How are demolition costs reflected in SC and I Approaches for Proposed Building?

[Beaufort]

Appraising a proposed single tenant retail building. Site is currently improved with old building pad, asphalt lot, old house, storage building, and 4 mobile homes.

My land sales comps are vacant sites. Based on these comps, I concluded an as though vacant land value for my site and deducted for demolition/removal to conclude an as is land value.

I included demo costs as sitework in Cost Approach and used as is land value in Cost Approach.

I think we're good so far.

Now, my question is, assuming that my improved sales comps and lease comps were constructed on vacant sites with typical sitework (no demo), am i to deduct demolition costs from the concluded Sales Comparison and Income Approach values?

Thanks.

:new_newbie:

 

[Howard Klahr]

Although you don't indicate in the post, I will assume that you are performing this assignment for a lender as part of their underwriting process for a loan on the project. If so, I would bet that the assignment requests "as is" and "as completed" values.

The demolition costs would therefore not be part of the site work costs in the cost approach but rather an adjustment in reporting your "as is" value of the site.

There would not be an adjustment in the sales comparison or income approaches since these are for the "as completed" value

 

[Beaufort]

Thanks for response. correct. appraisal is for lending purposes. need as is and as completed values.

ok. makes sense not including demo costs in sales and income approaches.

As far as cost approach, I'm using the as is land value in cost approach (concluded value of vacant site less demo costs), so demo costs would have to be included in site work, right? Am I missing something?

 

[Howard Klahr]

As far as cost approach, I'm using the as is land value in cost approach (concluded value of vacant site less demo costs), so demo costs would have to be included in site work, right? Am I missing something?

No, the demo costs should be applied as an adjustment in the land value analysis. To apply the demo costs as site work allocates the cost to the improvements, not the land value.

Think of it this way, if the subject were a comparable you would adjust the demo costs in the analysis of that comparable.

The "as completed" valuation in the cost approach would not reflect the demo costs, yet the "as is" value of the site would include the deduction for the demo costs.

 

[Beaufort]

10-4. Appreciate your help.

 

[Terrel L. Shields]

, I'm using the as is land value in cost approach (concluded value of vacant site less demo costs), so demo costs would have to be included in site work, right? Am I missing something

Land is valued as if vacant and available for its highest and best use.

"As is" the land is worth what other vacant lots would sell for LESS the cost to cure (demolition)
As proposed, again the land is valued as if vacant and available for its highest and best use. That would presume the site to be worth as if vacant after the demolition has occurred...I think that's what Howard is saying.

 

[Beaufort]

i understand now.

I was coming up with the same value by using the as is land value and including demo in the sitework, but i understand the reasoning for using as if vacant land value and no sitework. I'm clear now.

Thank you for the help. have a great week!

 

[Michael S]

The subject site is worth less than a vacant site because of the improvements. You should conclude an as is value then make a line item adjustment at the end for the cost of demolition. Keep in mind though there might be some value in those former improvements as far as utilities that are stubbed into the future building pad as opposed to being at the property line. There may be connection/hookup fees that have already been taken care of.

I.e. value of the site = $200,000
- demolition costs = $20,000
Value of the site as is = $180,000

 

[vahokie]

Here is another twist on this: suppose the improvements are so depreciated as to not be contributing to value. A FHLMC/FNMA lender requests a 1004. Would you still obtain comps as best as you can in a similar condition as the improvements, then add several vacant lot comps? Then do as is value of the lot - demo costs? And what about the Cost Approach?

Thanks