Difference between Arithmetic and Natural Zoning - Coursework Example

According to the RICS Red Book (2014), fair value can be defined in two ways, meaning that the valuer should be sure on which of the two ought to be adopted in a given situation. In the first definition, the book states that fair value refers to the price that would be received upon the sale of an asset or payment for the transfer of a liability in an organized transaction between participants in the market and the measurement date. The second definition refers to the estimated price for transferring an asset or a liability between recognizable conversant and wiling parties that echoes the specified interests of those parties. On the other hand, the book defines market value as the estimated quantity for which a liability or an asset should exchange on the date of valuation between a seller who is ready and willing to sell and a willing buyer in an arm’s length transaction. This happens after proper marketing and only if the parties had each acted knowingly, sensibly, and without compulsion. Fair value is in most cases used in the international and U.S contexts, such as in the bilateral investment agreements. Investment worth is that value of the business on the basis of return on investment, when a business is to be sold entirely to an investor. The value of the business here is ongoing with no anticipation that it will close, thus it is open for business. Similarly, it is the estimated price an exchangeable security would fetch on the market if convertibility would not be achieved. The definitions in the three terms according to the RICS red book shows that the differences depend on the situations and international contexts in which they are used interchangeably, but they require considerations of unique factors that affects the buyer and the seller (Waters, 67). Difference between arithmetic and natural zoning Arithmetic zoning in reality divides a shop into three or four distinct zones, with each deviation starting from the front part. The depth of the zone is usually 20 feet deep and are not so important as long as the zone depths of the plants under focus are equal. On the other hand, natural zoning follows the same logic as arithmetic one but it can only efficiently be used to analyze rents in a shopping center or street where information is accessible on some units, as it necessitates comparison between units. The methods base on the fact that the depths of the shops are the determinants of the zones (Kahr & Thomsett, 20). The arithmetic zoning is much far preferable than the natural one because it is quicker and simpler to undertake, yet still, it has a long acceptance of use. In addition, except in maybe some contemporary shopping developments, much greater varieties of shop depths may be found in a natural approach with comparatively shallow zones. Arithmetic zoning is better in many cases to a general rent analysis for the reason that in retailing, the space used to appeal to the client into the premises is the most valuable one. The arithmetical effects on rental analysis as well as rental value opinions are very real. b). Standard shop units are majority of shops that are situated in traditional retail shopping centers. Zoning is not normally applied to other than standard shop units because the principle of valuation recognizes that positions are constantly less valuable. In places where there are majority of shopping centers, retailers have the view that the front space of it has higher value than in places where the shops are rear. In the same way, first floors, accommodation on basement, and upper levels are perceived to be of comparatively low value. Standard shop units are also directly accessed from the main sales floor. Another reason may be that other units or places may lack the consistency of approach as opposed to standard shop units which have precise positions. C. i) a Market Valuation of the unit for the investor owner The scenario can be interpreted as one indicating regression. A falling tide may reduce all ships, following the regression principle that states that a shop’s value may decrease as a result of the presence of similar shops in the same locations with lower value (Kahr & Thomsett, 20). Thus, an exclusive shop may not appreciate as expected, when other shops are obsolete, old-fashioned, or poorly maintained. The market valuation can be illustrated as shown below. Initial value (for 4 years ago) 80,000 Current value 65,000 Depreciation 15,000 Depreciation rate (p.a) = 4.6875% ii). how and why the valuation would change in case of a local’s liquidation If the tenant is a local concern with a poor track record and there lies a concern that he might go into liquidation, the valuation will go down. This is because, the bad track record conveys bad news about the shop’s investments. One would anticipate that the contagion effect be more crucial for shops with highly same cash flow features than for other shops. The poor track record, on top of giving negative information, will decrease the market value of the main competitors by having a big impact on their dealings with regulators, clients, and suppliers. For example, clients with less track record information about personal shops in a unit could reassess their view of the creditworthiness of all shops in the unit. Consequently, these shops might experience a decrease in demand and will be forced to promote or advertise their creditworthiness (Kahr & Thomsett, 20). To clearly understand how valuation will be affected by poor record and liquidation, it is important to consider the issue of leverage. If the poor track record conveys a bad picture about the shop, the percentage fall in equity of tenants with good records increases with their leverage due to the high leverage and the larger the elasticity of the value in regard to the total value of the shop. On the other hand, the greater the leverage, the higher the value of liquidation, because the decline in the shop value increase the likelihood of bankruptcy. The valuation would change to accommodate for the advertisement costs. Using market valuation multiplier of 0.75 obtained from (Snowden 129). Initial value (for 4 years ago) 80,000 Current value 65,000 Depreciation 15,000 Advertising costs 0.75*65000= 48,750 Current Unit value 65000-48750= 16,250 References Kahr, Joshua, and Michael C. Thomsett. Real Estate Market Valuation and Analysis. Hoboken: John Wiley & Sons, 2006. Internet resource. Snowden, Richard W. The Complete Guide to Buying a Business. American Management Association, 1994. Waters, J. "Valuers’ Compliance with the Reporting Standards of the RICS “Red Book”." RICS, London (2014). Read More