Cost Approach and Indirect Costs

[ETex2]

I'm doing some review work and I'm constantly amazed at the inconsistencies applied in the Cost Approach and thought I would ask a couple of questions and get your response:
1) does the Marshall and Swift unit-in-place replacement cost include indirect costs such as financing costs, taxes and insurance during construction, lease-up, etc.. (Yes I know it does not include entrepreneurial incentive.)
2) has anyone ever seen or performed an appraisal of a proposed commercial building where the combined indirect and direct costs equals 50% of direct or hard costs? This would be for a single tenant commercial building that is pre-leased (leased fee interest).

I know that since other specifics are unknown, you can't really fully address the questions, but I'm kinda dumbfounded by what I am seeing by certain appraisal reports and just wanted some general input.

 

[Michael S]

I've appraised some proposed single-tenant retail buildings (Family Dollar, O'Reilly Auto Parts, etc.) and the budgeted indirect costs were between 25-38% (not including entrepreneurial incentive). Typically on most properties though I would expect something in the 10-15% range.

The calculator method includes taxes and insurance during construction, as well as architects fees, and contractor overhead and profit. I don't see any mention of those items in the segregated cost section.

 

[Terrel L. Shields]

I don't use M & S anymore, but typically they did allow for insurance, architect fees, etc. Look in the book. It will tell what it includes.

 

[Terrel L. Shields]

FYI, entreprenueral profit is something I have a visceral dislike for. While is does "fill the gap" between cost and price (in a rising market) it also cannot be captured without a sale. Thus, an owner occupant who holds the property for 10 years can expect almost zero contribution for "EP". The time value of money eats that up. So in my mind EP is an intangible that cannot be identified until the property sells.

So in 2008 when people were lumping 20% or even 30% on for "EP"....within a year that had evaporated to essentially zero. So what purpose does EP really serve?

For owner-operated buildings, I cannot see a real use for EP. For space intended for resale to investors or occupants, then it makes more sense since the EP is captured basically in year 1.

 

[Joyce Potts]

Get rid of M&S and look to tour local builders and suppliers.

 

[Meandering]

Standards Rule 1-4
In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results.
.
(b) When a cost approach is necessary for credible assignment results, an appraiser must:
(i) develop an opinion of site value by an appropriate appraisal method or technique;
(ii) analyze such comparable cost data as are available to estimate the cost new of the
improvements (if any); and
(iii) analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (accrued depreciation).


Your answer is in your market data.


.

 

[Howard Klahr]

1) does the Marshall and Swift unit-in-place replacement cost include indirect costs such as financing costs, taxes and insurance during construction, lease-up, etc.. (Yes I know it does not include entrepreneurial incentive.)

As Terrell has already noted M&S notes what is and even what is not included in the costs reported in the manual. In fact all of the cost services provide this information and each of them report it differently. My suggestion is to read the book to better understand the source being quoted.

2) has anyone ever seen or performed an appraisal of a proposed commercial building where the combined indirect and direct costs equals 50% of direct or hard costs? This would be for a single tenant commercial building that is pre-leased (leased fee interest).

I am totally confused by this question. You are asking if A+B = 50% of B

 

[CANative]

Get rid of M&S and look to tour local builders and suppliers.

 

[Terrel L. Shields]

Well, Can perhaps divine intervention might solve the problem...

If Indirect costs and EP are 50% of the "cost approach", then yes, I'd question the quality of the CA. An architect might charge 10%. Supervision (engineering) might run 7%. Building fees, including charges for environmental displacements...hmmm big Q but I'd be surprised if a feasibility study would allow more than 10%...but I'd look at land and site prep for additional costs if merely trying to "fill the gap" between cost and sales.

I know a church property where they spent over $200,000 getting the site ready for construction. They had to pay for sewer to tunnel under the road then go 800' to the main. They had to pay something similar for water and due to the size of the proposed buildings, they had to engineer the drainage and build a retaining pond.

 

[Lee Lansford]

...

So in 2008 when people were lumping 20% or even 30% on for "EP"....within a year that had evaporated to essentially zero. So what purpose does EP really serve?

.../QUOTE]


It is a bit of a moving target, isn't it?