Profits Method of Valuation
Valuation of Real Properties
NICMAR University Pune | AY 2025-26
Dr. Shruti Vaishampayan, Architect - Urban Planner
Profits Method of Valuation
Valuation Methods
Prof. Shruti Vaishampayan 11/5/2025
Market Direct Capital
Comparison
Approach
Investment Profits
Income Method Method
Approach
Cost Land and Residual or
Building Development
Approach Method Method 2
Valuation of Properties
Profits Method of Valuation
Contents
Prof. Shruti Vaishampayan 11/5/2025
• Introduction
• Application of the method
• Approach
• Exercises
Valuation of Properties
Profits Method of Valuation
Introduction
Prof. Shruti Vaishampayan 11/5/2025
• It is resorted to properties developed for certain types of
trade and businesses, as in the case of trading/ business
properties. E.g. hotels, petrol pumps, race courses,
cinema, night club, nursing home, old age home etc.
• The property wherein it is applied is also called as
operational property, which poses problem of rating
valuation due to the continuous operation of
trade/business prevailing in its premise.
• In such property, the annual value/rent is worked out
from the annual business profits made by making use of 4
the premises.
Valuation of Properties
Profits Method of Valuation
Application of the method
Prof. Shruti Vaishampayan 11/5/2025
• It is assumed that Gross business profit comprises three
elements:
1. A return from land and building components
2. A remuneration for
(i) the occupier’s entrepreneurship (ii) venture risk
3. A return on the capital deployment by trader/businessman
• From the Gross trade profit, the fixed costs and operational
costs of trade/ business are deducted to arrive at ‘Net
trade/business profit’ .
• The return on tenant’s capital on business/trade is deducted
from it to arrive at ‘Divisible Balance’ between the
hypothetical tenant paying the rent and occupant for his 5
trade/business .
Valuation of Properties
Profits Method of Valuation
Approach 5. Divisible Balance is
1. Estimate gross
shared between
turnover (sales)
Prof. Shruti Vaishampayan 11/5/2025
landlord and tenant,
of the business
with landlord’s share
incl market and
forming ‘Gross rental
location aspect
value’
2. Deduct true
4. Deduct the return
purchases (direct
on tenant’s blocked
costs) from gross sales
capital in business –
turnover to arrive at
Divisible Balance
Gross Profit
3. Deduct the
working expenses
(fixed and operating
costs)from Gross 6
profit – Net
Maintainable Profit
Valuation of Properties
Profits Method of Valuation
Exercise
Prof. Shruti Vaishampayan 11/5/2025
• Hotel Holiday Inn located in central part of city (near railway
station) built in 1995 with amenities like Swimming pool,
Garden lawn, Tennis court and Gymnasium. The occupancy
rates are 60% for suite, 70% for double and 80% for single
rooms.
• Hotel can accommodate about 250 guests with single(100),
double(100) and suite (50)occupations with a room tariff of Rs
1000, 2000 and 2500.
• It is centrally air conditioned with facilities like a restaurant,
bar, spa, 2 syndicate rooms, 1 ball room and car parking which
give an income of 43 lakhs.
• Workout the annual value of this property using profits 7
method to determine the tax to be paid by these premises to
the Pune Municipal Corporation.
Valuation of Properties
Profits Method of Valuation
Valuation of Hotel Property
Prof. Shruti Vaishampayan 11/5/2025
• Maintainable future income:
• Room revenue – Rs 6.57 crores
• Other facilities – Rs 43 lakhs
• F&B services – Rs 2 crores
• Sundries – Rs 50 lakhs
• Total Sales – Rs 9.5 crores
Less Purchases – Rs 3 crores
• Gross Trading Profit – Rs 6.5 crores 8
Valuation of Properties
Profits Method of Valuation
Valuation of Hotel Property
Prof. Shruti Vaishampayan 11/5/2025
• Working expenses:
• Salaries and Wages – Rs 2 crores
• Energy consumption – Rs 50 lakhs
• Telephones and Laundry – Rs 30 lakhs
• Repair/refurbishment – Rs 12 lakhs
• Repair/maint of structures and plants – Rs 8 lakh
• Other maintenance expenses – Rs 50 lakhs
• Total Working Expenses – Rs 3.5 crores
• Net Maintainable Profit = Gross profit – working 9
expenses = Rs 3 Crores
Valuation of Properties
Profits Method of Valuation
Valuation of Hotel Property
Prof. Shruti Vaishampayan 11/5/2025
• Net Maintainable Profit – Rs 3 Crores
• Tenant’s Capital - Rs 2 Crores
• Value of Stock, Contents – Rs 1.15 crores
• Working Capital – Rs 85 lakhs
• Return on Tenant’s Capital (@10%) – Rs 20 lakhs
• Divisible Balance – Rs 2.8 crores
• Gross Rental Value (@ 40% of DB) – Rs 1.12 Cr
• Value of Hotel Property (assuming a 10% annual income
yield) – Rs 11.2 Crores
10
Valuation of Properties
Profits Method of Valuation
Thank you!
Prof. Shruti Vaishampayan 11/5/2025
References:
• S Datta, 2004, Valuation of Real Property, Eastern Law House,
Kolkata/New Delhi
• Chapter 4 – Investment Method of Valuation
11
vshruti@[Link]
Valuation of Properties
