RCN Estimates / Rules / Insurable Values

[MattLeck]

We just had a 2900 Sq.ft. commercial office/dentist building that appraised for $200,000 (note that the property had some major deferred maintance/AC not working, etc). We also require that a RCN estimate be included in the report. The RCN estimate came back more than double the value of the entire property (improvements and dirt). Here is a summary:

Value based on Income and Sales Comparison: $200,000
Replacement Cost New Estimate: $422,823

What conclusions can I make about those two numbers? I have some ideas... but was wondering what you guys thought?

Thanks!

 

[Pittsburgh Pete]

Tons of external/economic obsolescence!!! May also be functional but can't know given limited data. When last I was in Florida, saw many vacant commercial spaces--oversupply? The extensive vacancies would attest to external obsolescence.

Don't know why the appraiser wouldn't try to at least explain the reasons for the spread.

 

[PL1957]

We just had a 2900 Sq.ft. commercial office/dentist building that appraised for $200,000 (note that the property had some major deferred maintance/AC not working, etc). We also require that a RCN estimate be included in the report. The RCN estimate came back more than double the value of the entire property (improvements and dirt). Here is a summary:

Value based on Income and Sales Comparison: $200,000
Replacement Cost New Estimate: $422,823

What conclusions can I make about those two numbers? I have some ideas... but was wondering what you guys thought?

Thanks!

RCN is exactly that - Replacement Cost New. It doesn't take into account any form of depreciation, whether physical, functional or external. Depending on how it's done, it may or may not include a land value. It is NOT an estimate of market value.

 

[MattLeck]

RCN is exactly that - Replacement Cost New. It doesn't take into account any form of depreciation, whether physical, functional or external. Depending on how it's done, it may or may not include a land value. It is NOT an estimate of market value.

Thanks PL and Pete, I follow you. I was just a little thrown off by the magnitude of the differences between RCN and value. Talked with appraiser and come to find out, the property was in a lot worse shape than I had expected.

 

[rbrienza]

You said that there was a cost ro replace new. Are you sure you wanted that or did you want a cost or repair/fix? And if the cost to fix the deferred maintenance plus the Value of subject (200K) is greater than the RCN then you might have a Highest and Best Use issue also.
Was the $200K after the deferred maintenance.
Due to the extreme deferred maintenance it may be best to tare down and reconstruct.

How is the Highest and Best use - If the market is so over supplied with that type of structure.

 

[MattLeck]

You said that there was a cost ro replace new. Are you sure you wanted that or did you want a cost or repair/fix? And if the cost to fix the deferred maintenance plus the Value of subject (200K) is greater than the RCN then you might have a Highest and Best Use issue also.
Was the $200K after the deferred maintenance.
Due to the extreme deferred maintenance it may be best to tare down and reconstruct.

How is the Highest and Best use - If the market is so over supplied with that type of structure.

Hey rbrienza, yeah we wanted RCN, just usually there is a more narrow gap between values.

The $200K value was fee simple market value (based on sales & income approaches)

The HIBU, based on the four tests, was that the property is adequate for updating and repair to an acceptable level in the market so that it can be utilized as office space.

The building is currently being utilized as storage space for uniforms and paper files for a dental office (which is right next door). Appraiser specifies that propery would need to be repaired and updated prior to office occupancy

 

[Terrel L. Shields]

RCN = replacement cost
DCN = Depreciated cost new

If a simple RCN then it will be current construction cost. If the value wanted is the current building value "as is" then DCN should reflect all functional and external obsolescences and that should be much closer estimate to "market"...it sounds like the improvements have both functional and external (off-site economic) issues.

 

[mgalleshaw]

Did I miss something? How can there even be a comparison of the value from the Income and Sales Approaches to a RCN, except to tell you there has been some bad ***t happen to these improvements? You need a contractor and architect to provide alternative costs to repair and the appraiser to value based on each scenario.
Sorry, I'm busy...
MGalleshaw

 

[Terrel L. Shields]

You need a contractor and architect to provde alternative costs to repair and the appraiser to value based on each scenario

I'd think it depended upon the nature of the project. We don't use Architects to design chicken houses. The field men for the poultry company directs the repairs needed and an independent contractor makes the bid based on the fieldman's notes.

 

[mgalleshaw]

More info

Sorry I wasn't clear, Terrel. I was referring to the post about an office building. I have a few friends, architects and contractors, who I call from time from time for deals like this. You get the architect to look at the place. Architects, at least the ones I know, already have some idea of costs and they can envision a repaired or renovated building much better than I. The architect can look at what is there and make use of it, maybe limiting how much tear-out has to be done to get to occupancy. Maybe there wouldn't be but a marginal cost to sprtiz the place up a little more and achieve a higher level of rent (say, from Class D office to B-). I'd get the architect to speak to the contractor and put the pencil to a few ideas. Downside is you have to pay these guys. But if they are good, they are only in it for a few hours each. And you put in your limiting condition that only preliminary estimates are available and recommend a more thorough analysis, noting that will increase the confidence in the value estimate.
Then I write what I think is a reasonably researched H&BU, offering alternatives. As is, cost to acheive any use, rehab to rent 1, rehab to rent 2, etc. as appropriate. Of course, you have to have a client who can understand the problem and recognize the cost-benefit to this type of somewhat more in-depth analysis. This might be a change in Scope. Since this is already ridiculously long, I have overcome the urge to put in war stories and bore you even more!
MGalleshaw