Q & A Database
The GIPS Standards Q&A database contains questions and answers (Q&As) on various searchable topics that provide additional interpretation on an issue. Q&As are considered to be authoritative guidance and must be followed in order to claim compliance with the GIPS standards.
Content from prior Q&As was included in the GIPS Standards Handbook as much as possible and many Q&As were archived. Change the Status drop-down filter to "Archived" to see the archived Q&As.
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ArchivedEffective: 16 May, 2017 - 31 December, 2019Categories: Real Estate, ValuationSource: GIPS Executive Committee
We understand that the GIPS standards require firms to obtain an external valuation for every property included in our real estate composites on an annual basis, or up to 36 months, if stipulated by the client agreement.
If an investment is under a sales contract, loan default, or lease termination at the time an external valuation is due, is an external valuation still required? If we relied on the transaction value determined by an existing sales contract, loan default or lease termination agreement in lieu of an external valuation, what happens if the transaction is cancelled?
The GIPS standards require an external valuation that fairly represents what an investor could receive for their investment if exchanged in a current arm’s length transaction between willing parties in which the parties each act knowledgeably and prudently. Generally, when a property is under a sales contract, the fair value of the property has been set by a market action.
When a property is under a sales contract by the expected date of the external valuation and the manager has no reason to believe that the deal will fall through, the manager may consider the sales contract to satisfy the external valuation requirement.
Similarly, in the case of a loan default or termination of a lease prior to the date of the required external valuation, the firm would not be required to obtain an external valuation.
If a firm has based their valuation on a pending sale, repossession, or lease termination, the firm must maintain documentation showing that the process was started by the date the external valuation would have been required.
If the sale of a property, loan default, or lease termination action is subsequently cancelled and the manager used the original transaction documentation to satisfy the external valuation requirement, the manager must obtain an external valuation of the property within six months of the transaction cancellation date.
Please also see updated Q&A