Marshall And Swift Cost Service

[Neil Melby]

I have been informed by an appraiser that Marshall and Swift Cost Service does not include entrenaurial profit for the builder and that I should add this on every appraisal. Is this correct?

Thanks!
Neil Melby

 

[Howard Klahr]

entrenaurial profit for the builder

Entrepreneurial profit is for the developer. Contractor overhead and profit is for the builder. Included in Marshall Valuation Service, contractor overhead and profit - yes, entrepreneurial profit - no

By the way it might be time to also let you know that there is no Santa Claus or Easter Bunny .

 

[KHS445]

From the introduction of each section in the commercial manual. "Calculator costs are averages of final costs including architects' fees and contractors' overhead and profit, sales taxes, permit fees and insurance during construction, interest on interim construction financing is also included, but not financing costs, real estate taxes or brokers' commissions (see section 1)." Section 1 contains more detail and while it does discuss contractor cost and profit it does not specifically address entrepreneurial profit, assuming that it is above and beyond overhead and normal profit margins.

 

[hastalavista]

I have been informed by an appraiser that Marshall and Swift Cost Service does not include entrenaurial profit for the builder and that I should add this on every appraisal. Is this correct?

Thanks!
Neil Melby

I don't like to make universal statements, but in nearly all cases, the answer is "yes": EI (Entrepreneurial Incentive) should be considered as a cost in the cost approach.
Most use the term Entrepreneurial Incentive and Entrepreneurial Profit interchangeably. IMO, the correct technical term to apply is EI as far as considering it in the cost approach.
(EI is what one needs/expects to make in order to go forward with the project... EP is what one actually makes after the project is completed and sold)

 

[Mark K]

......add this on every appraisal. Is this correct?

Thanks!
Neil Melby

Every appraisal?

Not if your area is like mine. If someone owns their own lot (happens frequently) and contracts out a builder to build them a home, situations where there is no "developer", adding EI is likely not appropriate. The builder profit is included in the bid.

If your subject is in a new cookie cutter subdivision, Pulte, Lennar, etc., it might be appropriate.

 

[Michael S]

If a property is typically built by/for an owner/user I generally do not include an EI. For example, most auto dealerships are owner/user facilities whereas a retail strip center is almost always built by a developer who expects to earn a profit from the construction/lease-up of the property. A special-purpose equestrian facility I appraised recently would never be built by a developer because there's no profit in it. It doesn't even make much economic sense to the owner-user (who is a crazy horse person by virtue of having built an equestrian facility). If you could only sell a property for what it cost to build (land, labor, materials, and indirect costs such as plans and permits) why would you take on the risk unless you expected to earn some profit? That's why a lot of contractors act as developers because they can capture some entrepreneurial incentive in addition to their normal markup on hard constructions costs to account for overhead and profit.

 

[NachoPerito]

Entrepreneurial incentive, loan fees, broker fees, mitigation fees, and hookup fees (GFC) are not included and should be added.

I would include EI almost all the time unless it is something that lacks conformity in the market and couldn't be leased at a rate that reflects the cost of construction.

 

[jay trotta]

What is the custom in your area ?

When & If you find a Builder or Developer that will provide you that information, you will have all rights & privileges to Santa Claus & the Easter Bunny. Good Luck

 

[CANative]

Every appraisal?

Not if your area is like mine. If someone owns their own lot (happens frequently) and contracts out a builder to build them a home, situations where there is no "developer", adding EI is likely not appropriate. The builder profit is included in the bid.

If your subject is in a new cookie cutter subdivision, Pulte, Lennar, etc., it might be appropriate.

The CA is an economic model. Market derived EI needs to be accounted for. Would you use a contractor's bid, unreviewed or tested against other sources as you cost source? No. Same goes with the land.

"Builder profit is not in the bid" unless the builder is also the entrepreneur for the specific project (building the subject,)

 

[hastalavista]

Every appraisal?

Not if your area is like mine. If someone owns their own lot (happens frequently) and contracts out a builder to build them a home, situations where there is no "developer", adding EI is likely not appropriate. The builder profit is included in the bid.

Mark-

While I readily acknowledge you know your market and I don't, I find the above illogical.

A buyer in Anytown, USA, has a choice:

A. Purchased a house at a cost of $500k; ready to go and can move in.
B. Builds the exact same house in the "A" option him/herself. Takes 6-9 months to do and has inherent risk that the house, ready to move-in, does not. Costs $500k to do so.
Both homes are worth $500k when all is said and done.

What would the rational person do? Take the house, ready to go at $500k, or spend the time/energy and accept the risk to build the exact same house for $500k?

The rational person would take the house, ready to go at $500k rather then spend time, take-on risk, at a cost of $500k that will result in the exact same house worth exactly the same.

Most people would take "A" if the "B" choice costs $499k. Or $490k. Or even $485k. Some may decide to take on the risk at $480k. Many would do so at $450k.
The difference (how much less would it need to cost to achieve the same house valued at $500k) is what EI is all about.
And this example applies to owner-users, not developers.