Estimate the economic life of the building. Life cycle of a property
remaining economic life, level of operating expenses, reversion rates and loss ratios, risks, ratio of land and building values, date of sale, method of best and most effective use, financing conditions, level of quality of management. In addition, the location and decoration should not differ fundamentally
remaining economic life; Ry is the rate of return on investment. Example. Investment terms: term- 5 years; R - rate of return on investment 12%; the amount of capital invested in real estate is $10,000. Solution. Ring's method. The annual straight-line rate of return on capital will be 20%, since in 5 years 100% of the asset will be written off (100: 5 = 20). In this case, the capitalization ratio
remaining term physical life. Physical depreciation can be calculated both for individual elements of the building with the subsequent summation of the calculated impairments, and for the building as a whole. For approximate calculations of wear, it is possible to use a simplified formula: AND The application of this formula is also relevant when calculating percentage adjustments for wear in compared objects (method of comparative
remaining term its useful life- 48 years old. Office space requires $1,000 to immediately replace carpeting and various supplies. Due to poor operation, loading platforms have physical wear and tear 25% higher than normal; their usual common term useful life is 30 years old; it is necessary to spend $2500 to repair them. Evaluable remaining term useful life roofs, systems
remaining term beneficial use. The useful life of an intangible asset is determined based on deadline: validity of patent, certificate; restrictions on the use of the facility in accordance with the legislation of the Russian Federation and foreign countries; stipulated by the relevant agreements. If term useful use of an intangible asset cannot be determined, then
term This is primarily due to the fact that this country, in the post-war period, correctly oriented itself and began to purposefully pursue state policy aimed at accelerating scientific and technical progress. The unified scientific and technical policy of the state is understood as a system of targeted measures that ensure the comprehensive development of science and technology and the introduction of their results into the national economy. United
term the service life of fixed production assets (machinery and equipment) must exceed three years; small enterprises should not cease their activities within one year from the date of commissioning of the equipment for which up to 50% of its cost is written off as cost. When using benefits in the field of accelerated depreciation, small businesses have the opportunity in the first year
deadline services. The most typical single indicator, the value of which is indicated in the passport data for products, is the guaranteed operating time before the first repair (T). This is the most objective indicator, since it is unprofitable to arbitrarily overestimate it (the losses of the product manufacturer increase with guaranteed servicing of unreliable products) and arbitrarily underestimate
deadlines pregnancy; at the birth of a child; for the period of parental leave until the child reaches the age of 1.5 years; child benefit. The procedure for assigning and paying these benefits is established by the Government of the Russian Federation. According to the Development Strategy of the Russian Federation until 2010, prepared by the Center for Strategic Research, a transition to a subsidiary state is expected, which
terms and ways to achieve the intended goals. All forecasts can be divided into two large groups: basic and social economic. The basic ones include demographic forecasts, forecasts of natural resources, scientific and technological progress, environmental, external economic, foreign policy, domestic policy, etc. Socio-economic include forecasts economic growth,
When assessing the degree of wear, the following terms are used.
Economic life represents a period of time during which an object can be used to make a profit. An object reaches the end of its economic life when its contribution to the value of the enterprise's property complex is zero.
Physical life span represents the period of time during which an object actually exists.
Effective age is based on an assessment of the appearance of the object, taking into account its condition, design and economic factors affecting its value.
Remaining economic life of an object is the period of time from the date of valuation until the end of its economic life.
The appraiser's task is to be able to calculate the remaining economic life of the property. When analyzing, the appraiser should not proceed from the assumption that the physical aging of an object is proportional to its physical and functional wear and tear. Carrying out proper repairs, modernization or re-equipment increases the life of the facility.
The remaining economic life of the object is affected by changes in economic and political conditions.
This method of determining wear is based mainly on expert and normative methods for calculating wear. The appraiser examines the property and his conclusions are based on the fact that the effective age, expressed as a percentage, reflects the typical economic life of the property, just as the percentage of accumulated depreciation reflects the total cost of reproduction at the date of appraisal. Thus, wear can be determined by the following relationship:
AND = EV
EV - effective age;
ВС - replacement cost of the object;
TS is a typical economic life (service life).
Calculation example.
The service life of the object is 50 years, its chronological age ХрВ = 20 years. Taking the replacement cost of the object as 100%, we have:
Х(И) 20 years (ХрВ)
H = 40% wear, where:
100(VS) 50years(TS)
X is an unknown quantity;
ChrA - chronological age.
Sometimes the effective age is equated to the typical economic life span, then the calculation is carried out as follows:
EF= % depreciation from replacement cost
20 years (EF)=0.333 or wear =33.3%
60 years (TS)
To calculate depreciation, in some cases it is very important to take into account the remaining economic life of the object, then depreciation is calculated as follows:
I+OS or EV+OS, where:
OS is the remaining economic life.
Calculation example. The typical economic life of an object is 80 years. His chronological age is 15 years. The effective age is determined by the appraiser based on an analysis of the condition, design, nature of the environment and is equal to 20 years (due to poor use and lack of proper repairs).
From the point of view of the functional operation of real estate objects, it is customary to distinguish several types of life spans. There are economic life periods that define a specific period of time in which real estate can be used as a source of profit. Such terms end when improvements made to the property cease to contribute to the value of the building. There is actually a lifetime of a property, that is, a period of time when the building exists and is suitable for living or working. In typical physical life span, which is determined by various regulations, the following subtypes of terms are distinguished. Effective age, which reflects the age of the object, depending on the exterior and technical characteristics. Chronological age, which corresponds to the time the building is in operation. Remaining economic life, which is used for the purpose of appraising a building by an appraiser, is calculated by the period from the date of the appraisal itself to the end of the economic life of the building.
Functional obsolescence of the building is that the building no longer meets modern standards - outdated architecture of the building, inconvenient layout, engineering support. Such wear and tear is caused by progress in science and technology in the field of architecture and construction technology. Another name for functional wear is obsolescence, which, like physical wear, is removable or irremovable. Economic wear and tear a building is called a decrease in value due to a negative change in its external environment, which is due to economic, political or other reasons. For example, in the area where the object is located, there has been a persistent tendency towards decline, or taxation, insurance have changed, there have been changes in the labor market, tourism, education, etc. Economic wear and tear is also called wear and tear from external influences. The degree of external wear and tear can be significantly affected by the immediate proximity to unattractive natural or artificial objects: swamps, wastewater treatment plants, restaurants, dance floors, gas stations, railway stations and train stations, industrial enterprises. The economic depreciation of a property should be considered irreversible, since the cost of expenses that should be aimed at eliminating external factors is disproportionately high.
External wear and tear can be measured by paired sales analysis, which is the sale of two comparable properties on the real estate market, one with signs of external wear and the other without them. The difference in price will allow us to draw conclusions about the amount of wear of the analyzed object.
Lifespan of real estate determined by a number of factors. Houses age gradually; over time, the moment comes when living in them becomes life-threatening. Considering the modern pace and quality of construction, a relatively young house can become problematic if, for some reason, there is a sharp deterioration in its technical condition, for example, cracked walls, deformation of the foundation, or warped door frames. If such signs are found in the house, the residents are immediately evicted. All issues related to dilapidated and dilapidated housing are regulated by the Regulations approved by the Resolution of the State Duma of the Government of Russia dated January 28, 2006. The Regulations define the requirements for premises intended for human habitation. All premises intended for people to live in them must be located in houses located on the territory of residential construction, which is determined by the system zoning plan. Housing must be provided with appropriate communications, such as: electric lighting, drinking water and hot water supply, heating, ventilation, and, where provided, gas. However, in one-story or two-story houses with no centralized utility network, there may be a lack of both a water supply system and a sewerage system.
All engineering systems must always comply with sanitary and epidemiological safety standards. The climate in rooms where people live must comply with standards. Acceptable relative humidity is a humidity of not more than fifty-five percent. And in a heated room, the air should have a normal temperature of eighteen degrees Celsius. Residential premises must be reliably protected from moisture, such as melt, rain or soil, and from leaks from communication systems. Placing a restroom, bathroom, shower or kitchen above living rooms is prohibited. Living rooms and kitchen areas must have windows. For auxiliary or household premises, compliance with this requirement is not necessary. Residential premises are prohibited from being located in basements or ground floors. Houses above five floors must be equipped with a safe elevator.
A house is considered unsuitable for habitation if it is located in areas of a possible landslide or mudflow, snow avalanche, or in an area that is regularly flooded with flood waters. An apartment building located in such an area is considered unsafe and subject to demolition. A house is considered unsafe if there are noticeable deformations of the foundation and load-bearing walls, which confirms the exhaustion of the load-bearing capacity of such a structure and the obvious danger of its destruction. Thus, an apartment building must be recognized as unsafe if it suffers damage in the form of a fire, accident, explosion, earthquake, uneven subsidence of soil and many other phenomena. But recognizing a house as unsafe is only possible if the house is technically beyond repair or if it is not economically feasible. Housing located close to busy highways, within which excessive noise levels have been recorded, is also considered completely unsuitable. In addition, an aggressive environment is sometimes a good reason why people’s lives in a certain place become dangerous.
Found an error in the article?
The total cost of reproduction or replacement is the sum of the costs of reproduction (replacement) of a new building in prices valid on the date of assessment. Therefore, it is necessary to take into account the differences in the characteristics of the new property and the property being assessed.
Wear in valuation means loss of utility, and therefore value, of the object of valuation for any reason. Depreciation (as loss of value) can be expressed in absolute and relative units. If depreciation is expressed in absolute units (monetary units), then it is deducted from the total cost of reproduction.
Vrep = Vprep – And or Vrep = Vprep – And, (6.5)
where SV is the cost of reproduction of the object;
V replacement – the cost of replacing improvements to the object;
Vр reproduction – the total cost of reproduction of the object;
Vп replacement – the total cost of replacing the object;
And – depreciation of the valuation object, expressed in monetary units.
If wear is expressed in relative units (percentage), then the following formula is applied:
Vп reproduced = V reproduced ∙(1 – И), (6.6)
where I is the wear and tear of the assessed object, expressed in relative units.
There are two ways to determine wear:
lifetime method;
method of dividing into types of wear.
Depreciation, as a loss of value, can be expressed both in relative terms (in relation to the full cost of reproduction or the full cost of replacement) and in absolute terms.
Calculation of wear and tear using the lifetime method
Wear and tear is a function of the time of an object.
Determining the depreciation of buildings using the life-span method is based on an examination of the structures of the object being assessed and the assumption that the effective age of the object is related to the typical period of economic life, as accumulated depreciation is to the cost of reproduction (replacement) of the building.
When calculating wear using the life-cycle method, the following concepts are used:
The physical life of a building (T n) is the period of operation of the building during which the condition of the load-bearing structural elements of the building meets certain criteria (structural reliability, physical durability, etc.). The physical life of an object is laid down during construction and depends on the capital group of the building. Physical life ends when the object is demolished.
Chronological age (T fact) is the period of time that has passed from the commissioning of the object to the date of assessment.
Effective age (T eff) is calculated on the basis of the chronological age of the building, taking into account its technical condition and the economic factors prevailing on the date of assessment that affect the value of the assessed object. Depending on the operating characteristics of the building, the effective age may differ from the chronological age up or down. In the case of normal (typical) operation of a building, the effective age is usually equal to the chronological age.
Rice. 6.1. Periods of a building’s life and characterizing them
assessment indicators
Indicators of physical wear and tear, effective age and economic life span are in a certain ratio, which can be expressed by the formula
I = (Teff / Tn) ∙ 100%, (6.7)
where And – wear, %.;
Tef – effective age, determined by an expert based on the technical condition of the elements or the building as a whole;
Tn – typical period of physical life.
I = (T fact / T n) ∙ 100%, (6.8)
where T fact is chronological age.
The application of formula (6.8) is relevant when calculating percentage adjustments for wear and tear in compared objects (comparative sales method), when it is not possible for the appraiser to inspect selected analogues to determine the indicators used in formula (6.7).
Example. Determine the value of the property being assessed. A plot of land with a building built in 1980 is being assessed. The standard service life of the building is 150 years. The market value of the land plot was determined by comparing sales and is equal to 4.5 million rubles. The total cost of replacing the structure was determined by the comparative unit method at the level of 11.4 million rubles. Valuation date: January 30, 2010.
Solution.
The chronological age of the building is 30 years. To calculate the wear and tear of a structure, we use formula (6.8), since the effective age is not given.
I = (T fact / T n) ∙ 100% =30/150*100% = 30%.
To calculate the value of the object being valued, we apply formula 6.2.
V= 4,500,000 + (11,400,000 – 0.3*11,400,000) = 12,480,000 rubles.
Thus, the cost of the assessed object, calculated within the cost approach, amounted to 12,480,000 rubles.
In world practice, three main approaches to assessing the value of real estate are used: cost, income and market, on the basis of which various types of value of the object are determined - market, investment, replacement, replacement cost, etc. (see 5.1.). Real estate valuation methods—the specific ways in which valuation principles are applied—depend on the approach taken.
The real estate valuation process can be divided into six stages: determining the scope of valuation issues (the essence of the valuation), preliminary inspection of the valuation object and concluding a valuation agreement; assessment plan; collection and analysis of information; applying assessment-appropriate approaches; approval and, finally, a report on the result of assessing the value of the object.
Let's analyze the capabilities of each stage of the real estate valuation process.
1. Definition of the task and conclusion of an agreement for the assessment of the property. The customer, as a rule, sets a specific goal for the appraiser - to determine the value of the property, which he needs to make a decision. The interests of the customer may be different: purchase real estate as an investment, sell the property, lend part of their assets, get a loan, pledge property, etc. In each case, the appraiser needs to determine a special specific type of value (for example, determining the market value of a property, investment or collateral value, etc.) and the area of its use (sale, obtaining a loan, insurance, etc.).
Utility, substitution and expectation are fundamental principles that help the evaluator understand the nature of the problems at hand.
When appraising a property, it is important to examine the property and determine the legal rights associated with it, since the buyer may only have a lease or limited rights to use the property, have only a certain interest in joint tenancy and partnership, the property may be encumbered with a mortgage, there may be legal restrictions, etc. When solving these problems, the appraiser, as a rule, proceeds from the evaluative principles of balance, change, economic size, and economic division. They allow the appraiser to determine which parts (shares) of real estate should be combined (divided) or in what sequence they should be sold, and all this should be done in the interests of the customer.
The appraisal of real estate is carried out on the basis of an agreement between the appraiser and the customer. Mandatory requirements for the contract include the need to indicate the type of assessment; type of value of the valuation object; the amount of payment for carrying out this work; as well as information about the educational institution that issued a document on education confirming the receipt of professional knowledge in the field of valuation activities; license issued by an authorized body in accordance with the legislation of the Russian Federation. An appraisal of a real estate property cannot be carried out by an appraiser if he is a founder, owner, shareholder or official of a legal entity, or a customer or an individual with a property interest in the property being assessed.
The cost of assessing a property depends on the complexity of the problem, the amount of expected expenses and the range of services provided. Payment can be in the form of a lump sum payment, an hourly rate, or as a percentage of the final assessment of the value of the property.
A proposal on the terms of the contract serves to clarify the responsibilities of the appraiser and the customer and confirms that the appraiser correctly understood the essence of the problem facing the customer. Concluding an agreement to complete the task and the amount of payment helps to avoid misunderstandings in the future.
2. Evaluation plan. After the essence of the assessment is understood and determined, the appraiser determines possible ways to solve it. To this end, a research program is developed, which becomes the basis of the second stage, called the “evaluation plan” and includes sequential solutions to the following tasks:
A) Structuring the assessment of a real estate property is that the appraiser first studies general value factors at the regional level, then moves on to more specific value factors at the local and segment level, and finally concentrates his attention on specific factors affecting the value of the land plot being valued and located on it real estate objects.
b) Evaluation plan involves collecting the necessary information, processing and identifying the specific segment of the real estate market to which the property being assessed belongs; determination of demand, possible competitors and possible buyers (users); analysis of the parameters of comparable objects, personal characteristics of possible users, market conditions for financing.
V) Specification of approaches to real estate valuation.
Each situation has its own approaches that are adequate only to it. To correctly select approaches, it is necessary to determine the criteria for their adequacy to the relevant situation. It is clear that the assessment requirements of government agencies may differ from the requirements of private owners. For example, when privatizing real estate, not economic, but social and political demands come to the fore.
In accordance with the standards for assessing real estate, all three approaches are used and, as a last resort, two, but it is necessary to justify the reason for the choice. The final assessment result is derived taking into account the significance of a particular approach in each specific case. 3. Collection and confirmation of information.
The reliability of the evaluator's conclusions depends on the data he used in his work. If they are not accurate, it will be difficult to prepare a valid conclusion. Therefore, the evaluator must collect such information as to support his conclusions in the report or analysis.
In the professional practice of appraisers, a certain system has developed in the selection of necessary information. Its essence is that the collected data should:
– directly touch the assessed object and be sufficiently fresh, i.e. specific;
– be confirmed by a personal inspection of the property by the appraiser or knowledgeable persons (experts);
– be comparable with data on similar objects available on the market; this comparability is especially important when using financial indicators, in particular when calculating future income;
– provide for the possibility of clarification if distortions or deviations from actual values were made during the process of collecting information;
– relate to the professional experience of the appraiser.
Since redundant information rarely increases the credibility of a report, the data collected should not overload the evaluator's reports.
A qualified selection of the necessary information will allow the appraiser to apply an approach appropriate to the given case to the valuation of real estate. 4. Approaches to assessing the value of real estate. COST APPROACH
involves assessing the cost of complete reproduction or the cost of complete replacement of the property being assessed, then subtracting the amount of physical, moral and economic depreciation and, finally, adding to the value thus obtained the market value of the land plot as undeveloped. Depreciation is the loss of usefulness and reduction in value of a property due to various reasons.
The cost approach involves performing the following mandatory operations:
1) determining the market value of the land plot on which the property is located (by comparing it with the value of similar plots or using methodological recommendations of government bodies);
2) determination of replacement cost;
3) calculation of all types of depreciation of the assessed real estate: physical, functional and external and determination of the replacement cost taking into account depreciation (the total depreciation of the property is subtracted from the costs of its reproduction or replacement);
4) calculating the total cost of the property by adding the market value of the land to the net replacement cost of the property.
The first operation is an assessment of the market value of the land plot on which the property is located- represents the study of:
Ownership rights to land;
Physical characteristics of the land plot;
Data on the relationship of the land plot with the environment;
Economic factors characterizing the land plot being assessed.
Sources of this information may be city district land committees and bodies where transactions with land plots are registered, mortgage lending organizations, appraisal and real estate firms specializing in transactions with land plots (for example, the Progal real estate agency, etc.
There are five main methods for assessing the market value of land, based on three basic approaches:
Comparable sales method;
Method of correlation (transfer);
Ground rent capitalization method;
Residue technique method for land;
Land development method.
The comparable sales method involves collating and comparing data on similar vacant land plots sold recently and making adjustments to sales prices.
Comparison of the assessed land plot with comparable plots is carried out according to the following elements:
Location ;
Sales time;
Physical characteristics;
Characteristics of income received from the land plot;
Conditions for financing a land purchase and sale transaction;
Terms of sale;
The matching (transfer) method consists of analyzing the sales of a building located on a similar site and dividing the total sales price into two components - the price of the building and the price of the land.
In this case, the cost of the building and other structures located on this site is initially assessed, then it is subtracted from the total price of the property complex and thereby the value of the land plot is obtained, the result obtained is transferred to the object being valued.
The ground rent capitalization method represents the capitalization of income received through rental payments.
This method is practically impossible to use in Russian conditions, since it is currently impossible to find comparable rental payments and capitalization rates due to the absence of a land rental market as such.
The residual technique method for land when estimating the value of a land plot is applicable in the absence of data on sales of vacant plots of land. Income is calculated based on the profit received taking into account the best and most efficient use of the land and the property built on it.
The method is based on the application of the principle of residual productivity of land.
The land plot development (development) method is used when it is necessary to determine the cost of a plot suitable for dividing into separate individual plots and involves the following sequence of actions:
Determination of the size and number of individual plots (when determining the size of individual plots, physical, legal and economic factors influencing the adoption of this decision are taken into account);
Calculation of the cost of developed plots using the comparable sales method;
Calculation of costs for the development of plots and their sale;
Determining the amount of cash flow by subtracting the costs of developing sites from the total revenue from sales of these sites;
Discounting cash flow taking into account the time of development and sales of all individual land plots.
The discount rate used to discount cash flow should reflect the existing trends in investment efficiency emerging in a given market for developed land plots; these rates should be quite high due to the significant risks of development and sale of plots.
The second operation is to determine the gross replacement cost.
There are three main methods for determining the replacement cost (replacement cost) of a property.
1. Comparative unit method (or unit cost method), in which the adjusted cost of a unit of measurement is multiplied by the number of units of the property being valued.
Units of measurement can be square or cubic meters.
1st place, etc. This is the easiest way to evaluate a property. 2. METHOD OF DIVISION BY COMPONENTS
, based on determining the components of real estate and multiplying them by aggregated cost indicators.
The components can be: foundation, walls and partitions, floors (coverings), roofing, floors, openings, finishing work, engineering equipment, labor costs, etc. Aggregated indicators can be calculated for 1 m3, 1 m2, 1 linear meter, 1 standard hour, etc. 3. METHOD OF QUANTITATIVE SURVEY
consists in drawing up object and summary estimates for the construction of the object being assessed, as if it were being built again.
This is the most labor-intensive method, but it can be significantly simplified if there are old estimates of the assessed object, according to which it was built, or an expert appraiser can resort to the services of a specialist estimator who will develop a new estimate for the assessed object using uniform norms and prices, indices prices for construction and installation works, SNiPs and other necessary documentation.
Typically, indirect costs are 10 to 15 percent of the regional construction cost..
The third operation is to determine the wear and tear of the property
In valuation activities, depreciation is considered as the main factor in the value of a property when applying the cost approach. Here, depreciation is used to account for differences in the characteristics of the new property and the property being appraised. Accounting for the depreciation of an object is a kind of adjustment to the cost of a newly reproduced building (determined using the cost approach) to determine the current value of the assessed object.
The concept of “wear and tear” used in valuation activities must be distinguished from the concept of “depreciation” used in accounting. Depreciation in accounting is the process of distributing the initial costs associated with the acquisition of an object over its entire service life, without determining its current value.
As you know, there are three types of wear and tear: physical, functional and external (economic). Physical deterioration
In practice, four main methods are used to calculate the physical deterioration of buildings: expert, cost, regulatory (or accounting) and method of calculating the life of a building.
It should be noted that physical wear and tear can be removable or irreparable.
Removable physical deterioration assumes that the cost of ongoing repairs is less than the added value of the object.
Physical deterioration is considered irreparable when the cost of correcting the defect exceeds the value it would add to the property.
Any defect in an object can, in principle, be corrected, but the cost of correction should not exceed the expected benefit.
To determine irreparable physical wear and tear, building elements are divided into two categories: long-term and wear-out. The wear of long-term elements, such as foundations, walls, floors, etc., can be calculated in groups by determining their effective service life and the remaining physical life in real conditions.
To calculate the physical wear and tear of long-term elements, you can also use the method of determining the costs of reproduction of building elements (or the cost method).
In the more accurate adjusted cost method of calculating physical depreciation, the percentage of deterioration of building elements is determined as a weighted value.
The categories of rapidly wearing building elements include elements whose service life is shorter than the estimated economic life of the building. This includes roofing, decorative finishing, painting, etc., i.e. elements that can be repaired (restored) through routine maintenance. Regulatory (or accounting) method
determining the physical deterioration of buildings involves the use of the currently valid “Unified norms of depreciation charges for the complete restoration of fixed assets in the Russian Federation”, approved by Resolution of the Council of Ministers of the USSR of October 29, 1990 No. 1072. The physical deterioration of a property can be determined method of calculating lifespan. Lifespan of a building or structure
are presented in Fig. 5.1. From point of view functional use
1. Economic life The following lifespans of a real estate property are distinguished:
2. , defining the period of time during which the object can be used as a source of profit. The economic life ends when improvements made no longer contribute to the value of the property. Lifetime
3. Typical physical lifespan determined by the regulations of the current legislation.
From the point of view of the life period of a real estate property, the following periods are distinguished:
1. Effective age which reflects the age of an object depending on its appearance, technical condition, etc.
Rice. 5.1. Lifespan of a building or structure
2. Chronological (actual) age, corresponding to the period during which the facility is in operation from the moment of its commissioning.
3. Remaining economic life used for the purpose of assessing an object by an expert appraiser and constitutes the period from the date of assessment to the end of the economic life of the object.
The relationship between wear and tear, replacement cost, effective age, and typical physical life can be described by the following formula:
(5.1)
where I is the wear and tear of the property;
And restore is the replacement cost of the property;
EV – effective age;
TS ezh is a typical period of economic life.
In other words, the percentage of depreciation from replacement cost is determined by the ratio of the effective age of the property to the typical economic life.
Functional obsolescence (or functional wear and tear) of an object thing is the object does not meet modern standards in terms of its functional usefulness. This type of wear and tear (can manifest itself in the outdated architecture of the building, in the convenience of its layout, volume, engineering support, etc.) is mainly due to the influence of scientific and technological progress in the field of architecture and construction. Functional wear and tear in domestic practice is called obsolescence and, just like physical wear and tear, it can be removable and irreparable.
Removable functional wear and tear includes the restoration of built-in cabinets, water and gas meters. Plumbing equipment, floor coverings, etc. The criterion for wear and tear, from the point of view of removability, is to compare the amount of repair costs with the amount of additional value received.
Irremovable functional wear and tear refers to a decrease in the value of a building due to factors associated with both excess and deficiency of the quality characteristics of the building. For example, in the rental market, two-room apartments are in greater demand compared to one-room apartments. The amount of this type of depreciation is calculated as the amount of losses from rent when renting out these apartments, multiplied by the rent multiplier (the ratio of the sale price of the property to the potential rent for it), characteristic of this type of apartment. Thus, the amount of irreparable functional wear and tear is determined by capitalizing rental losses.
Economic wear or wear from external influences – This is a decrease in the value of a building due to a negative change in its external environment caused by economic, political or other factors. The reasons for external wear and tear can be both the general decline of the area in which the object is located, and the actions of the government or local administration in the field of taxation and insurance; other changes in the employment, recreation, education, etc. markets.
A significant factor influencing the amount of external wear is the close proximity to “unattractive” natural or artificial objects - swamps, sewage treatment plants, restaurants, dance floors, gas stations, railway stations, hospitals, schools, industrial enterprises, etc.
Favorable and unfavorable environmental factors can affect the value of the property being appraised to a greater extent than similar, but not appraised, properties. This influence is directly reflected in the appraiser’s opinion about the value of the property and is recorded in the report. When an appraiser, during a site survey, identifies problems associated with the state of the environment, he must determine the nature and extent of pollution based on his own research or sanitary and environmental examination. The responsibilities of the appraiser also include recommendations for conducting a detailed examination if various types of contamination were discovered during the initial examination. In cases where environmental pollution problems have been identified or are expected to occur, the appraiser should recommend an environmental assessment prior to commencing the assessment process.
The object being assessed may not be significantly influenced by environmental pollution factors, although this influence may be quite strong on similar objects that are not currently being assessed. In cases where in any area all real estate objects are equally susceptible to environmental influences, it is not advisable to conduct additional analysis.
The decrease in value associated with environmental pollution is determined using methods similar to those for determining depreciation.
For example, the cost of toxic waste disposal may be related to the cost of renovating the site, e.g. the cost of removable defects.
Economic wear and tear, in contrast to physical and moral wear and tear, is always considered irreversible, because the amount of costs allocated to eliminating external factors is disproportionately high.
A way to measure external wear and tear is to analyze paired sales (when two comparable objects are sold on the real estate market, one of which has signs of external wear, the other does not). The difference in prices allows us to draw a conclusion about the amount of wear and tear from the external influence of the object being evaluated.
Another way to measure external depreciation is to compare the rental income of two properties similar to the property being assessed, one of which is negatively impacted. Capitalization of income losses from comparing these two objects will characterize the amount of wear and tear from external influences. Fourth operation - adding land value to replacement cost
. This operation is a pure mathematical operation and is based on adding the cost of land with the replacement cost, taking into account depreciation, to obtain the total value of the property. INCOME POD.
Its essence lies in the fact that it is associated with determining the value of future income from the use of a property. The technology for using the income valuation approach involves performing five operations. First operation: determination of future gross income
.
1. Estimation of potential gross income, i.e. the income that the facility is capable of generating in a year, provided that the space is fully occupied before deducting operating costs. Thus, potential gross income represents the expected total amount from the main activity on the property being valued.
2. An estimate of actual gross income, calculated based on potential gross income. At the same time, losses during collection of payments are subtracted from it, and additional income from the property is added (for example, from business activities on the territory of the property or within it).
If, for example, the cost of a hotel is estimated, then the owner’s income will consist of the following elements: rooms, restaurants, cleaning and laundry services, rent for installed kiosks and shops. The appraiser must take into account the development potential of the entrepreneur and reflect it in his report.
The buyer should know that he can increase profits through better management, financial control, the involvement of new production facilities and other factors. These additional income opportunities are typically taken into account by stakeholders during the present value assessment process. Second operation: subtracting transaction costs
. The appraiser analyzes operating expenses that are reflected in the company's balance sheet.
This type of costs reflects the costs necessary to maintain the functional suitability of an object, which ensures receipt of gross income.
Operating costs are assumed to be:
Conditionally constant, which do not depend on the degree of operation of the property (for example, property tax, insurance premiums, etc.);
Conditional variables that change depending on the degree of use and load of the property (for example, fees for utilities, cleaning, garbage removal, etc.);
Third operation: definition and adjustment to net (operating) income. The adjustment to net income is determined by the individual characteristics of the entrepreneur.
Let's say 70 percent of the income will be spent on paying rent and other production expenses, then the entrepreneur can receive up to 30 percent of the gross income received in the form of remuneration. In the case of a high level of competition, this ratio may change due to a reduction in the personal income of the entrepreneur.
It should be noted that net income does not take into account amounts for servicing loans and depreciation charges.
Fourth operation: goodwill valuation and multiplier. Goodwill is defined as “the benefits transferred by the seller of a business to the buyer; a list of clients or customers recognized as a distinct element of the value of a business” (Oxford English Dictionary). The International Accounting Standards Board believes that
goodwill is “the difference between the value of a business as a whole and the market price of its assets”
. Both definitions characterize the additional value obtained as a result of the individual characteristics of doing business and added to the value of the property being valued.
To determine the value of a potential owner's goodwill, the appraiser must:
· include the owner’s main assets – land and production elements, including machinery and equipment;
· exclude the value of the tenant's real estate (including equipment and equity) and the value of goodwill associated with the name of the previous owner (if any);
· at the customer’s request, separately indicate the cost of certain items related to real estate (furniture, tenant assets, etc.), if a comparative method of real estate valuation is used. The appraiser multiplies the resulting value of goodwill associated with the property by a coefficient from 1 to 5. The choice of the coefficient depends on the appraiser’s opinion about the reliability of cash flows in the future and the prospects for growth (decline) of the business..
Fifth operation:
1.
determining the final value of real estate
2.
The following methods can be used:
3.
Income capitalization method (direct capitalization method).
Discounted cash flow method.
1. Future value of a single investment – determines the value of the future value of a monetary unit after n periods at compound interest:
(5.2)
where i is the actual compound interest rate
2. Current value of a single investment– corresponds to the current value of the monetary unit, obtained after n periods at a given interest rate per annum:
(5.3)
3. Current value of a single investment for the period– determines the present value of a series of future equal unit payments over n periods at the compound interest rate i:
(5.4)
4. Future value of a single investment for the period – shows what is the future value of a series of future equal unit payments over n periods at the compound interest rate i:
(5.5)
5. Depreciation factor for a single investment – shows what the size of payments should be over n periods so that their present value at interest rate i is equal to 1:
(5.6)
(5.7)
6. Compensation fund factor – calculates the amount of equal payments that would accumulate 1 monetary unit in the account by the end of the annuity period:
Direct capitalization method used if constant or smoothly changing income is forecast. This method is based on the determination of the capitalization rate, which is a capitalization ratio that takes into account both the net profit received from the operation of the property being valued and the reimbursement of capital spent on the acquisition of this property.
In general, the capitalization rate is defined as:
There are other methods for calculating the capitalization rate:
1. Direct matching method consists in comparing the evaluated object with an analogue object. In this case, it is assumed that similar properties have the same capitalization rates.
2. Linked Investment Method applies in the case of using both borrowed and equity capital to purchase a property.
a) the capitalization rate on borrowed funds (mortgage constant) is determined by the ratio of annual debt service payments to the principal amount of the mortgage loan;
b) the capitalization rate on own funds (capitalization rate of equity capital) is determined by the ratio of the part of the net profit from the operation of the property attributable to equity capital to the amount of equity capital
The overall capitalization rate is determined by weighing its components in proportion to the amount of debt and equity capital in the total amount of capital invested.
The component of borrowed capital is defined as the product of the mortgage constant and the ratio of the amount of borrowed capital to the total amount of invested capital. The equity component is defined as:
3. Ellwood method is a modified linked investment method that takes into account the length of the investment period and changes in the value of the property over time.
4. Cumulative method takes into account in the capitalization rate adjustments for risks associated with investment investments, ineffective investment management, low liquidity of funds and other methods for determining the capitalization rate
The direct capitalization method is based on the fact that income from the use of a property and proceeds from its resale are capitalized into the current value, which will represent the value of the property.
(5.10)
The general formula for determining the value of a property using the direct capitalization method is as follows:
It should be noted that the value of a real estate object (A object), when using the direct capitalization method, can also be identified with the cost of rent for a number of years of operation of the real estate object. In this case, the method of determining the value of a property is called the “direct capitalization of annual rent method.”
Capitalization of the annual rent depends on the individual assessment and risk of rent collection.
, (5.11)
where A object is the cost of the object;
BH – net income;
Г – number of years of lease of the object;
With cap. – rent capitalization coefficient, calculated as the ratio of the amount of net income (NI) to the amount of annual rent (A ar.pl.).
Discounted Cash Flow Method applies in the case of randomly changing and unevenly received cash flows depending on the degree of risk associated with the use of the property.
Using this method assumes:
1. Establishing the duration of receipt of income from the property.
In international valuation practice, it is customary to take the average duration, unless otherwise provided by additional conditions, as 5–10 years. Among Russian appraisers, the practice has developed to evaluate this period in the range of 3–5 years.
2. Forecasting the amount of cash flows:
Building trends in cash flows of income and expenses;
Frequency of income.
If expenses for reconstruction or modernization of a property are envisaged, then their amount is deducted from net income in the periods in which they occur.
3. Determination of the discount rate.
The discount rate refers to the compound interest used in calculating the present value of future payments.
There are various methods for determining the discount rate:
Construction method;
Method for comparing alternative investments;
Selection method;
Monitoring method.
Construction method is based on the premise that the discount rate is only a function of risk and can be defined as the sum of all risks associated with the acquisition, operation of real estate and other operations (real estate market risk, capital market risk, low liquidity risk, inflation risk, real estate management risk, financial risk, environmental risk, legislative risk).
At the core method for comparing alternative investments lies the provision that projects with similar risks should have similar discount rates.
Selection method assumes that the discount rate is calculated based on data on completed transactions.
Monitoring method allows you to identify trends in the profitability of alternative investments that are related to the profitability of the property. Such an analysis allows us to make an assumption regarding the likely forecast of changes in the profitability of a property based on monitoring of the real estate market, the results of which are officially published.
4. Discounting of cash flows, which is carried out by bringing the value of cash flows from future periods based on the functions of compound interest and summing up all current values.
The calculation process involves discounting each cash flow with its corresponding discount rate and then adding all the resulting values:
(5.12)
where С t – cash flow of period t; i t – discount rate for cash flow of period t
5. Calculation of proceeds from the sale of a real estate object (reversion) at the end of the period of ownership and bringing it to the current value through the discount rate.
6. Addition of the current values of income streams and proceeds from sales.
7. Calculation of the value of a property as the difference between the current amount of income for the billing period and the amount of borrowed funds.
Residue technique involves the capitalization of income that relates only to one of the components of the funds invested in the property, while the value of the other components is known. Those. such an assessment is made taking into account the influence of individual factors of income generation.
Calculation of the value of a property is carried out in the following sequence:
1. The part of income for a certain period that is necessary to attract investment in a component with a known cost is determined by multiplying the capitalization rate by the value.
2. The amount of income that falls on the second component (unknown) is determined by subtracting the income that falls on the first component from the total income.
3. The value of the second component is determined by dividing the income attributable to it by the corresponding capitalization rate.
4. The value of the property is determined by adding the value of the known component and the calculated value of the unknown component.
MARKET APPROACH is based on an analysis of market sales and is the basis for most real estate appraisals in a market economy. It is based on market information that is easily accessible to the appraiser and allows for a simple, logical judgment about the price of an object.
The process of using this method is quite simple: a real estate object is selected that is similar to the object being valued, which already has a known market price; then, after comparing their technical and economic parameters, the differences are recorded and appropriate adjustments are made in cost form, and the base cost is determined.
Application technology comparative method when assessing the value of real estate, includes five operations:
Its essence lies in the fact that it is associated with determining the value of future income from the use of a property. The technology for using the income valuation approach involves performing five operations. collection of comparative data.
The appraiser collects as much information as possible about the sale of similar properties. Sources of information may include: owner registration, information from colleagues, official records and statistics. When collecting information, the appraiser must be confident in its completeness and objectivity.
The buyer should know that he can increase profits through better management, financial control, the involvement of new production facilities and other factors. These additional income opportunities are typically taken into account by stakeholders during the present value assessment process. Information on the cost of 1 sq. m. must be present..
The appraiser must be sure that the transaction took place between two independent parties and the price paid was not influenced by any factors, including close relationships between the parties. In addition, the appraiser must examine the conditions under which agreements were reached on the amount of sale of the property or rent, and compare these values with market information on this matter. The rent for a new building, for example, in the real estate market may be a good indicator, but a transaction between obligated partners or relatives is not.
Third operation: temporary adjustments. Very often, the appraiser has information about transactions that occurred several years ago. In an economy with high inflation, you need to know the exact date of the transaction in order to make mathematical or qualitative adjustments when analyzing the data.
Fourth operation: adjustment of differences between comparable properties.
In real practice, it is difficult to find absolutely similar real estate properties in terms of size, location, age, design, layout, and other parameters.
· at the customer’s request, separately indicate the cost of certain items related to real estate (furniture, tenant assets, etc.), if a comparative method of real estate valuation is used. In this situation, the appraiser must approach the problem from the point of view that any information is better than no information. Based on its nature and on the basis of his own experience, the appraiser determines the differences between the compared real estate objects and expresses them in cost form. The appraiser finds these differences in the location of objects, the degree of their wear, and determines differences in many other factors..
making a decision on the value of real estate
The issue of comparability of data between two compared real estate objects requires special consideration, since, despite the similarity of various parameters of the property being valued and market analogues, it is possible to come to an incorrect conclusion about the value. The appraiser must compare the size of the property being valued, its age and other factors with similar factors of similar properties, make adjustments in value terms and take them into account in further analysis.
5. Coordination of results obtained using different approaches. Reconciliation is a process in which judgment and logic are applied to arrive at a final estimate of the value of a property based on the results obtained through various valuation methods.
This process includes preliminary and final stages.
During the preliminary stage, the appraiser:
– checks the possibility of using the principles of real estate valuation using market, cost and income approaches;
– analyzes from a common sense perspective various amounts of real estate value obtained as a result of applying market, cost and income approaches in assessing the value of real estate;
– ranks the significance of estimates obtained by different methods, depending on the conditions of application of the methods and the specific object;
– checks the reality of primary information.
At the final stage, the appraiser returns to the original problem, uses statistical analysis to develop probable values for the value of the object, and determines its expected maximum values. Then, taking into account his experience and knowledge, he presents the customer with a single estimate of the value of the property.
It should be emphasized once again that reconciliation is not a mechanical averaging of results obtained using market, cost and income approaches, but a process of logical reasoning, conclusions and decisions.
6. Report on the result of the valuation. As a final step, the appraiser writes a report on his findings and conclusions, which he then submits to the client (Appendix 14). Depending on the terms of the contract, this report may be a simple letter drawn up on a standard form or a detailed written report and must not be ambiguous or misleading.
A real estate valuation report is prepared taking into account a thorough analysis of market data and, especially, in cases where environmental pollution occurs.
Thus, a systematic approach to assessing the value of various types of real estate includes three main approaches (market, cost and income), each of which uses a unified set of valuation principles.
St. Petersburg is characterized by obsolescence of buildings, for example, narrow staircases that do not meet modern standards, low ceilings.
The minimum price for a comprehensive survey of a building is 15–20 thousand rubles.
In countries with market economies, when assessing commercial real estate, the cost of land is usually 15–30% of the total cost, the average figure is approximately 20%. Despite the fact that this average value is quite approximate, it can be used to evaluate land in our country.
It is necessary to take into account that prices for land plots published in periodicals are, as a rule, so-called seller prices (i.e. inflated prices), while actual transaction prices are required for comparison and comparison) they are usually 8 – 12% lower than published.
The price of a land plot is somewhat influenced by the degree of distance from St. Petersburg. For example, in the 30-kilometer zone of St. Petersburg, prices are higher than in the remote zone.
In Russian conditions, there is an annual trend of increasing prices for land plots; significant seasonal fluctuations in their prices have been recorded: in the spring, prices increase, in the winter they fall. Seasonal fluctuations in some areas of the Leningrad region reach 10–15%.
Often the size of land plots is determined based on the economic capabilities of potential investors. The sizes of individual land plots usually range from 6 to 30 acres. Land plots measuring 15 acres are in greatest demand on the market.
Developed land plots are those to which underground utilities, roads, electricity, gas have been installed, and also on which residential buildings have been built according to individual projects.
The costs of developing and selling land include costs for clearing, planning and marking the site, construction of access roads, utilities, electricity and gas supply, as well as overhead costs for maintaining management personnel, security, etc.
The percentage of physical wear and tear, for example, of a residential property, assessed by an expert method, is determined on the basis of the “Rules for the physical wear and tear of residential buildings VSN-53-86” of the State Civil Engineering Committee.
In Russian terminology - standard service life.
Harrison G. Real estate assessment. M., 1994.
The reconciliation process is sometimes called the “examination of conscience.”
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