production cost. If circumstances suggest a valuation on a cost basis, the valuer must ask himself whether a cautious breeder would actually be prepared to pay the amount resulting from the cost. This manner of proceeding may be used to cross-check occasional bubbles occurring on the animal husbandry market, for example when pressure is generated by the demand on a specific market segment with limited stocks (EVS GN 5.58).


185

Existing produce

4.39 Existing produce refers to crops that have just been started, plants that

are growing, existing crops, produce that is in the ripening stage and produce soon to be harvested. Existing produce is valued by establishing their value at an intermediate stage in time of the production cycle. This type of valuation is required, for example, when appraising the expected yield of land at an intermediate stage of the production cycle and when appraising damages.

4.40 Existing produce can be valued using the market approach, when there is

an independent market on which the intermediate product can be sold. If there is no such specific market, existing crops and produce can be valued using construction of the cash flow of the crop or produce that is undergoing ripening. As a general rule, the sum of the costs incurred since the start of the production cycle until the intermediate point in time is indicated as the past value (or retrospective value), while the difference between the expected value of the completed production and the expected costs from the intermediate moment in time until the end of the production cycle in order to complete production is indicated as the future value (or prospective value). For accounting purposes, this latter value, referred to existing crops and produce, is indicated as the net cash value (IVS 2 3.6).

Stored produce

4.41 Stored agricultural commodities are valued on the basis of its market value

or, otherwise, on the basis of the cost incurred and on its replacement value (EVS GN 5.53).

4.42 Preserved produce subject to subsequent natural or artificial changes can

be appraised using the market approach, when there is an independent market on which the intermediate product can be sold as such. Otherwise, preserved produce undergoing further processing is valued by constructing the cash flow of the produce being processed, with the past value and the future value. Produce undergoing further processing can be valued on the basis of the replacement value with other


186

equivalent products having the same purpose (food, fertilising, etc.) taking their quantity and quality into account (EVS GN 5.54).


187

Chapter 14

Guidelines for Valuations of Condominium Shares of Property 1.0 Introduction 1.1 Condominium property is a very common type of property in the urban

areas. A condominium unit is a separate ownership, in which the owner holds title to an individual unit and an undivided partial interest in the common areas of the total condominium. For the partial areas, the share of each individual owner is listed in a millesimal table, the use of which regulates the legal and economic relationship between the owners.

1.2 Despite the importance of the millesimal table consequences of litigation

in regard to the assigning and revising of shares, very often the calculation of the ownership shares takes place according to indications of a very approximate logical and practical basis.

1.3 Scientific valuation literature has repeatedly expressed perplexity on the

valuation of thousandth values of the owners’ shares according to the common practice.

1.4 Commercial manuals dogmatically offer valuation techniques based on

the use of technical coefficients, which usually have no clear, immediate reference to the specific reality of the real estate market segments of the condominium units.

1.5 The application of these valuation techniques results in millesimal lists of

a cryptic nature, in which the shares are presented in an apodictic way, that requires no proof and is objectively indisputable.


188

1.6 From a methodological perspective, this takes place because it was considered that certain qualitative characteristics of the property (orientation, exposure, etc.) could not be appraised in monetary terms. Therefore, the valuation of these characteristics was done by using technical coefficients.

1.7 Our Civil Code establishes the ownership value on common areas in

proportional relationship to the value of the property unit of the total condominium. This value must meet the following conditions: a) express advantages and disadvantages of the condominium unit in relationship to other units in terms of ordinary technological, functionality and finishing parity; and b) represent an objective reference for the valuation and examination of the value itself.

1.8 The value satisfying these conditions is the market value. 1.9 The market value of the condominium unit satisfies both conditions, as it

reflects: a) the size and the quality of the property, representing the property

characteristics and their variations; b) the objective appreciation of the market based on the demand and the

offer; in this way, the market value applies an equalizing principle of justice.

1.10 According to this criteria, the millesimal list of property shares varies

when the real estate market conditions and property prices change, influencing the economic measure of the advantages and disadvantages of one ordinary condominium unit compared to the others.

1.11 The objective of the Italian Property Valuation Standard is to provide the

guidelines for the valuation of condominium shares of property, indicating the fields of application.

2.0 Definitions 2.1 The millesimal share of unit represents the incidence expressed in

thousandths of the value of the part, composed of one or more condominium units, out of the total condominium property.


189

2.2 The valuation of the condominium shares of property is based on the

market value. 2.3 The units in a condominium complex usually present a variety of uses

and types of technical and economic characteristics. As a result, the valuation of the property shares regards the surveying of different market segments, within which the units are classified.

2.4 The valuation of the ownership shares in condominium properties is done

in reference to the market segments, individually defined according to their parameters.

2.5 Property valuations on a medium and large scale regard the process of

valuation of a universe of real properties, using common property data and standard valuation methodologies (Chapter 8). There is a wide range of property units being valued, with different uses and typologies (all the property units in a building, an area, a town, etc.) and are valued individually.

2.6 The market value of real property can vary in time. The price variations

are preceded by variations in the business activities. The real estate market cycle is characterised by successive stages of expansion, contraction, recession and recovery. The main factors determining the cycle phases of the market are: supply, demand, unsold and vacant properties, the price level, the capitalization rate and the demand of investors. The first four factors concern the real estate markets, while the other two apply to the financial market.

2.7 In the ontogenetic cycle, a property is initially inserted in the “new

properties” market usually by the promoters or building contractors. The shares appraised for a new building present an essentially limited validity, given that with the passing of time, shares have to be revised when the property ideally moves to the “semi-new properties” market and finally reaches the “used properties” market.

2.8 In the field of condominium properties, the value of the property units

can vary in time with different concordant or divergent trends,


190

influencing the relative incidence of the values of the units and thus their condominium shares.

2.9 The variations in the condominium unit values depends principally on the

use, typology, and the size of the properties, on the market regime and cycles, and the relative appreciation of the property characteristics.

2.10 The appraisal of condominium shares of property concerns the valuation

of the market value for each individual unit, based on an appraisal methodology, since the problem of appraisal in a condominium is part of the general problem of valuation. However, due to the relative uniformity offered by the condominium units, as regards location, use and typology and to the coinciding date of valuation, the valuation procedure can follow a single systematic methodology.

2.11 The valuation of condominium property is based on:

– valuation principles, which represent the foundations upon which the appraisal is based;

– the market value; – the appraisal methodology, by which a quantitative valuation is

expressed; the appraisal methodologies are classified into the market approach, the income approach and the cost approach.

2.12 The market approach is a method to appraise the market value or the

income generated by the property, which is done by comparing the property being valued to a group of properties with the same characteristics, recently negotiated and with known prices or income and belonging to the same market segment. The market approach includes: – the market comparison approach (MCA), which is based on the

collecting of actual property data and property characteristics (Chapter 8, Appendix D);

– the appraisal system, based on a linear equations system regarding the comparison between the subject property and a set of similar comparable properties;

– the allotment system, based on a system of linear equations regarding the allotment of the price or the income or the total cost of similar comparable properties, according to uniform characteristics.


191

2.12.1 In the market approach, it is immediately evident that the single-parameter appraisal system with a single technical parameter (usually the area) cannot be applied to the valuation of condominium shares of property, because if the share depended only on the area, condominium units with the same area would wrongly result in shares of the same amount, in contrast with the fact that the units differ from each other at least as regards the location factor.

2.12.2 The MCA is the multi-parameter appraisal approach that fully

lends itself to the valuation of condominium shares of property and which complies with the conditions established by the Italian Civil Code.

2.12.3 In the market approach, the appraisal system is a valuation

procedure based on a system of equations that calculate the marginal prices of qualitative characteristics, otherwise impossible to value. The appraisal system is based on the comparison between the similar properties and the property to be valued. The elementary equation states that the difference in price between two properties depends on the differences in their characteristics.

2.12.4 The appraisal system can be applied in combination with the

MCA. 2.13 The income capitalization approach includes income capitalization

procedures, which calculate the market value taking into account the property’s capacity to generate monetary income. The income approach is based on the transformation of a property’s income or of a property investment into capital value by means of the capitalization rate (Chapter 8, Appendix E).

2.13.1 The income capitalization approach is divided into: the direct

capitalization; the yield capitalization; the discounted cash flow analysis.


of a property through the sum of the value of the ground built upon as if it


192

were suitable for building and of the cost of rebuilding the building, depreciated if necessary. It is also called the depreciated reproduction (or reconstruction) cost (Chapter 8, Appendix F).

3.0 Discussion 3.1 In the present professional practice, the valuation of the condominium

shares of units is performed using methods based on a ministerial circular of 1926, regarding the dividing of expenses among members of building cooperatives, benefiting from State contributions, then integrated by a 1966 circular. It is a conventional valuation based on the unit area and on corrective coefficients to take into account the particularities of the individual units of the same condominium. The corrective coefficients, reported and tabulated in the valuation handbooks, are indicative and give valuers wide margins to modify them subjectively. At the present time, this empirical system of valuation on condominium properties is not based on the observation of the market prices or on a rational (and fair) valuation method.

3.2 The empirical system of the valuation of the millesimal shares of

ownership obviously does not indicate the functional relationships between property characteristics and the market value, but simplifies the calculation by using technical coefficients applied to the size of the property unit (equivalent and virtual area).

3.2.1 This procedure is not based on the observation of the market

prices nor on the real estate quotations, but gets around the appraisal problem by calculating the virtual areas of the property units rather than their monetary value.

3.2.2 As a consequence, the millesimal share is calculated on the

relationship between the virtual area of the individual unit and the total sum of the virtual areas of the total condominium.

4.0 Application 4.1 The Italian Property Valuation Standard is concerned with the valuation

of condominium shares of property based on the market value according to an equity principle.


193

4.2 The valuation of the property shares concerns the valuation of the market

value of every individual unit making up the co-owned property, using a procedure based on the appraisal methodology. In comparison with other appraisals, the rational process of valuing the shares may follow a single, systematic methodology, since the property units are relatively uniform as regards location, use, typology, and the coincidental time of valuation.

4.3 The valuation of the condominium shares concerns a valuation on a

medium and large scale, that can be dealt with by means of standard valuation procedures. In these conditions, it is possible to use the MCA and to the mixed procedure composed of the MCA and the appraisal system.

4.4 For the purposes of share valuation, the units are classified according to

homogenous categories in relationship to the market segment to which they belong.

4.5 The appraisal of the market value is done individually for each property

unit making up the property or the condominium complex. 4.6 In the field of condominium property, the property shares of each unit is

rationally calculated according to direct simple distribution applied to market values, as a ratio between the market value of the individual unit and the sum of the market values of all the property units making up the condominium property. The share of ownership can be presented in millesimal figures.

4.7 In brief, the procedure of rational valuation of the condominium shares of

property can be divided into the following stages:

4.7.1 the census of the property units making up the condominium; 4.7.2 the classification of the property units according to homogeneous

categories, classified principally by use, typology and size; 4.7.3 the collection of data property and market information, relative to

each homogeneous category, in the corresponding real estate market segments;


194

4.7.4 the individual valuation of each property unit in each

homogeneous category; 4.7.5 preparation of the table of market values of the property units; 4.7.6 preparation of the rational thousandth ownership shares

according to direct distribution; 4.7.7 the distribution of shares according to the condominium owners; 4.7.8 the registration of shares per property unit to rightful shares of

individual owners. 4.8 The Valuation Report must also indicate (Chapter 9):

– the valuation method and procedures applied in the systematic appraisal of property units;

– the valuations done individually for each condominium unit, in the

respective homogenous category; – a synoptic report of the market value of the property units, of the

rational millesimal ownership shares, and of the rightful shares according to the condominium co-owners;

– the registration of shares per property unit to rightful shares of

individual owners.

Italian Property Valuation Standard Section II

195

Section II Organizations in the Tecnoborsa

Technical-Scientific Committee and the effects of the Main International Laws and Regulation in the Property Sector


196

Chapter 15

Organizations in the Tecnoborsa Technical-Scientific Committee and the Chambers of Commerce Introduction The Tecnoborsa Technical-Scientific Committee is made up of institutions, organizations, research centres, trade associations and other bodies, which in their field of work organize real estate data banks, promote specialized publications, or collect, elaborate and use information that comes from the economic-property sector. The knowledge of the real estate market possessed by these organizations meets various demands: for some the demand is inherent to their own institutional purpose, which requires the availability of specific information. For others, it is of a social nature and consists in providing a service to its own associates. For others still, it represents the opening of a new field of activity or an activity that is complementary to their principal institutional functions. The Tecnoborsa Technical-Scientific Committee is made up of the following bodies: – ABI, (Associazione Bancaria Italiana) – Italian Banking Association; – Agenzia del Territorio – National Land and Building Registry; – Censis (Centro Studi Investimenti Sociali) – Social Investment Study

Centre; – Confidelizia (Confederazione Italiana Proprietà Edilizia) - Italian Property

Owners’ Federation; – Consiglio Nazionale degli Architetti, Pianificatori, Paesaggisti e

Conservatori - National Council of Architects, Planners, Landscapers and Curators;

– Consiglio Nazionale dei Ingegneri - National Council of Engineers; – Consiglio Nazionale dei Geometri - National Council of Surveyors;


197

– Consiglio Nazionale dei Periti Industriali- National Council of Industrial Experts;

– Consiglio Nazionale delle Borse Immobiliari Italiane - National Council of Italian Real Estate Exchanges;

– FIAIP, Federazione Italiana Agenti Immobiliari Professionali - Italian Federation of Professional Real Estate Agents;

– Geo.Val, Associazione Geometri Valutatori Esperti – Association of Expert Valuers-Surveyors;

– LUISS Libera Università Internazionale degli Studi Sociali Guido Carli - LUISS Guido Carli University;

– INU, Istituto Nazionale di Urbanistica- National Town Planning Institute; – ISMEA, Istituto di Servizi per il Mercato Agricolo Alimentare - Institute of

Agricultural and Food Market Services; – Ministero dell’Economia e Finanze: Dipartimento Tesoro e Comitato

Esperto - Ministry of Economy and Finance: Department of the Treasury and Council of Experts;

– Poste Italiane S.p.A. – Italian Post Office; – Tecnoborsa; – UNI, Ente Nazionale Italiano di Unificazione - Italian National Unification

Board; – Unioncamere, Unione Italiane delle Camere di Commercio - National

Union of Chambers of Commerce; – Università Luigi Bocconi – Bocconi University Newfin. Figure 15.1- The subdivision of the component bodies on the Tecnoborsa Technical-Scientific Committee


198

Here follow explanations of the organizational structure of such bodies, their role in economics and the property market as well as their activities. 1 ABI - ITALIAN BANKING ASSOCIATION ABI (Associazione Bancaria Italiana), the Italian Banking Association, established in Milan on 13 April 1919, is the representative association of all bank and financial workers operating in Italy. Members of ABI include banks and financial brokers which, directly or indirectly, represent all of the Italian credit firms operating in Italy, as well as the majority of financial institutions. ABI studies the problems concerning credit and financial mediation; its activities include performing informational activities, technical assistance and consultation for its members. It collaborates with administrations and institutions for the solution of questions involving the credit and financial industry. It promotes, in cooperation with its members and in the accordance with the principles of free competition, initiatives to rationalize services. ABI also represents the Italian credit and financial systems in all international contexts, including in the European Banking Federation and the European Mortgage Federation, which stand out for their continued dedication and comprehensive competence. The organizational structure of ABI is divided into six functional areas: – the regulatory area, which combines services that study and interpret the

laws regulating the activities of banks and financial brokers at the national, community and comparative levels, providing members with suitable operative instructions;

– the management systems area, which comprises services that analyse the economic and operative situations of banks and financial brokers, as well as the services through which ABI promotes and coordinates the system initiatives for the regulation and operative rationalization of the common services;

– the studies and technology area, which provides members with data, information and analysis of the main phenomenon of the Italian and foreign settings important to the banking system and to the reference markets. It carries out goal-oriented studies in the fields of economic and financial activities, business management, technological innovation and security;

– the trade-union and labour area, which handles the stipulation of contracts and agreements with the workers’ trade-unions, helping


199

members in managing labour relations and the problems related to the labour market, including obligatory and supplementary social security, assistance services, accident prevention and safety;

– the finance area, which follows the evolution of the organization and the operation of the financial markets. It also promotes and manages operative system initiatives;

– the internal resources area, which ensures the operation of the association structure and carries out logistical and organizational support activities useful in the pursuit of social aims.

The ABI members deal with various problems regarding the property market, in particular with land and mortgage credit. The property market is also becoming an area of particular interest for the banking sector thanks to the actions of specialized brokers and entities which favour optimum operation (common property investment funds, pension funds, real estate exchanges, etc.) ABI is also focusing attention on the property market because of the importance management and valuation of real estate has been acquiring in recent years (www.abi.it). 2 NATIONAL LAND AND BUILDING REGISTRY On a basic level, the Ministry of Economy and Finance is divided into five departments. Four agencies are under the Department of Fiscal Policy, among which the Agenzia del Territorio (National Land and Building Registry), established on 1 January 2001 as part of government organizational reforms through DM 28.12.2000 n.1390. The Registry therefore took over the activities and functions of the District Department, except for those that were transferred to the State Property Agency. The National Land and Building Registry, a public organization endowed with legal status and ample independence, as set out by its own charter, continues to carry out tasks and jobs related to the land register, geotopographical and cartographical services and property registers; it can provide estimations directly on the market, as well as other technical services, formerly within the province of the defunct District Department, to private and public subjects on the basis of both conventional and contractual relationships. It also continues to manage the Real Estate Market Observatory. As part of the process of decentralization provided for by Legislative Decree 31.03.1998 n. 112, the Registry is the body that oversees the coordination of functions carried out by the State and those given to municipalities. It can


200

continue to manage services regarding the keeping and updating of the land register that fall within the province of local bodies, either on the basis of appropriate conventions stipulated by them, or in association with these local bodies. Given the public nature of the service and in the process of decentralization to local bodies, the National Land and Building Registry’s fundamental objectives include: – the improvement of the quality of service provided to users, by means of

better use of information technology and the simplification of procedures; – striving for equity in the creation of a fair land register, an essential

condition for correct taxation of real estate. The National Land and Building Registry has maintained its organizational makeup, characterized by offices in every provincial capital that are coordinated by the Departmental Offices, which will gradually become regional offices. The departmental offices will have headquarters in the regional capitals and will also have the task of overseeing the relationship with the systems of local and regional autonomies. The Real Estate Market Observatory, established in accordance with regulatory measures and active since 1993, allows one to know the state of the property market in real time and to look after its “historical memory.” The Observatory is operational in carrying out the institutional tasks of the Ministry. The Observatory makes its own studies on the property market available by means of various publications. In fact, a volume which examines the property market values in the 103 provincial seats has been published. This publication was intended to an aid to the experts of the Tax Offices in the completion of institutional valuation, as well as to be of help to other State administrations and public organizations. External users can use the Observatory’s data via two CD-ROMs, published every six months by the DEI, containing property values in approximately 8100 municipalities and in Rome, which allow one to search by place name (www.agenziaterritorio.it). 3 CENSIS - SOCIAL INVESTMENT STUDY CENTRE Censis (Centro Studi Investimenti Sociali) – Social Investment Study Centre is a socio-economic research institute founded in 1964. It has been a foundation since 1973, recognized by DPR 11.10.1973 n. 12, also thanks to the participation of large public and private organizations. For more than thirty


201

years, Censis has provided research, consulting, evaluation, and proposals in the basic sectors of society, including training, labour, welfare, territorial networks, environment, economy, local and urban development, public administration, media and culture. Research is commissioned primarily by Ministries, Regions, Provinces, Municipalities, Chambers of Commerce, business and professional associations, banks and credit institutes, private companies, network managers, and community and international organizations, as well as for various European Union programs. Since its founding, Censis has based its work on two basic principles: the constant adhesion to standard operating mechanisms and the evolution of the Italian sociological realities within an international framework, and the pursuit of the continual refining of the instruments and methods for research and cultural presence. Therefore Censis’s efforts are aimed primarily towards the following fields: – examining problems typical of a civil society, such as the evolution of the

social and economic structure, the development of individual and collective behaviour, the role played by local systems and entrepreneurial innovation;

– providing assistance in managing urban processes and in planning local policies, through the involvement of individuals and the creation of a “governing culture” for the action of institutional powers.

In addition to the research activities on external committees, Censis independently promotes a series of foundational initiatives, through which the interpretive lines emerging from the research work are examined. New paths for learning the Italian socio-economic realities are also explored. Some of these activities are regular annual events; others satisfy the demands of the economic situation, connected both to research and the social and economic development of the country. Within the panorama described, the studies and analysis of the real estate market represent one of the Study Centre’s areas of activity. Since 1997, with this aim, the Centre has compiled the specialist publication Monitor Immobiliare (Real Estate Monitor) in collaboration with Scenari Immobiliari. This annual report presents a series of data on the property market, along with the analysis for the demand for real estate, future economic and social scenarios as well as other specific investigations (www.censis.it).


202

4 CONFEDILIZIA - ITALIAN PROPERTY OWNERS’ FEDERATION Confedilizia (Confederazione Italiana Proprietà Edilizia), the Italian Property Owners’ Federation, is an association re-established in 1945 from all the territorial homeowners’ associations, the direct descendant – following the collapse of its corporate structure – of the Homeowners’ Association, which had been established in 1883. Confedilizia has over 200 offices throughout the all of Italy. Members of Confedilizia include homeowners (even those with one house), condominium owners, and institutional investors such as insurance companies, banks, pension funds, social security organizations and national real estate companies. Other members include property associations, among which ADSI-Associazione dimore storiche italiane; AMPIC-Associazione multiproprietari italiani Confedilizia; ANBBA- Associazione nazionale dei bed & breakfast e degli affittacamere; ANCE-Associazione nazionale costruttori edili; ANIA-Associazione nazionale imprese assicuratrici; Asases- Associazione archivi gentilizi e storici; ASPESI-Associazione nazionale tra società di promozione e di sviluppo immobiliare; ASSINDATCONLF-Associazione sindacale nazionale datori di lavoro colf; ATMSI-Associazione tutela memorie italiane; CONFCASALINGHE-Confederazione nazionale casalinghe; FIAIP- Federazione italiana agenti immobiliari professionali; FIDALDO-Federazione italiana datori di lavoro domestico; and FIMPE-Fondo integrativo multiservizi proprietari edilizi. Special sections of Confedilizia organize property trusts (ASSOTRUST-Coordinamento trusts immobiliari Confedilizia), property funds (COFIC-Coordinamento fondi immobiliari Confedilizia) and Italians abroad (CITIES-Coordinamento italiani all’estero). Confedilizia stipulates National Collective Contracts (CCNL) for employees of building owners and, through the Assindatcolf, for domestic workers. As a signatory – along with the CGIL, CISL and UIL – of the CCNL for employees of building owners, and as an exclusive representative of the building owners, with these same trade unions it has established not only the Coasco fund but also the Cassa Portieri, which distributes welfare assistance to employees in the sector, and Ebinprof, which among other things provides training and requalification for workers interested in the CCNL. The superintendents of real estate, both in condominium and other, take part in the life of the organization through the Coram (Superintendent Register Coordination). The headquarters of Confedilizia ensures the continuous updating – with the registration of new members – in the Confedilizia National Register of Superintendents. Those registered are issued a certificate


203

of membership signed by the Confedilizia president and by the president of Coram, and provides its services free of charge. In collaboration with the RINA, Confedilizia provides property quality certification service to organizations, societies, joint-owners, and individuals. Confedilizia has signed protocols with Assocameretero (Association of Italian Chambers of Commerce Abroad) for providing real estate consultancy to Italian nationals who live or work abroad; with the European Arbitration Court, with which it has established the Property Chamber of the European Arbitration Court-Italian Delegation, which has the task of resolving disputes about rental, joint-ownership, preliminary contracts of sale, deeds of sale, property brokerage, etc.; and with the National Association of Credit Societies. It maintains a relationship of continuous consultation with the ABI and Confcommercio. It also has collaborative agreements, including those with Confagricoltura, the Federazione Nazionale Proprietà Fondiaria, Anacam (Associazione nazionale imprese di costruzione e manutenzione ascensori), Aniem (Associazione nazionale piccole imprese edili) and Assoutenti (as well as with the Comitato Nazionale Difesa Contribuenti Bonifiche of this last association). Internationally, Confedilizia is amongst the “Interest Groups” accredited by the European Parliament. It also represents Italy within the UIPI (Union Internationale de la Propriété Immobilière, an organization accredited by the Council of Europe, by the OCSE, the European Parliament and the UN Housing Committee in Geneva). Within the European Union, it represents our country in the EPF (European Property Federation). To directly assist Italian nationals, Confedilizia has established its own delegations abroad, in the United States of America, England, Germany, France, Spain, Belgium, Switzerland and Argentina. It also has continued relations with the Confedilizia of San Marino. Confedilizia is regularly consulted, not only by ministries, but by parliamentary commissions of the Senate and House, by CNEL and by regional governments and local bodies. It writes the monthly “Confedilizia notizie” (“Confedilizia News,” which is distributed to individual members via the District Associations) as well as publications of interest to the sector through the associated Confedilizia Publications. The institutional duties of Confedilizia are the representation of the groups of real estate owners and investors in their relationship with Parliament and the Government and the problems that affect the property sector (www.confedilizia.it ).


204

5 THE NATIONAL COUNCIL OF ARCHITECTS, PLANNERS, LANDSCAPERS AND CURATORS

The Consiglio Nazionale degli Architetti, Pianificatori, Paesaggisti e Conservatori – National Council of Architects, Planners, Landscapers and Curators – assumed its new name effective as of 1 September 2001, pursuant to DPR 6 June 2001 n. 328 – Ch. III, Art. 1, paragraph 1. It is a public non-profit organization, established within the Ministry of Justice. The National Council of Architects institutionally works as a consultative body for executive and legislative institutions, regarding matters that might be of interest to their profession and in general, problems concerning architecture. The organization fulfills its role by preparing opinions on bills and regulations affecting the profession. The National Council of Architects takes care of the representation of interests relevant to the whole sector, coordinating the activities of provincial Orders. The professional Orders hold supervisory and disciplinary powers over the registered members with the aim of suppressing any possible abuse or failings for which the professionals would be held responsible. The Orders are also in continual contact with local administrative authorities to whom they can provide advice on topics concerning their profession and press for action they feel appropriate (www.cnappc.it). 6 THE NATIONAL COUNCIL OF ENGINEERS The Consiglio Nazionale dei Ingegneri – National Council of Engineers – is a public non-profit organization. It was established by Royal Decree 23 October 1925 n. 2537, and its duty is to preside over the sectorial regulations of the engineering profession. It is subject to the supervision of the Ministry of Justice. In the sphere of consultative activity, the National Council of Engineers works as a body of executive and legislative power, regarding matters that might be of interest in the profession and, in general, engineering problems. The organization fulfills this role by preparing opinions on bills and regulations regarding the engineering profession (Art. 14 D.Lgl. 1944, n. 382). Amongst other activities, the Council edits and distributes a monthly cultural and informational magazine, L’Ingegnere Italiano. The publication of the magazine goes back to 1952.


205

L’Ingegnere Italiano focuses on providing information on activities carried out by its representative bodies (CNI, orders, federations); it gives ample space to technical-cultural articles and professional updates. Regulatory provisions that could concern engineering activities are given maximum attention, highlighting the meanings and specifying their effects. The National Council of Engineers, in its current legal configuration, handles the representing of interests important to the entire sector, coordinating the activities of the 100 provincial Orders. The professional Orders hold supervisory and disciplinary powers over the registered members2 with the aim of suppressing any possible abuse or failings for which the professionals would be held responsible. The Orders are also in continual contact with local administrative authorities to whom they can provide advice on topics concerning their profession and press for action they feel appropriate. Considering how important it is that this profession be practiced correctly and precisely, both for the community and the sector, the Orders are currently organizing a series of refresher and technical cultural proficiency courses for the engineers. To keep registered members informed about the activities they carry out and to allow them an active role in the life of the Order, an informational magazine is published, in which topics considered to be of greatest interest are reported (www.tuttoingegnere.it). 7 THE NATIONAL COUNCIL OF SURVEYORS The Consiglio Nazionale dei Geometri – National Council of Surveyors – was established by the Royal Decree of 11 February 1929 n. 274 and represents surveyors across the whole country. It is subject to the supervision of the Ministry of Justice and has the task of directly coordinating the work of the local professional boards, as well as representing the registered professional members of worldwide esteem. The eleven members of the National Council are elected every three years from the 108 provincial boards. The directors of the district Orders are elected, in turn, every two years by the registered surveyors.

2 There are currently about 140,000 engineers registered who carry out their work independently, or who are employees of private and public organizations.


206

The surveyors work as independent workers in the fields of construction, valuations, the environment and surveying for private and public customers as well as technical consultants for judicial authorities. As an exponential body the National Council has decisive powers in all disputes regarding surveyors, which represents the most important institutional function of the organization. It is a collective body and its representation is conferred to the President pro-tempore. Other institutional duties are those of the Secretary and Vice-President. It pursues non-profit aims and has its own specific structure. It publishes periodicals which it sends to its all members on the professional register; it organizes conferences and meetings on matters specifically relevant to the surveyors’ profession. It is made up of various national multisectorial organizations, as well as international associations of the sector. The National Council operates in all economic, social, political and normative spheres which concern surveyors (www.cng.it). 8 THE NATIONAL COUNCIL OF INDUSTRIAL EXPERTS The first legal recognition of the profession of Industrial Expert goes back to 1929, with the indication of the moral and scholastic qualifications required to become a member of the professional register. The current legislation, pursuant to DPR 328/2001, requires a three-year degree to join a Provincial Board of Industrial Experts and Industrial Expert Graduates. The Assemblies of the Boards elect the members of the National Council of Industrial Experts (Consiglio Nazionale dei Periti Industriali), which gives voice to and represents the needs of the profession in all its capacities, protecting its identity and professional independence (www.cnpi.it). 9 THE NATIONAL COUNCIL OF ITALIAN REAL ESTATE EXCHANGES The Consiglio Nazionale delle Borse Immobiliari Italiane – National Council of Italian Real Estate Exchanges – was established by Chambers of Commerce instituting real estate exchanges to coordinate, represent and help the Exchange system operating across the country. The Real Estate Exchanges are subject to the administration and control of the Chambers of Commerce on the basis of a rule that regulates its operation, its operative scope, its managing


207

bodies, and guarantees its transparency. Legally they can be organized into three distinct forms: – direct management by the Chamber as a “special service”; – indirect management, through “special businesses”; – joint-stock or limited responsibility non-profit companies, with mostly

public capital and some shares held by the chambers of commerce. Real estate operators, agencies and associations organized at a local, national or international level can become accredited with the establishment if they fulfill certain criteria. The admission commission ascertains they are members of the professional register pursuant to Law 3.2.1989 n. 39 and on the basis of the requirements of experience and professional honesty, of solvency and specific insurance cover (professional civil liability). Real rights and every other type of rights and contracts (including rentals) regarding all types of property and companies with real estate are dealt with in the Exchanges. The public may find the Real Estate Exchanges useful because of the range of offers available, the certainty of the information provided, the clarity of contracts and the chance to benefit from the assistance of appropriate and important services: – a continuous “statistical survey service” of prices and the publication of

relevant lists; – the “property auctions service”; – The “appraisal service,” certified by a Committee of Experts. The statistical survey service helps provide knowledge on the real estate market, which is an essential requirement to planning and making rational choices in the economic policy, town planning-environmental and credit spheres. The property auctions service, regarding voluntary sales through the competitive auction system, allows public and private organizations and companies to benefit from a transparent system of alienation of property combined with the professionalism of operators in the valorisation of real estate being disposed of. The appraisal service is aimed at both the general public and at public and private organizations. It is run by the Exchange Management, which avails itself of a pool of specialized experts (nominated by the Chamber of Commerce) who possess certain requirements and have at least five years of professional experience. The final reports, which aim to ensure complete information and increased reliability to the appraisals, are certified by the Appraisal Committee or by the price lists. In brief, the Committee itself


208

examines the appraised price and gives its opinion in accordance with market values. The Real Estate Exchanges are located across the entire country, though unevenly distributed. The Rome Exchange was established in 1989, followed by those in Milan, Umbria-Central Italy (Chambers of Commerce of Perugia and Terni), Bari, Brescia, Adriatico (Chambers of Commerce of Ascoli Piceno, Ancona and Macerata), Vicenza, Venice, Pisa, Piacenza, Trieste, Lodi, Pescara, Viterbo, Toscana (Chambers of Commerce of Florence, Prato and Pistoia), Catania, etc. (Many others are in the stage of being set up). The work of the National Council of Italian Real Estate Exchanges is useful in the development of property markets. This is also evident in the services offered by the Real Estate Exchanges, among which stand out the price lists, which – when accompanied with other objective data such as the number of property sales that have taken place in different cities – can help the monitoring of specific economic-property realities and contribute to greater transparency in the property market (www.borseimmobiliari.it). 10 FIAIP - THE ITALIAN FEDERATION OF PROFESSIONAL REAL ESTATE

AGENTS The Federazione Italiana Agenti Immobiliari Professionali – Italian Federation of Professional Real Estate Agents – is an independent, professional, non-profit association which brings together more than 10,000 real estate agencies and societies. Members include real estate agents, paid representatives, tourist estate agents, property experts and technical consultants, consultants and managers of properties owned by third parties, qualified as according to Law 39/1989 and listed on the professional register kept at the Chambers of Commerce; also, credit brokers registered with the UIC professional register in accordance with D.P.R. 28 July 2000, n. 287. The association has various aims: – the protection, assistance and defense of the sector’s interests; – the promotion of training programmes and bringing its associates up to

date; – the representing of registered members in organizations whose aims are

related to those of the association. FIAIP stipulated the National Collective Work Contracts with the trade union representatives Cgil-Filcams, CislFisascat, and UilUiltucs.


209

FIAIP participates in and acts as the technical secretariat of the Interparliamentary Real Estate Observatory, whose legal headquarters are located in the Chamber of Deputies, an institutional body working with the department’s knowledge in keeping with its social interests and with the centrality of the sector in the national economy. Amongst the other aims that the association pursues are: – the development of tourist services other than hotels (an area of activity

for one part of the members); – the promotion of laws concerning the profession and related economic-

professional sectors; – the study of foreign property markets and incentives for the collaboration

between associates and foreign colleagues; – providing its own associates with technical, legal and informational tools

useful in practicing the profession. FIAIP, made up of more than 100 provincial and regional boards, collaborates with various banks with the aim of helping provide financing for their clients’ purchase of a first home. FIAIP is a member of Confindustria, Confedilizia and Fita-Confindustria. Abroad, it represents Italy within the Confederation Européene de l’Immobilier (CEI) and in the National Association of Realtors (USA). It has a share in the stock capital of Tecnoborsa. The association works within the property market in a systematic and widespread manner through its own Property Observatory, gathering data on sales and rentals derived from transactions carried out by its own members, with the aim of spreading knowledge on property market trends. FIAIP periodically publishes and distributes the information gathered via periodic reports which are selectively distributed. Among those which stand out, the biannual “Osservatorio Immobiliare urbano” (Urban Property Observatory) and the “Osservatorio immobiliare turistico” (Tourist Property Observatory); the FIAIP booklets (published with the support of the Technical-Scientific Committee); the bimonthly “L’agente Immobiliare” (Real Estate Agent) and its own website that in addition to providing a service for its members, allows Internet access to up-to-date information on the property market (www.fiaip.it).


210

11 GEO.VAL - ASSOCIATION OF EXPERT VALUERS-SURVEYORS The category of surveyors traditionally carries out its professional activity in the valuation sector, where their expert knowledge of the land register, the territory and real estate valuation methods is put to good use. It is widely held that society and the market demand greater transparency, quality and professionalism; that Europe – and other parts of the world – should be proposing regulations to harmonize the valuation procedures; that the application of International Accounting Standards and of a financing system that gives greater guarantees for credit and tax purposes is expected in the near future. The National Council of Surveyors, considering that this is an evolving sector that is affected by the continuous financing of the economy, has decided to capitalize on the expertise and experience of surveyors in the field of valuation, promoting the establishment of a free association for surveyors enrolled in their own professional register. The members intend to adapt and integrate the traditional expertise and obtain a European-level qualification in the sector of property valuation. The “Geometri Esperti Valutatori” (Association of Expert Valuers-Surveyors) was established on 13 December 2000 with the aim of conducting studies and research on all matters concerning the valuation of personal properties, land and buildings, publishing the appraisal methods and procedures used by its own members. The association, which has its headquarters in Rome, with the National Council of Surveyors, brings together professional surveyors who have freely chosen to practice their profession mainly in the field of property valuation. There are currently more than 1500 associates throughout the country. By joining the association, the associates have committed themselves to observing the code of ethics and qualification criteria, including permanent training established by the same association. In May 2001, the association became a full member of TEGoVA (European Group of Valuers Associations) at the end of a qualification course for Surveyors to attain to the professional qualification (EN 45013) through the procedure activated by TEGoVA (www.geoval.it).


211

12 INU – NATIONAL TOWN PLANNING INSTITUTE INU is a chartered public law body of higher culture and technical coordination. The Institute was founded in 1930 to promote building and town planning studies, divulging the principles of planning. In the thirties and forties, it was involved in the formation of the town planning law (1942); after the war (the current charter of 1948) its involvement was applied to the reconstruction and subsequent diffusion of the planning and legislative reform. INU is divided into nineteen regional sections. Associated bodies are the regions, provinces, and municipalities; the IACP (Autonomous Board for Tenement Housing); public and private financial businesses and organizations; university departments; professional registers and boards; cooperatives and their associations; research bodies; professional studios and cultural associations. Associates (active and non-active members) are researchers and lecturers from universities and other bodies, professionals, public administration managers, employees and students. Architects, engineers and town planners cooperate with lawyers, economists, geologists, geographers, agronomists, cartographers, ecologists, archaeologists and doctors. The Institute provides consultancy to and collaborates with district, central and suburban public administrations in the study of town planning and building problems, both generally and locally. It also handles relationships between similar organizations and bodies of different countries. These fields of research justify the Institute’s interest for Italian and foreign real estate markets. INU promotes independent study and research, although it collaborates extensively with universities and other specialized organizations. Numerous initiatives (seminars, conferences, surveys etc.), magazines and other publications contribute to the promotion and diffusion of planning culture. In recent years, INU’s research has been organized in study committees and observatories whose sectorial approaches were able to contribute to the overall vision of territorial and environmental problems. It is precisely within the committee on the “Property System” that studies and market analysis of the real estate market are developed. The committee’s aims and field of interest, which involve land regulation, planning implementation policies, the property tax system and cadastral reforms, and the study of the real estate system in relation to “the production of the materialized city,” require the study of the real estate market both as far as its trends and its exact values are concerned.


212

INU uses information on the real estate market in an instrumental way, not to produce reports that simply spread information on real estate market values and trends, but rather for investigations concerning topics related to town planning and the implementation of projects in relation to the real estate market. These studies are made known through magazines and a series of editorials promoted by the Institute. Since 1998, INU has offered its own website for the publication of cultural initiatives (www.inu.it). 13 ISMEA - INSTITUTE OF AGRICULTURAL AND FOOD MARKET SERVICES ISMEA is a public law economic body, established in 1987, which works to develop the competitive power of the Italian agriculture and food system. The Institute’s new organization and mission were set forth in Legislative Decree 29 October 1999, n. 419 (Art. 6, paragraph 5). In particular, ISMEA provides information, insurance and financial services and offers types of credit and financial guarantees for farms and farm associations with the aim of: – encouraging transparency in the agricultural market, reducing

informational asymmetries; – fostering the relationship between banking and insurance systems and

agricultural markets. – encouraging structural improvement and business competitiveness in

agriculture. – reducing the risks concerning production activities and the market. Consequently, the new model supporting competitiveness adopted by ISMEA provides for the supplying of complimentary services and in the following categories: – market information services; – agricultural land services; – financial services; – insurance services. Market Information Services From 1987 to now, ISMEA has organized and set up a survey system able to constantly monitor in detail all of the significant phenomena in progress in the food and agriculture market. Thanks to the comprehensiveness of its data collection network and consolidated wealth of information, ISMEA qualifies as a privileged and


213

exclusive observer of the food and agriculture system in Italy. It is able to provide complete analyses of market trends of the main productive systems in Italy. ISMEA’s market services can be distinguished on the basis of: – the analysis aggregation level (macrosector, sector, individual product,

individual business); – the type of analysis (monitoring the market, provisional scenarios,

structural analysis and economic-financial valuations); – the time scale and frequency of revision. Agricultural Land Services On the basis of a specific help system within the agricultural land sector approved by the European Commission, ISMEA supports regions in encouraging farms to grow and enticing the younger generations into agriculture. The creation and strengthening of efficient farms are promoted by ISMEA through the assisted intervention for the purchase of farms, in particular in favour of the young, using the form of property leasing and through the provision of assistance and post-allocation tutorship. ISMEA’s agricultural land services, in continuation with the work carried out until 1999 by the fund for the development of rural property, allowed the direct activation of about 30,000 loans, whose repayments are immediately reinvested with the aim of starting new land initiatives. The average extent of ISMEA’s property interventions is about 30 hectares (much more than the ISTAT average of about seven hectares), the average investment per loan is about 300,000 euros and more than 80% of the loans are granted to young farmers under 40. ISMEA also acts as an advisor in the privatisation process of farm land by local, regional and national governments. Financial Services The task of reorganization of the public guarantee instruments in agriculture, begun with D.Lgs. 102/04 and Law 311/04, took shape with the incorporation of the Special Section and the Interbank Guarantee Fund into the ISMEA. On the basis of this regulation, ISMEA makes financial and credit instruments available to farmers and the banking system which respond to three fundamental objectives: – Improving the financial management of farms and guaranteeing easier

access to credit –Direct and Loan Guarantee Funds Management;


214

– Facilitating access to the capital market, increasing the capitalization possibilities of businesses for investments – Venture Capital Fund Management;

– Examining the problems of credit supply and demand and developing objective measures in the assessment of creditworthiness for farms – Development of Rating Models in partnership with Moody’s.

Insurance Services The role of agricultural insurance was defined by Article 127 of Law 388/2000, which established within ISMEA the Agricultural Risk Reinsurance Fund, at the same time attributing the Institute with an operational role in the experimentation of new insurance instruments. In particular, the Reinsurance Fund provides compensation for agricultural risks covered by subsidized insurance policies. Working with state assistance for the payment of premiums, the insurance company is reinsured, by the ISMEA, resulting in a reduction of the risk and thus of the premium paid by the farmer. In addition, with the aim of supporting public participation in agricultural risk management and to provide information aimed at risk prevention, ISMEA manages the Agricultural Risks Database (Sicuragro), established through the Mipaf Decree of 18/7/03. Further information about the Institute’s activities can be found by consulting its website, which contains the forms to use the operative instruments made available by the above-mentioned regulations, together with a simple and useful guided course (Strada delle Opportunità - Road to Opportunities) which helps the user to identify agricultural financing opportunities that are most suitable to their specific needs (www.ismea.it). 14 LUISS GUIDO CARLI UNIVERSITY LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli (Guido Carli Independent University of Social Studies), is an independent university. It was established between 1974 and 1978 from a pre-existing institution in Rome, the Pro Deo. Through its three faculties of Economics, Law and Political Science, LUISS offers an advanced educational model, whose purpose is to not only to transmit knowledge but to provide the younger


215

generation with the “training in flexibility” they will need to become the masters of their own future. The key features of the LUISS model are the following. Instruction is characterized by: a limited number of students, entrance examinations, full time compulsory attendance, a highly qualified teaching staff that comes not only from the academic world but also from high level professional experience, the intensive study of foreign languages and information technology, an extensive library with a catalogue that can be consulted via its website, an international exchange network with 100 universities both in and outside Europe, career guidance service for high school students, the assistance of qualified tutors during the entire study period and internships, seminars, and debates and discussions on important issues which complement regular lectures. LUISS is characterized for its privileged relationship with the working world. More than 200 business, public and private institutions and multinationals collaborate with the university to offer final year students and recent graduates the first concrete opportunities to enter the job market. The Placement Office organizes numerous meeting and training opportunities: a career guidance and training service that facilitates the entry of final year students and new graduates into the working world with training and internships with both public and private businesses and institutions; periodic meetings and presentations with the most important multinationals, merchant banks and public and private organizations and institutions. The LUISS Guido Carli University has its origins from a preceding institution in Rome: the Pro Deo University, established in 1966. In 1974, a group of entrepreneurs led by Umberto Agnelli decided to invest human resources and finance in an innovative project for management training. LUISS adopted a new teaching model, which followed that of prestigious international universities. Over the following years, other important industrial groups, both public and private, and credit agencies joined the founders, which brought skilled and qualified entrepreneurs to the University’s Board of Directors. In 1977, the University officially changed its name to LUISS - Libera Università Internazionale degli Studi Sociali. A year later, the president of Confindustria at the time, Guido Carli, became President of the University. During this period, the elements making up the LUISS training project were becoming increasingly evident: the limited numbers, the difficult entrance selection process, the study program in keeping with market demands and therefore the close liaison with the business world and the study of foreign


216

languages and information technology. Guido Carlo remained President of LUISS until his death in 1993. In 1982, LUISS extended the courses it offered, adding a Law Faculty to Economics and Political Science. In 1994, the Board of Directors decided to rename the University in memory of Guido Carli. LUISS is independent according to Art. 33 of the Constitution. It was established in accordance with Art. 1 of the Consolidation Act of the Law on Higher Education, approved by the Royal Decree of 31 August 1933 no. 1592, which guarantees Independent Universities legal status and administrative, didactic and disciplinary independence, within the limits of those allowed and under the supervision of the State, practiced by the Ministry of Universities, Scientific Research and Technology (www.luiss.it). 15 MINISTRY OF PRODUCTIVE ACTIVITIES The Ministry of Productive Activities is the body that implements the Government’s economic-industrial policy. Its tasks are currently regulated by Article 27 of Legislative Decree 30 July 1999 n. 300. The Ministry is assigned with State functions and tasks involving industry, crafts, energy, commerce, fairs and markets, the processing and subsequent commercialisation of agricultural products, tourism and the hotel industry, mining, mineral waters and spas, consumer policies, international trade and the internationalisation of the production system, post, telecommunications, publishing, multimedia production, information technology, telematics, radio and television broadcasting, technical innovations applied in the communication industry with particular regard to the electronic business. The Ministry carries out the functions and tasks concerning the State in the following operational areas: – a) development of the production activities; – b) commercial trade and the internationalisation of the economic system; – c) communication and information technology.

(www.attivitaproduttive.gov.it)


217

16 MINISTRY OF ECONOMY AND FINANCE DEPARTMENT OF THE TREASURY AND COUNCIL OF EXPERTS

Department of the Treasury The Ministry of Economy and Finance’s Department of the Treasury provides technical support for the Government’s decisions on economic and financial policy, and it develops macroeconomic strategies and the most important planning documents. The Department is responsible for the following principle processes: – analysis of international and domestic economic, monetary and financial

problems; – international and community economic and financial affairs; – the preparing of economic and financial programming guidelines, in line

with the obligations of convergence and stability deriving from Italy’s membership in the European Union;

– coverage of financial needs, borrowing, management of public debt both at home and abroad and financial operations, and analysis of the relative trends and flows.

– regulation of the financial and banking systems and supervision of bank foundations.

– valuation, anti-money laundering and anti-usury measures; – financial interventions in favour of public bodies and productive

activities; – financial management of State shareholdings, sale and placing of State

shareholdings on the financial market; – management and valorisation of State assets and possessions. Council of Experts The Technical-Scientific Council of Experts works within the Department of the Treasury and has the task of carrying out the preparation, analysis and study of matters within the Department’s province. The Council is divided into two separate boards: one for problems of a technical-scientific nature, called the Technical-Scientific Board, and one for the analysis of legal, economic and financial problems, called the Board of Experts. Board members are named by ministerial decree, after being proposed by the head of the Department of the Treasury. They are chosen from among university lecturers and experts with a specific and proven professional specialization in the topics and issues falling within the Department’s institutional activities. The Department of the Treasury provides the Technical-Scientific Council’s


218

Secretary. The Technical-Scientific Board is made up of nine members and carries out advisory and consultation duties for the Department, particularly as regards the solving of technical-scientific problems in economic and financial planning. The Board of Experts is made up of ten members; the tasks specifically attributed to it include: a) carrying out studies and formulating proposals for the defining of approaches to financial policy; b) analysing the problems connected to the Treasury’s participation in various international organizations. Individual experts can be appointed by the Head of the Department to represent the administration in national and international organizations and to carry out specific tasks. If members of the Council of Experts belong to other administrations or public bodies, at the time of the appointment they are given temporary posts. The Council of Experts, pursuant to Article 2, paragraph 3 of Law 27 November 1991 n. 378, carries out the preparation, analysis and study activities requested by the Department Head for matters within the Department’s province (www.mef.gov.it). 17 ITALIAN POST OFFICE The Italian Post Office (Poste Italiane S.p.A.) provides a core postal service and offers financial services across the whole country through a network of 14,000 post offices. In the sector of postal services, the Italian Postal Service carries out the collection and delivery of ordinary mail, printed matter, registered mail, insured mail and parcels. It also offers a telegram service, an express courier service (Postacelere) in Italy and abroad and the “Postel” service of “hybrid” E-mail. In collaboration with the Ministry of Communications, the Italian postal service also performs activities related to the issue and sale of stamps. The turnover related to the postal services exceeds 8,000 billion lire. Other organizations that make up the Italian postal service are SDA, a national operator in the express courier service with a turnover of about 250 million euros; Postel, the market leader in the field of “hybrid” E-mail; Poste Vita, which works in the life insurance policy sector; Postecom, which develops and manages online services, and Europa Gestioni Immobiliari, which operates in the real estate field with valuations for the investment and/or the transfer of assets in portfolios. Poste Italiane S.p.A., established on 28 February 1998, also offers universal postal and payment services across the entire country. In 1997, it registered


219

approximate 12,000 billion in revenue. In just over three years from its transformation into a joint-stock company, the organization is facing an extensive restructuring process, along the lines laid out by the 1998–2002 Plan. In the financial services sector, the Italian Post Office offers postal current accounts, postal savings accounts, postal interest-bearing securities, national and international money orders and currency exchange services; in addition, it offers collection and payment services for businesses and public administrations. The turnover of the Italian Post Office’s financial services is about 5,000 billion. The Italian Post Office deals with matters related to the real estate market regarding the management of its own considerable real estate holdings. It figures as one of the main property owners in the country, following the considerable work with infrastructures carried out by the former post office administrators until the 1980s, characterized by a vast national network of various types of buildings. Since 1999, it has brought about a rationalization program of its own property resources, aimed towards effective management. The Italian Post Office is present and operating on the Italian real estate market through Europa Gestione Immobiliare SpA, a subsidiary through which it carries out valuations and the selling and investing of assets no longer used for institutional activities. The Italian Post Office has a Real Estate Department, structured in a central office and in district branches located in regional capitals, which manages specialized properties, both its own and those belonging to third parties. A specialized structure, the Real Estate and Purchases Head Office, is dedicated to the selling of houses and the management of related services. The Italian Post Office website provides information on the activities and the wide network of services offered by the Group’s companies (www.poste.it). 18 TECNOBORSA SCPA Tecnoborsa is a joint-stock consortium for the development of the real estate market, created through the Chamber of Commerce system. It was founded in 1997 to contribute to the development, regulation and transparency of the Italian real estate market and its full integration with those of other countries in the Europe Union. The majority of the stock capital is reserved for the chamber of commerce system in order to express and support the company’s institutional vocation


220

and to represent the interests of the territory. Other shareholders include members of other institutions and organizations which represent the interests of operators involved in the sector. Current shareholders include: Unioncamere; the Chamber of Commerce, Industry, Crafts and Agriculture of Rome as well as those of Ancona, Ascoli Piceno, Bari, Brescia, Brindisi, Como, Cosenza, Macerata, Matera, Milan, Novara, Perugia, Pescara, Pisa, Ravenna, Rieti, Rimini, and Terni; Confedilizia – the Italian Property Owners’ Federation; FIAIP – the Italian Federation of Professional Real Estate Agents; Geo.Val Associazione – Geo.Val Experts; Immobilcredit Srl; Progetto Europe Associates Srl; Region of Lazio; the Regional Union of Chambers of Commerce in Lazio and the Regional Union of Chambers of Commerce in Molise. Tecnoborsa is a non-profit organization that represents a means for regulating the market by developing systems, instruments and guidelines which aim to foster interaction between the various operators representing the entire panorama of supply and demand. Tecnoborsa plans and puts on the new strategic, informational and instrumental services in protection of the interests of all those involved. Tecnoborsa is a member of the UNECE/REAG (Real Estate Advisory Group of the United Nations Economic Commission for Europe) with headquarters in Geneva, and which involves some of the major international institutions and organizations. Moreover, Aldo De Marco is Vice-President of this body and Giampiero Bambagioni a member of its Board of Directors. Tecnoborsa has a Technical-Scientific Committee which is made up of institutions, public bodies, organizations in the sector and the research institutes referred to in this chapter. The Committee promotes and develops technical-scientific activities of strategic interest. Within the framework of its own aims of promoting the Italian real estate economy and favouring knowledge and transparency in the market, Tecnoborsa has created the ONMI - National Property Market Observatory, which works to produce the due diligence and the re-imprinting of innovative notions, proposals and projects vital to the socio-economic growth of this specific sector and to competition in the country’s system. Thanks to the increased interest and supplying of new “raw materials,” i.e. new production regulations, Tecnoborsa realized the need to create a new organization, called CSEI - Centro Studi sull’Economia Immobiliare (Real Estate Economics Study Centre). Its primary aims are to collect, analyse, summarize and make available all the information concerning the real estate economy, at the same time guaranteeing transparency and usability.


221

Amongst the main activities that the CSEI is asked to carry out, the projection and development of surveys and databases regarding the real estate economy and market in particular deserve mention. Moreover, it actively contributes to the QEI - Quaderni di Economia Immobiliare (Notebooks on Real Estate Economy). The CSEI is characterized by its scientific approach and its practical nature, dealing with economic issues as a fundamental financial instrument within the national and European panorama. Tecnoborsa periodically collects reliable data, which it analyses, processes and divulges to all interested parties. The ONMI maps out market trends and other indicators which can be used as benchmarks in the sector. Tecnoborsa also organizes the Osservatorio Nazionale dei prezzi degli immobili (National Real Estate Prices Observatory), which is an important transparency tool for the public and a precious source of statistics and studies for those working in the field. Tecnoborsa is also involved in market regulation, carrying out services for the standardization of conduct, methods and operative instruments; research and information; training with initiatives for the professional development of operators; innovative instruments with support activities for the development of the market, for the Chamber of Commerce system and the Real Estate Exchanges, and also for the raising of professional standards through the promoting of the certification of quality for businesses in the sector (www.tecnoborsa.it). ITALIAN REAL ESTATE EXCHANGE The Italian Real Estate Exchange is a Tecnoborsa service aimed at guaranteeing uniformity in univocal operational methods and disseminating them across the whole country. It represents the largest market offer through a computerized platform assigned to the management of a single real estate database, set up by accredited bodies and governed by special regulations. The Italian Real Estate Exchange was set up to: – issue regulations and supervise the work of accredited agencies; – standardize the various local price lists, preparing a single method for the

surveying, measurement and valuation of real estate, with the aim of publishing a single national price list;

– provide specific guidelines for standardizing negotiation methods; – provide a wide range of real estate offers; – divulge information, studies and research on the real estate market; – make available: newsletters, forums and press reports;


222

– facilitate and promote market transactions and operations through a single platform that is also able to manage sales by order of the court;

– carry out training initiatives and professional development for operators in the sector;

– offer access to Italian and foreign investors seeking real estate for residential, industrial, directional or commercial use, and also promote a qualified tourism offer of seasonal rentals and/or time-share properties (www.bii.it).

19 UNI - ITALIAN NATIONAL UNIFICATION BOARD UNI – the Italian National Unification Board – is an independent non-profit association founded in 1921 and recognized by DPR no. 1522 and in 1983 by Directive 83/189/EEC. UNI’s associates include businesses, professionals, associations, public organizations, and economic, technical and educational institutes, as well as 14 federate bodies. The Association’s field of activity covers all sectors, with the exception of the electric and electrotechnical sector, which is covered by the CEI (Italian Electrotechnical Committee). Article 1 of the charter stipulates among its purposes: the elaboration of projects and technical standards; the creation of archives for national and international technical standards; the promotion of certification and research activities regarding technical standardization, in collaboration with the Standardization bodies in other countries and international technical standardization organizations. The standardization is not made up of laws, but of voluntary and consensual regulations for market operators. UNI prepares and issues technical standards through collective and transparent work, using the specific knowledge of experts and a well-organized information structure. This ensures quick work, without excessive costs and a great transparency of the entire process. UNI directs a total of 702 technical boards (to which should be added those directed by the 14 federate bodies), divided into 58 technical committees, 161 sub-committees, 483 work teams with 17 technical officers and 7000 experts who take part in the standardization activity. The principal sectors in which the technical committees are organized concern: – Construction (cultural heritage, fire safety, structural engineering,

building processes, products and systems for building authorities etc.)


223

– Mechanics (acoustics, lifting equipment, containers, gemmology, lifts, freight elevators, escalators, motors etc.)

– Businesses and associations (environment, colorimetry, documentation, automatic information, micrographics, ergonomics, quality and technical support management etc.)

– Consumer and material goods (food and beverages, footwear, paper, packing, wood etc.)

A new field of activity in constant growth is the “Services” sector, in which Uniter (a federate body of UNI) and the “Services” committee work. Standards published in this sphere include: – UNI 10719 on the congress organization; – UNI 10750 on Real Estate Agents – service requisites; – UNI 10801 on joint-ownership and real estate administration. Recently a task force has been set up to evaluate the possibilities for studying methods for measurement in the services field. This topic is of particular importance for the growing need to prepare reference criteria for evaluating the quality of services provided. UNI publications include technical manuals; practical manuals; guidelines for the application of ISO 9000, a magazine and bulletin (in addition to digital format products such as “Global Service,” “UNIped,” “UNI Edil,” “UNI 626,” “UNI Qualità,” “Macchine Sicure,” “Imprese & Ambiente”). “U&C Unificazione e Certificazione” (Standardization & Certification) is the only monthly magazine in Italy that deals with the topics of standardization, certification, accreditation and the quality of products, procedures and services. It is the official organ of the two Italian certification organizations UNI and CEI, as well as of Sinal (National Laboratory Accreditation System) and Sincert (National Accreditation System for Certification Agencies). Supplementary to the magazine is the fortnightly bulletin “UNI Notizie,” (UNI News), which keeps up to date with all the news relevant to UNI and the various sectors involved in standardization activities. “UNI Notizie” also publishes the complete list of national, European and international standardization projects in progress, the assimilation of the EN standards issued by the CEN - Comitato Europeo di Normazione - European Committee for Standardization (www.cenorm.be) and the adoption of ISO (International Organization for Standardization) standards (www.iso.ch).


224

20 UNIONCAMERE – NATIONAL UNION OF CHAMBERS OF COMMERCE Unioncamere – the National Union of Chambers of Commerce – is a body to whom the Chambers of Commerce and the competent department of the autonomous Valle d’Aosta Region belong to by law. Established in 1901 as a National Association of the Chambers of Commerce, dissolved in 1928 and re-established in 1946, Unioncamere was recognized as a public law body in 1954, with DPR no. 709. Law n. 580 of 1993 for reform to the Chambers of Commerce in confirming statutory independence and the attributions contained in the organization’s charter has specified further to Article 7 the functions of Unioncamere, of representing the general interests of the Chambers of Commerce and the promotion and direct management of the Chambers’ services and activities and those of economic categories. Unioncamera, having adapted its own charter, assimilating all the innovations introduced by Law 580/93 and by D.Lgs. 29/93, also made provisions to adapt its organizational structure and the instruments of financial management. Since 1995, a budget-program has been prepared in which the planning of the various areas and functions which concern the following aspects is highlighted: – actions for internationalisation; – sector policies and activities in the environmental field; – promotional services networks and regional policies; – economic and statistical information; – staff, labour relations and organizational development. The initiatives promoted by Unioncamere in the area of sector policies, carried out in close contact with the national trade associations have mainly applied to the sectors of agriculture, transport and the environment, to the policies of small and medium-sized enterprises and, lastly, to the activities of division bodies (Assonautica, Assicor, etc.) The research on prices by the Observatory of Prices has continued, in collaboration with the trade associations and with ISTAT, the results of which, in addition to being reported by the major daily newspapers, have been a regular source of information for the Observatory of Prices established by the Ministry of Industry. New monitoring activity has also been set up, regarding the price trends of public service charges, especially at a local level. Recent years have seen further growth in the organization’s activity in services connected to economic and statistical information. An important action of assistance in favour of the Chambers of Commerce, which also


225

supported the creation of new councils (pursuant to Law 580/93) was carried out within this area. Amongst the measures aimed at the development of the system are initiatives and activities concerning the areas of staff, labour relations and organizational development. From a planning point of view, two actions have been followed: the implementation of valuation systems within the Chambers of Commerce and services in partnership. Regarding ordinary activities, the prevalent trends have concerned relations with the Chambers of Commerce for the management of employment relationships. Starting in 1996, Unioncamere has also been strengthening its collaborative relationship with the Committees and groups of the Chamber of Deputies and the Senate. To this end, the legislative office contributed with documentary support for research on legislative measures regarding the functions and powers of the Chambers of Commerce. The responsibility to carry out various projects has been given to MediaCamere and regards the fortnightly publication of “Per l’Impresa” (For Business), the monthly supplement “Istituzioni” (Institutions) and the management of the Chamber system’s Press Agency. As far as economic information is concerned, publication has continued of the bimonthly “Tendenze dei prezzi” (Price Trends), which summarizes the inflation rates analysis and forecasting work carried out in collaboration with the IRS of Milan (www.unioncamere.it). 21 BOCCONI UNIVERSITY - NEWFIN Bocconi University, founded in 1902, was the first Italian university to grant a degree in economics. It was established privately by Ferdinando Bocconi, as an independent and pluralist institution. In keeping with the ideals of its founders, Bocconi University seeks to address the scientific research and education needs of the national economic system and to act as a constructive part of a continuous process of cultural progress and integration at an international level. Bocconi University carries out its mission through research and teaching. Through both general and applied research, Bocconi offers its contribution to progress of economic science. It makes accurate operational tools available to the enterprise system, also through its extensive collaboration with international institutions.


226

Research activity is essential for enriching the curriculum, contributing to its constant renewal. The curriculum aims to provide students with a solid cultural training and suitable instruments to face their professional future with discipline and awareness. The University also provides the updating and qualification of those already working in the job market with a number of advanced training programmes. Newfin, the Research Centre for financial innovation, has served for more than fifteen years as a reference point for those working in the field finance and banking intermediation. Created in February 1984, the Centre carries out research on market trends and on the development of financial tools and brokerage models both in Italy and abroad. It is financially supported by a group of banks and financial institutes, including: Banca Carige, Banca Agricola Mantovana, Banca di Roma, Banca Popolare di Lodi, Banca Popolare di Milano, Banca Intesa, Banksiel, Monte dei Paschi di Siena, Sanpaolo and Fondiaria-Sai. Newfin deals with in-depth analysis for financial innovation and organizes numerous occasions for debate, through the combination of academic research and the demand from large institutions for financial services. In research projects, financial circles that have brought about innovation are examined with priority, followed by the pattern of diffusion and its effects on the market structure, on competition and the ways of managing the change. The skills used vary from high-tech to strategic business management and microeconomics. The research regards situations in Italy and the most significant international experiences, thanks to collaborations with foreign research centres and universities. Amongst Newfin’s main activities are: studies and projects relating to the evolution of Italian and international financial systems; ad hoc research and feasibility studies commissioned by Newfin’s sponsors; the organization of conferences, seminars, meetings and debates on the subjects studied at the Centre; periodical publications on financial innovation and reports on studies of interest to the academic world and financial operators (www.unibocconi.it). 22 CHAMBERS OF COMMERCE, INDUSTRY, CRAFTS AND AGRICULTURE THE CASE OF THE ROME CHAMBER OF COMMERCE. Chambers of Commerce, Industry, Crafts and Agriculture are amongst the institutional subjects that are most sensitive to the growth and development of


227

local economies. With the adoption of Law 29.12.1993 no. 580, they have also assumed a central role in the real estate economy, comprising both professional members enrolled on the Professional Register (Real Estate Agents and Property Brokerage Associations, Experts) and service and building industry enterprises. They also play a part in market control and regulation activities for the protection of consumer rights, as well as specific conciliatory and arbitration activities. In this perspective, the Rome Chamber of Commerce3 is a shining example of the application of the spirit of the law and the interpretation of collective needs, having in 1989 established the Rome Real Estate Exchange, the first in Italy, with which it has contributed decisively to the development of the real estate market in urban areas and the development and qualification of operators, besides having an indirect influence on the professional standards and the development of the national market. It could not be otherwise, given the breadth of the market, the importance of the building construction industry and the absolute value of the negotiations carried out on the provincial level. Successively, many other Chambers of Commerce established Real Estate Exchanges (in chronological order: Milan, Umbria (Chambers of Commerce of Perugia and Terni), Bari, Brescia, Adriatic (C of C of Ascoli Piceno, Ancona and Macerata), Vicenza, Venice, Pisa, Piacenza, Trieste, Lodi, Pescara, Viterbo, Tuscany (C of C of Florence, Prato and Pistoia), Catania, etc. (with many others in an advanced stage of being set up). The need to amalgamate and take advantage of the different experiences of the various real estate exchanges and to give them standardized rules and tools so as to create a system, led to the founding of the National Council of Real Estate Exchanges, promoted by the Chambers of Commerce in Rome, Milan and Perugia, later enlarged with representatives of other exchanges; in turn, the body became a division of Tecnoborsa. (Section 18). With the objective of contributing to strategic development in Italy so as to achieve full integration with the economic-financial systems of the European Union, the Rome Chamber of Commerce promoted the establishment of Tecnoborsa in 1997 as a joint-stock consortium; the stock capital is controlled by the Chamber of Commerce of Rome and other chambers of commerce, with institutions and organizations in the real estate market also holding shares (Section 18).

3 The President of the Rome Chamber of Commerce, Industry, Handicraft and Agriculture is Dr. Andrea Mondello, the Secretary General is Dr. Fabrizio Autieri.


228

Tecnoborsa’s mission as a non-profit, institutional body, is to regulate and develop the national real estate market with the common consent of the principle operators involved in the sector, creating strategies, plans and innovative tools needed by the operators in order to provide services with higher value added. With this aim, Tecnoborsa carries out informative, analytical and comparative activities aimed at encouraging market transparency; direct and indirect training activities to prepare the professional operators that the market demands; the promotion and support for chambers of commerce to boost and increase local real estate markets. Sensitive to the development of the international real estate economy, the Rome Chamber of Commerce has given decisive support to the Land For Development Programme (LFDP) from its first edition in 2002, promoted jointly by Tecnoborsa, the United Nations Economic Commission for Europe and its Real Estate Advisory Group (REAG). The initiative, which brought about the holding of annual forums in Rome, involved government organizations and the major international economic and financial institutions in the sector. The LFDP shared and planned the establishment of the High Level Commission on Legal Empowerment of the Poor (HLCLEP) with the aim of contributing to economic and social development at a worldwide level The HLCLEP was presented at the United Nations Headquarters in New York in September 2005. Amongst the other activities promoted by the Rome Chamber of Commerce, through the special agency which manages the Real Estate Exchange, is the “RIMI” (Italian Real Estate Market Show), which is the only consolidated event of the sector on a national scale and of European interest. The actions, instruments created and activities promoted both in Italy and abroad by the abovementioned organizations, individually or working together synergically, have strongly contributed to an objective development of the Italian real estate market. From a market with little transparency, with unclear rules and limited appeal for investors, it has become one of the most interesting, to the point of being considered by international operators as one of the most promising and dynamic international markets today (www.rm.camcom.it).


229

Chapter 16

Basel 2 and Real Estate Rating Bank Debts Secured by Property 1 BASEL 2 and REAL ESTATE RATING 1.0 Introduction 1.1 The Basel Committee on Banking Supervision4, with the so-called “Basel

2,” that is the regulations applying to Bank Capital adequacy, has had a profound effect on the criteria applied to the extending of credit. The Agreement, which will become fully operative as of January 1, 2007, has substantially innovated the “Basel 1” agreement - dating back to 1988, adopted by more than 100 countries – that governs the principles according to which the bank must hold a minimum level of capital to face the risks to which it is exposed.

2.0 Definition 2.1 The Agreement is based on three “pillars”:

– the minimum capital requirements, which take into account the operational and market risks;

4 The Basel Committee on Banking Supervision was instituted by the bank governors of the Central Banks of the 10 most industrialized countries at the end of 1974, that is: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, The Netherlands, Spain, Sweden, Switzerland, Great Britain and the United States (www.bis.org). The Basel 2 Agreement, defined in July 2002, has set the following calendar: 20 December 2002 – conclusion of the third and last enquiry about the impact of the new Agreement; 29 April 2003 – publication of the third draft of the Agreement; 5 May 2003 – publication of the results of the third impact study; 2004 – publication of the official text of Basel 2; 2006 – result test; 1 January 2007 – the new Basel Agreement goes into effect.


230

– controls exercised by the central banks regarding capitalization risk endorsement, which could impose a coverage greater than the minimum requirements;

– market discipline and transparency regulations that allow for more information to the public on the questions of capital, risks and their management.

Figure 6.1 Basel 2 Agreement – Summary

2.2 The Agreement allows for the availability of additional credit resources,

while observing the more selective valuation rating indices, and the reduction of limits of discretion on behalf of the commercial structures of the banks5.

3.0 Discussion 3.1 Rating constitutes an overall judgment of creditworthiness that the bank

attributes to the client receiving the financing. In the preliminary stages before authorizing the credit (or the renewal of a line of credit), a series

5 The impact that the Agreement will have on Italian small and medium enterprises is still being evaluated. Projections, according to us, can become univocal only after the concrete application of Basel 2, which – in any case – will require an adequate sensibility toward the operational development imposed by the new ratings to the small and medium companies.


231

of quantitative and qualitative data is collected regarding the enterprise applying for credit that will be elaborated according to the institution’s own valuation criteria.

Rating systems are an ensemble of: a) models for valuation models, appraisal and forecasting; b) instruments (based on information technology procedures); c) processes; d) competences; e) organizational structures.

The result is a summarized valuation of creditworthiness which, together with the other credit policies and strategies of client acquisition by the bank, can guide the analyst in deciding whether or not to allow the financing.

3.2 Rating models are also finalized to the valuation of the risks involved in a

financing operation based on the following valuation: f) probability of default of the beneficiary; g) of the debt at the time of default (in a specific operation); h) percentage of debt that could be lost once the recovery operations are

over.

3.3 Basel 2 also brings about greater controls over bank guarantees and, in particular, a periodic asset monitoring of the value of the real estate placed as a security on mortgages. The regulations imply further analysis elements regarding the necessity to avail of a specific rating system applied to real estate properties that is harmonized and complementary to the principal components of internal analysis. Therefore, amongst the various risk activities, weighting becomes a key factor in processing quantitative factors (i.e. elements used for the valuation that are absolutely objective and independent from the subjective appraisal of the analyst) and of qualitative factors (i.e. variable factors, which Basel 2 identifies as: corporate governance, company traditions, business plans, competitive positioning, business reputation of the company, etc.).


232

4.0 Application 4.1 The principal elements of real estate rating, listed below, have been taken

from “Italian Real Estate Rating” ™ (IRER)6 4.2 These elements, subject to weighting as regards the specific management

purposes – amongst others – are concerned with: – risk evaluation of real estate investments and disinvestments; – transparency of information (Chapters 6 and 7); – the quality of the process and the product (service-Report) in

property valuation (Chapter 9); – evaluation of variable factors connected to mortgage credit risk

(Loan-to-Value); – the economic situation and characteristics of the local market; – the analysis and periodic updating of the property situation

(management, maintenance, economic and legal); – maximization of revenues from securitization operations on

performing and non-performing mortgages; – weighting of risks related to a real estate portfolio.

4.3 Briefly, it is considered that the overall judgment of the creditworthiness

of the clientele should include, increasingly, more qualitative factors regarding real estate rating.

6 The IRER is an original risk evaluation model specifically defined for the particularities of the Italian economic-real estate system, devised by Giampiero Bambagioni on the basis of international experience (principally on the basis of European and American models). It is also an object of comparison for international alliances, including the various Land For Development Programme (LFDP) Forums, promoted by the United Nations Economic Commission for Europe (UNECE) – Real Estate Advisory Group in collaboration with Tecnoborsa.


233

2 BANK DEBTS SECURED BY PROPERTY 1.0 Introduction 1.1 The proposal of European Directives in the field of bank capital adequacy

gives preference to financing secured by real estate mortgage, under the condition that a series of requirements be complied with. To this effect, they can be summarized as follows: the relative discipline in the Standardised Approach, paragraphs 1 and 2; the minimum requirements for the recognizing of real estate securities and property valuation criteria –paragraphs 3 and 4 respectively – that have a general importance for both the Standardised approach and Internal Rating.

2.0 Debts secured by mortgage on residential real estate 2.1 Debts fully secured, according to the ways and means approved by the

competent Authorities, by mortgages on occupied residential real estate, intended to be occupied or rented by the owner, are to have a weighting factor of 35% applied to them.

In the exercising of their discretion, the national supervisory Authorities may consider themselves satisfied when the following conditions are met:

a) the property value does not does not greatly depend on the debtor’s

creditworthiness. This condition does not exclude situations when macroeconomic factors influence both the property value and the debtor’s regularity in meeting obligations;

b) the debtor’s reimbursement capacity does not depend in a significant measure on the property results or the underlying real estate project, but rather on the borrower’s own creditworthiness to repay the debt drawing from other sources of income. As a consequence, repayment of the debt must not depend significantly on the financial flows generated from the property used as security;

c) that the minimum requirements listed in the following paragraphs 3 and 4 be satisfied;

d) the value of the property has to be greater than the debts by a considerable margin;


234

2.2 The Authorities may waive the necessary observance of the conditions in paragraph b) for debts fully and totally secured by mortgages on residential properties located in the national territory under their jurisdiction, provided that they ascertain that this territory has a strong, well-developed market of residential properties with loss rates low enough to justify such action.

2.3 When the competent Authorities of a member State apply the aforesaid

discretion, the competent Authorities of other State Members may allow their credit intermediaries to apply a risk weighting factor of 35% to such debts, fully and totally secured by mortgages on residential properties.

3.0 Debts secured by mortgages on non-residential properties 3.1 At the discretion of the national supervisory Authorities, debts fully and

totally secured, according to the conditions considered satisfactory by the same Authorities, by mortgages on offices or commercial premises located within the territory under their jurisdiction may receive a risk weighting factor of 50%.

3.2 The application of this weighting percentage is subject to the same

conditions provided for in the recognition of 35% weighting factor provided for financing secured by mortgages on residential properties (with the exclusion of paragraph d);

3.3 The risk weighting factor of 50% is applicable to the part of the loan that

does not exceed a limit calculated on the basis on the following conditions: a) 50% of the market value of the property considered; b) the lesser between 50% of the value of the real estate and 60% of the

real estate mortgage lending value in member States that have established, by means of legislative regulations, strict criteria for the valuation of the mortgage lending value.

3.4 In the exercising of their discretion, the national supervisory Authorities

may consider themselves satisfied when the following conditions are met: c) the value of the real estate does not greatly depend on the debtor’s

creditworthiness. This requirement does not exclude the situations in


235

which purely macroeconomic factors influence both the property value and the debtor’s regularity in meeting obligations;

d) the debtor’s reimbursement capacity does not depend in a significant measure on the property results or the underlying real estate project, but rather on the borrower’s own creditworthiness to repay the debt drawing from other sources of income. As a consequence, repayment of the debt must not depend significantly on the financial flows generated from the property used as security;

e) that the minimum requirements listed in the following paragraphs 3 and 4 be satisfied;

f) the value of the property has to be greater than the debts by a considerable margin.

3.5 The Authorities may waive the necessary observance of the conditions in

paragraph b) for debts fully and totally secured by mortgages on non-residential properties located in the national territory under their jurisdiction, provided that they ascertain that this territory has a strong, well-developed market of non-residential properties with loss rates that do not exceed the following limits:

– up to 50% of the market value (or 60% of the mortgage lending

value); it must not be greater than 0.3% of the current loans in any year;

– the total losses must not be greater than 0.5% of the current loans at any moment.

The risk weighting factor of 100% is applied to the part of the loan that exceeds the above-mentioned limits. When the competent Authorities of a member State apply their discretion as stated in the preceding paragraphs, the competent Authorities of other State Members may allow their credit intermediaries to apply a risk weighting factor of 50% to such debts, fully and totally secured by mortgages on residential properties.

4.0 Minimum requirements for the recognition of real estate securities

The recognition of real estate securities implies that the following conditions be met:


236

g) legal certainty

The mortgage or obligation must be validly opposable in all jurisdictional systems and be promptly registered in the required form. The security must be validly constituted (that is, all the legal requirements to execute the security must be observed). The protection contract and the relative legal procedure must be such as to allow the credit intermediary to execute the security within a reasonable time frame.

h) Property value monitoring

The value of the property must be frequently monitored, at least once a year. More frequent checks should be made if market conditions are subject to significant variations. It is possible to use statistical valuation methods to monitor the property value and to identify properties that need a revaluation. The must be valued by an independent expert, if the information indicates that its value could be lower in relationship to the general market quotations. For loans over 5 million euros, or equivalent to 5% of the credit intermediary’s own reserves, the real estate property must be valued an independent expert at least every three years.

An “independent expert” is understood to mean a person that has the necessary qualifications, skills and experience to carry out property valuations and who is independent from the credit decision process.

i) Documentation

The residential and non-residential properties accepted by the intermediary and the relative credit policies must be clearly documented.

l) Insurance

The credit institutions must have the necessary procedures to make sure that the properties received as security are adequately insured against damage risks.


237

5.0 Valuation of real estate securities 5.1 The property is appraised by an independent expert at a value equal to or

less than the market value. In the member States that have established by means of legislative dispositions or regulations strict criteria for the valuation of the mortgage lending value, the property can be valued by an independent expert at a equal to or less than the mortgage lending value.

5.2 Market value is understood as the estimated amount for which the

property should exchange on the date of valuation between a willing seller and a willing buyer in an arm’s-length transaction under normal market conditions and after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value must be documented in a clear and transparent manner.

5.3 Mortgage lending value is understood as the value of a property as

determined by the valuer making a prudent assessment of the future marketability of the property, taking into account the long-term sustainable aspects, the normal and local market conditions, the current use and the possible alternative appropriate uses of the property. Speculative elements and components may not be taken into account in the assessment of the mortgage lending value. The mortgage lending value must be documented in a clear and transparent manner.

5.4 The value of the mortgage guarantee is equal to the market value or to the

mortgage lending value of the property, reduced if the case may be to take into account the monitoring results or eventual pre-emption rights on the property.