A valuer is appointed, rotated and instructed in writing, and the instruction is the investor's to read.

Every number a closed-ended fund reports between its first position and its last sale rests on a valuation, and every valuation rests on three facts the constitution may or may not fix. Who appointed the valuer, and who can remove it. How long the valuer has held the appointment, and when it must change. What the valuer was instructed to assume, in a letter the manager wrote, and who besides the manager has read that letter. A constitution that says the fund's assets are valued independently has said a word; a constitution that fixes the three facts has said what the word means. The investor that reads a net asset value reads the valuer's conclusion on the manager's assumptions, and the assumptions are in the instruction letter, and the letter is the document the investor has usually never seen.

This note sets out what the valuation is for and who relies on it, the appointment and its holder, the rotation and its period, the instruction letter and its assumptions, the special assumptions that move a number, the valuer's access to the positions and the manager, the valuation policy above the valuer, the committee's reading, the reliance and the valuer's liability, the interim valuations that gate carry and equalisation, the onshore valuer and the register jurisdiction, the lender's reading, a comparison, a worked appointment as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What the valuation is for

The valuation sets the net asset value, and the net asset value sets the charge where the base is value, the interim carry test, the equalisation price where the price is value, the continuation sale's reference, the transfer price for a holder selling its units, the lender's covenant, the holder's own accounts and the regulator's view of the fund's solvency. One number, nine uses, and each use has a party that gains if the number is higher and one that gains if it is lower. The manager gains from a higher number on the charge, the carry test and the continuation reference; the register gains from a lower number on the equalisation price for later holders and the continuation reference as seller. The valuer stands between them, and independence is what keeps it there.

Why the word is not the facts

A constitution that requires the fund's positions to be valued independently, by a qualified valuer, at least annually, has said what most regimes require and no more. The word independent in that sentence describes the valuer's status, a firm outside the manager's group, and not its position: who engaged it, who can end the engagement, what it was told. A firm outside the manager's group, engaged by the manager, removable by the manager, instructed by the manager on assumptions nobody else reads, is independent in the word's sense and not in any other. The three facts are what the word means in practice, and the register that reads the word and not the facts has read a status.

The basis of value

The instruction letter fixes the basis, and the basis is a different number for each choice: market value, assuming a willing buyer and a willing seller at the date; fair value under the accounting standard the fund reports in; investment value to a particular holder; or a special basis for a particular use, such as a forced sale. The policy fixes the basis for the net asset value and the constitution fixes it for each use that moves money, and an instruction letter that changes the basis has changed the number by a definition. The committee reads the basis first.

The frequency

Annual valuation by the valuer with quarterly updates by the manager is the usual pattern, and the updates are the manager's marks on the valuer's annual assumptions, rolled forward. The updates are where the number drifts, because a quarterly update carries the manager's view of what changed, and a valuer that values annually sees the drift once a year. The policy says what the updates are, who makes them, and whether the valuer reviews them; and the uses that move money are tied to the annual number or to a valuer's interim number rather than to an update.

The appointment

The constitution says who appoints: the manager, the board, the committee, or the manager with the committee's approval. A valuer the manager appoints and may remove is a valuer whose next engagement depends on the manager, and its independence is its professional standing against its commercial interest. A valuer the committee appoints, on the manager's nomination, with removal by the committee, is a valuer whose engagement depends on the register. The appointment's holder is the first fact, and it is the one most constitutions leave to the manager because the manager runs the fund.

The appointment is by an engagement letter between the fund and the valuer, and the letter says who the valuer reports to, who may instruct it, who may remove it, and who may rely. A letter in which the manager is the client and the fund is the subject is a letter the valuer reads as the manager's engagement; one in which the fund is the client, acting by its board or committee, is the fund's.

The rotation

A valuer that has valued the same positions for eight years has formed a view of them, and the view is continuity. Rotation after a period, usually a stated number of years with a cooling period before reappointment, replaces the view with a fresh one, and the first valuation by a new valuer is the test of the old. Rotation costs the fund the new valuer's learning and the manager the relationship, and it is resisted for both reasons. The constitution fixes the period and the cooling, or fixes a rotation of the responsible individual within the valuer's firm, which is cheaper and weaker. A fund with no rotation has a valuer whose independence is its first year's.

The instruction letter

The valuer values on instructions: the basis of value, the date, the assumptions about the positions, the information supplied, the method to be applied or the valuer's choice among methods, the special assumptions. The manager writes the letter because the manager holds the information, and the letter is where a valuation is moved without the valuer moving. A letter that instructs the valuer to assume a planning consent that has not been granted, a lease that has not been signed, a completion that has not occurred, or a market the valuer would not itself assume, produces a number the valuer signs on the manager's assumptions. The letter's assumptions are the number, and the committee reads the letter before it reads the number.

Special assumptions

A special assumption is an assumption about a fact that differs from the facts at the valuation date, and valuation standards require it to be stated in the report. The assumption that a development will be completed on budget, that a tenant will renew, that a licence will be granted, that a parcel's tenure will be converted, is each a special assumption, and each is a number's difference. The valuer states them; the manager chose them; and the report's statement of special assumptions is the list the committee reads against the facts. A report whose special assumptions are not stated is a report outside the standards, and a valuer that signed it has a question to answer.

Access

The valuer values what it can see, and the manager controls what it sees: the positions' accounts, the leases, the development budgets, the onshore vehicles' records, the site. An instruction letter that supplies a summary and a site visit produces a valuation on the summary; one that gives the valuer direct access to the onshore vehicles' records and the administrator's data produces a valuation on the facts. The constitution says that the valuer has direct access to the administrator, the depositary and the onshore vehicles, and the engagement letter says so too.

The valuation policy

Above the valuer is the policy: the fund's written rule on basis, frequency, method by asset class, the treatment of positions the valuer cannot value, the committee's reading, the manager's power to override and its disclosure. The policy is the fund's, adopted by the board or the committee, and the valuer values within it. A manager's override of the valuer's number, permitted by most policies for stated reasons, is disclosed to the committee with the reasons and the valuer's number beside it, and an override used twice a year is a valuer the manager does not accept. The policy's override provision is where the committee reads the manager's hand.

The regulator's reading

Each regime requires the fund's positions to be valued at a stated frequency under a stated policy by a person with stated qualifications, and requires the manager to manage the conflict its own interest in the number creates. The regulator reads the policy, the engagement letter and the committee's minutes of its readings as the manager's compliance with the second requirement, and a manager whose valuer it appointed, instructs and may remove, without a committee reading, has met the first requirement and not the second. The inspection asks for the instruction letters, and the manager that sent them to the committee sends them to the regulator from the same file.

The committee's reading

The committee reads the engagement letter, the instruction letter, the report's special assumptions, the valuer's number and any override, and the uses the number feeds that quarter. It reads the instruction letter for assumptions that move the number in the manager's favour, and the report for the valuer's own statement of what it was told to assume. It approves the valuer's appointment and rotation where the constitution gives it the power. And it instructs the valuer directly where the constitution permits, on a continuation sale or an equalisation, because those are the valuations where the manager's interest is sharpest.

Reliance and liability

The valuer's report says who may rely on it, and the engagement letter says the valuer's liability cap. A report on which only the manager may rely is a report the register reads without recourse; one on which the fund and its holders may rely, to a cap, is the register's. The lender asks for reliance in its own name, and the engagement letter extends it for the lender's facility. The valuer's professional indemnity cover, confirmed annually, is the cap's substance.

The valuer's own conflicts

The valuer may act for the manager's other funds, for the developer, for the lender, for a buyer at a continuation sale, or for the onshore vehicle's counterparty, and each is a conflict the valuer discloses under its own standards and the engagement letter requires it to disclose to the committee. A valuer that values the fund's position and advises the buyer of it has a conflict no instruction letter cures, and the committee that learns of it at the sale learns late. The engagement letter lists the valuer's other engagements with the manager's group and requires notice of new ones, and the committee reads the list at each rotation.

The transfer price

A holder selling its units to another holder or to a third party prices them on the net asset value, and the constitution may fix the transfer price by reference to it. The selling holder and the buyer each read the valuation for the assumptions beneath it, and a net asset value on the manager's assumptions is a price the buyer discounts and the seller did not know to. The constitution's tie of the transfer price to the valuer's annual number, and the committee's reading of the letter, are what make the transfer price a price rather than a negotiation about the assumptions.

Interim valuations

The valuations that gate carry, price an equalisation, reference a continuation sale or fix a transfer price are the ones where independence is tested, because each moves money between the manager and the register or between holders. The constitution ties each to the annual valuation by the appointed valuer, or to a valuation the committee instructs, and not to a manager's mark. A carry test that reads a manager's interim mark of unsold positions is a test the manager sets for itself, and an equalisation at the manager's mark is a price between two sets of the manager's investors that the manager set.

The onshore valuer

Positions in a register jurisdiction are valued under that jurisdiction's standards by a valuer licensed there, where the regime requires it, and the fund's valuer relies on the onshore valuation or instructs it. Two valuers, one onshore and one at the fund, are two numbers unless the fund's valuer adopts the onshore number under its own standards, and the policy says how. A parcel valued by a registry-licensed valuer for the onshore transfer and by the fund's valuer for the net asset value has two numbers for two purposes, and the committee reads why they differ.

The lender's reading

A lender whose covenant reads the net asset value reads the valuer's appointment, rotation and instruction as its covenant's integrity, and its facility names the valuer or the class of valuer, requires reliance, and requires notice of any change of valuer or any override. A change of valuer mid-facility is a covenant event under most facilities, because the new valuer's first number resets the covenant's base.

By fact · by holder	Manager holds it	Committee holds it	What the register reads
Appointment	The manager's valuer	The register's valuer	Who the valuer depends on
Removal	At the manager's will	By the committee	Whether the valuer can say no
Rotation	None or the individual	The firm, after a period, with cooling	Whether the view is fresh
Instruction letter	The manager's assumptions, unseen	Read by the committee before the number	Whether the assumptions moved the number
Special assumptions	Chosen by the manager	Read against the facts	Whether the number assumes what has not happened
Access	A summary and a visit	Direct to the records	Whether the valuer saw the facts
Override	Undisclosed	Disclosed with the valuer's number	Whether the manager accepts its valuer
Reliance	The manager only	The fund and its holders	Whether there is recourse

An appointment, as a type

A fund's constitution gives the committee the appointment and removal of the valuer on the manager's nomination, fixes rotation of the firm after a stated period with a cooling period, requires the instruction letter to go to the committee before the valuation, requires special assumptions to be listed in the report and read against the facts, gives the valuer direct access to the administrator and the onshore vehicles, ties the carry test and the equalisation price to the appointed valuer's annual number, discloses any override with the valuer's number beside it, and extends reliance to the fund, its holders and the lender. The engagement letter names the fund as client acting by its committee. In year three the committee reads an instruction letter assuming a planning consent not yet granted, strikes the assumption, and the number falls. In year five the firm rotates and the new valuer's first number is within the old's range. In year nine the committee instructs the valuer directly for the continuation sale's reference. The lender's covenant read the same number throughout.

The structure paper's page

The structure paper carries a page on valuation: the three facts and their holders, the policy's basis and frequency and method by class, the engagement letter's client and reliance, the instruction letter's route to the committee, the special assumptions' treatment, the access, the override, the rotation and cooling, the uses tied to the annual number, the onshore valuer's place, and the realisation record. The page is written before the constitution so that the facts are a design, and it is the page the committee reads when it appoints.

The development position

A development position is valued on assumptions about completion, cost, programme and sale, and every one is a special assumption until the building stands. The instruction letter for a development platform is the longest the manager writes, and the committee reads it longest, because a development valued on the business plan's base case is a development valued at the manager's forecast. The valuer's report states the assumptions and the sensitivity to each, and the committee reads the sensitivity as the number's range. The promote beneath the platform is computed on realisation and not on valuation, which is the one mercy in the arithmetic.

The second fund's reading

A manager's second fund is read against the first fund's valuation history: the valuer's appointment and rotation, the committee's reading of the letters, the overrides, and the realisation record against the last valuations. A first fund whose realisations fell within a band of its valuations, under a committee-appointed valuer that rotated, is a fund whose numbers the second fund's anchor reads as numbers; one whose realisations fell below a rising valuation, under a manager-appointed valuer that never changed, is a fund whose numbers the anchor reads as the manager's. The second fund's valuation provisions are the first fund's record, and the anchor writes them.

Four cases, as types

A manager appoints and may remove the valuer, writes the instruction letter, and the committee reads the number. The number rises each year on special assumptions about completions and renewals, the carry test is met, and the new valuer after a change the lender forced finds the positions a fifth lower.

A constitution fixes rotation of the responsible individual within the firm. The firm's view continues under a new signature, and the continuation sale's reference is the firm's eighth-year view of positions the buyer's valuer reads differently.

An instruction letter gives the valuer a summary and a visit. The onshore vehicle's records, which the valuer did not see, carry a lease dispute the summary omitted, and the number the valuer signed is the manager's.

A committee appoints, rotates, reads the letter and the special assumptions, and instructs directly on the continuation sale. The net asset value over a decade is a number nine uses relied on and no buyer contested.

What each party holds

The committee holds the appointment, removal, rotation, the instruction letter's reading and the direct instruction on conflicted valuations.

The manager holds the nomination, the information supplied and the instruction letter's drafting.

The valuer holds its standards, its special assumptions stated, its access and its liability.

The administrator holds the data the valuer accesses and the uses the number feeds.

Counsel holds the constitution's provisions, the engagement letter and the reliance.

The lender holds its covenant's reliance and its notice of change.

Where it surfaces

It surfaces at the engagement letter, when the client named is the manager. It surfaces at the first instruction letter, when the committee asks to see it and is told it is the manager's. It surfaces at the first report, when the special assumptions are read against the facts and a consent assumed has not been granted. It surfaces at the carry test, when the number that passed it was a quarterly update. It surfaces at the equalisation, when the later holders' counsel asks who set the price. It surfaces at the lender's change of valuer, when the new number resets the covenant. It surfaces at the continuation sale, when the buyer's valuer reads the positions differently. And it surfaces at the transfer price, when a selling holder learns that its units' value was the manager's assumptions.

The cost of getting it wrong

A net asset value on the manager's assumptions costs the register every use the number fed: charge on value overstated, carry paid on a test that should not have passed, equalisation priced high for later holders, a continuation reference the buyer discounts, a transfer price a selling holder was underpaid or overpaid by. It costs the lender a covenant reset and the manager the lender's trust. And it costs the manager its second fund, because the second fund's anchor reads the first fund's valuation history against its realisations, and the gap between the two is the manager's assumptions made visible. The cost of getting it right is a committee that reads letters and a valuer that rotates.

The realisation test

The test of a valuation is the realisation: what the position sold for against what it was last valued at. The committee keeps the record over the fund's life, position by position, and reads the pattern. Realisations consistently below the last valuation are assumptions consistently generous; realisations consistently above are a valuer consistently conservative, which costs the register at equalisation and the manager at the carry test. The pattern is the valuer's and the manager's record together, and it is what the second fund's anchor reads.

A timeline, as a type

At the first close the constitution fixes the three facts and the policy is adopted. The committee appoints the valuer on the manager's nomination under an engagement letter naming the fund as client. In year one the committee reads the first instruction letter and the first report's special assumptions. In year two the carry test reads the annual number. In year three a special assumption about a consent is struck and the number falls. In year four the lender's facility names the valuer and takes reliance. In year five the firm rotates; the new valuer's first number is read against the old's. In year six the equalisation for a late-admitted class is priced at the valuer's number on the committee's direct instruction. In year nine the committee instructs the continuation sale's reference directly and the buyer's valuer agrees within a range. Over the decade the realisation record shows sales within a band of the last valuations, and the second fund's anchor reads it.

The sequence

1. The constitution fixes the appointment's holder, the removal, the rotation and cooling, the instruction letter's reader, the special assumptions stated in the report, the access, the override's disclosure and the reliance.
2. The valuation policy is adopted above the valuer, with method by class and the override's terms.
3. The engagement letter names the fund as client by its committee and extends reliance.
4. Each instruction letter goes to the committee before the valuation, and special assumptions are read against the facts.
5. Conflicted valuations are instructed by the committee directly.
6. Rotation runs on the period, and the new valuer's first number is read against the old.

Questions a manager asks

Is a big firm independent by itself. Its standing is its independence's substance; the three facts are its form, and a big firm instructed to assume a consent signs the consent.

What rotation period is usual. A stated number of years for the firm, with cooling; shorter for conflicted valuations by direct instruction.

Can the manager override. Under the policy, for stated reasons, disclosed with the valuer's number; an override is a disagreement the committee reads.

Does the committee need to read every letter. The annual letter and every conflicted one; the quarterly updates by the same valuer on the same assumptions may be read by exception.

What about positions the valuer cannot value. The policy says: at cost, at the last valuation, or by a specialist the committee appoints.

Who bears the valuer's cost. The fund, under the engagement letter, whoever appointed it.

Terms used

Valuer: the person appointed to determine the value of the fund's positions under the policy.

Instruction letter: the manager's letter fixing the basis, date, assumptions and information for a valuation.

Special assumption: an assumption that differs from the facts at the valuation date, stated in the report.

Rotation: the mandatory change of valuer after a period, with a cooling period before reappointment.

Override: the manager's departure from the valuer's number under the policy, disclosed.

Reliance: the persons entitled to rely on the valuation, named in the report and the engagement letter.

What to read

The constitution's valuation provisions; the valuation policy; the engagement letter and its reliance; each instruction letter; the report's special assumptions; the facility's valuation covenant. On this site, the exposure and platform rooms under Land and the economics room under Structures.