Cost Approach

1
Chapter 14 15

• Cost Approach
• Newer Properties With Little Depreciation
• Special Use Properties
• Limited Market / Income-Generating Activity
• Renovations Additions
• Value of Adjustments in Comparison Approach
• Feasibility Analysis

2

• Procedure
• Estimate Value of Site
• Estimate Direct and Indirect Costs of
  Improvements
• Estimate Appropriate Entrepreneurial Profit
• Estimate All Depreciation (3 Types)
• Physical Deterioration
• Functional Obsolescence
• External Obsolescence
• Add Site Value, Direct and Indirect Costs, and
  Profit and Subtract Depreciation

3

• Site Value
• From Chap. 13 in Book
• Reproduction Vs. Replacement Cost
• Reproduction Cost Exact Duplicate With Same
• Materials/Standards
• Replacement Cost Substitute With Same Utility
• Utility to Users Built Using
  Current Materials/Standards

4

• Direct Vs. Indirect Costs
• Direct Costs Construction Costs Such As
  Materials, Labor, Contractor Profit, Building
  Permits, Etc.
• Indirect Costs Associated Costs Such As
  Professional Fees, Financing, Taxes, Sales
  Expenses, Etc.
• Higher Indirect Costs Due to Market
• Imbalances External Obsolescence

5

• Entrepreneurial Profit
• Profit Market Value - Total Development
• Marketing Costs
• Market Based
• May Not Be Achieved
• Depreciation
• Physical Deterioration Wear and Tear
• Functional Obsolescence Internal Property
  Characteristics Not Current with Market
• External Obsolescence Factors Outside of
  Property

6

• Final Value
• As of Effective Appraisal Date
• Consistent With Comparison and Income Approaches
• Cost Data Sources
• Construction Contracts
• Local Contractors Cost Estimators
• Published Cost Manuals

7

• Cost-Estimating Methods
• Cost-Index Trending
• Comparative-Unit Method
• Unit-In-Place Method
• Quantity Survey Method
• Cost-Index Trending
• Original Cost Updated to Current Value
• Not Very Accurate Use as a Check
• Current Cost Current Index Original Index
  Original Cost

8

• Comparative-Unit Method
• Dollars Per Unit of Measurement
• Estimate Cost Per Unit of Benchmark Bldg.
• Adjust Where Necessary to Match Subject
• Add Miscellaneous items to Unit Cost
• Not As Accurate As Unit-In-Place Method
• Total Cost Subject Size Unit Cost

9

• Unit-In-Place Method
• Cost Per Unit of Various Components
• Component Cost Component Size
• Component Cost Per Unit
• Total Cost Sum of Component Costs
  Miscellaneous Items
• Quantity Survey Method
• Most Comprehensive, Accurate Complex
• Complete Analysis Which Details Cost, Quality,
  And Quantity of Every Item.

10

• Factors Affecting Cost Approach
• Quality of Construction
• Size of Building Larger Buildings Generally Cost
  Less Per Unit
• Shape of Building Irregular Shapes Cost More
• Wall Height Higher Walls Cost More.

11

• Example 3 Unit-In-Place
• Calculating Unit Sizes
• Foundation Linear Feet of Perimeter Length
• Floor Gross Building Area
• Roof Gross Building Area
• Exterior Walls Total Wall Square Footage
• Minus Window and Door Space Add
• Window and Door Costs Separately
• Framing Area Supported by Frame (Disregard Eave
  Height)
• Other Gross Building Area