USDA 'requires' Cost Approach for CONDOS

[David Mescon]

Marion, although the unit owner typically has exclusive use of the airspace within their defined unit, they also own a pro-rata share of all common elements, including the building itself. Again, few non-commercial apprasers are competent to perform a cost approach on a condo. because they have to know how to determine the cost of the entire project and then determine the pro-rata share of said unit.

Sorry, we don't usually disagree, but I'm gonna have to respectfully do so in this instance.

 

[Meandering]

Dave you are correct.

However, can you build a pro-rata share of a building, or common area, with in a $ dollar cost, that is reflective of the market value of a unit owner's unit?

The unit owner owns 1/137th of the entire complex, which costs $x,zzz,zzz to build, Oh wait, doesn't that $x,zzz,zzz number exceed the license level for CRs in many states? Oh snap!

But anyway,

But anyway, the entire complex costs $x,zzz,zzz to replace (land + new cost - depreciation) and the unit owner's pro-rate share to replace via the cost approach is $xx,zzz.

and is going to depend on who owns the land, the condo association or the declarant, or some other entity.

But that is not a "replacement cost" for a single unit, and reflective of the market value of a single unit, to a typical single unit buyer.

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[David Mescon]

Marion, although the unit owner typically has exclusive use of the airspace within their defined unit, they also own a pro-rata share of all common elements, including the building itself. Again, few non-commercial apprasers are competent to perform a cost approach on a condo. because they have to know how to determine the cost of the entire project and then determine the pro-rata share of said unit.

Sorry, we don't usually disagree, but I'm gonna have to respectfully do so in this instance.

Dave you are correct.

However, can you build a pro-rata share of a building, or common area, with in a $ dollar cost, that is reflective of the market value of a unit owner's unit?
You betcha. I never said it was easy.

The unit owner owns 1/137th of the entire complex, which costs $x,zzz,zzz to build, Oh wait, doesn't that $x,zzz,zzz number exceed the license level for CRs in many states? Oh snap!
Absolutely - this is an argument I have made for decades. Obviously, I would charge more to do such an assignment than I would to appraise the project itself.

But anyway,

But anyway, the entire complex costs $x,zzz,zzz to replace (land + new cost - depreciation) and the unit owner's pro-rate share to replace via the cost approach is $xx,zzz.

and is going to depend on who owns the land, the condo association or the declarant, or some other entity.
The type of vestiture of the land in and of itself is typically irrelevant. The contributory value of the owner's interest in said land is all that matters.

But that is not a "replacement cost" for a single unit, and reflective of the market value of a single unit, to a typical single unit buyer.
It is if performed properly. Lets just go backwards for a minute - I performed a feasibility study for a high rise condo. project years ago. Much of the work involved determining costs for the project. It involved determining the aggregate costs of the project, based upon a hypothecated ideal unit mix, and the values thereof. Not particularly different than the case at hand.

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[Meandering]

I don't think we disagree at all Dave.

We're saying the same things in different ways.

As a CG, you could say, a similar complex would cost $X to replace per unit. But that $X is not the "market value of a unit." And you and I know we do this for comparison purposes. A complex with 100 units on 20 acres might cost $X,zzz per unit to build, but a complex of 1,000 units on 20 acres might cost $zzz per unit to replace the entire complex, therefore we demonstrate the economic concept of scale, and can then make adjustments between competing yet different complexes, but not different and competing individual units in different complexes, based solely upon the costs to replace the entire complex.

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[hastalavista]

So, you're MV is $5 million for that 20th floor condo. Land value is 150 million. Cost of construction is 200 million for the Highrise.
MV for the house down the street is 1.8 million. Land value is 1 million. Cost of construction is 800,000

Now...they were both razed. Vacant land. How much would it cost to build the house and how much would it cost to build that 20th floor condo?

Res-

What you are describing would be a challenging analysis to perform.
It isn't impossible and can be done.
I'll give you a simpler example:
A new 2-unit condo; each unit is identical. The project is vacant and ready for sale. The H&BU of the land is for 2-condo units. You have site value comparables (good ones). You have cost estimates (good ones). You have an excellent idea of what EI is for this type of project.
Do you think you have enough information to complete the cost approach?
Do you think if those two units sell the second after you've left the site, your cost approach value indication would have some relationship to the price the units sold for?

If you answer "no", I don't know what to say.
If you answer "yes", then the rest of the issues that are being raised (units on the 20th floor... land value that is $200 million, etc.) are just parts of the equation. Complicates the analysis but does not invalidate the method. And that is what I'm saying.

I'm afraid I must take responsibility of sidetracking this thread. The OP's original post was about USDA requiring the cost approach on an individual condominium unit. No one who has posted so far has thought that was a good idea. No one who has posted so far has said it should be done. On that point, there is unanimity. I'll leave it there.

 

[Meandering]

It is not a good idea to do a cost approach to ascertain the market value of a single condo unit, for a typical single condo unit buyer.

Dave is correct that we can calculate a pro-rata share of an entire complex.
Denis is correct that there are soft costs and holding costs that need to be incorporated into the overall costs to construct a replacement complex. Marketing is typically not a function of the cost approach, but is included at the end of the cost approach to reflect the market adjustments for holding time above time to construct, and time for the permitting process.

However, the 2 unit complex cost to replace would greatly suffer a disadvantage of economy of scale, over the cost to replace a single unit in a 1,000 unit complex. Even though, the unit in the 2 complex and the unit in the 1,000 unit complex might be the same exact size, age, condition and quality of finishing.

But, while we can play magical math all day long, it does not reflect the "market value" in terms of cash or financing equivalent to cash, for a typically motivated, knowledgeable buyer of a single unit, who will not be purchasing the RIGHT to build or own the BUILDING regardless to the size, but rather might have a pro-rata share in an entire complex, which then becomes much more than typically knowledgeable single unit buyers concern themselves with, as the insurance and maintained of the buildings and common areas are usually pro-rated in the condo fees, which are a concern for a buyer and are already addressed elsewhere in the report.

 

[David Mescon]

Marion - we do agree. I was getting worried there for a minute.

Res, as Denis mentioned, there are considerations in appraising the project that are already within a typical residential cost approach, almost by default, like absorption and some of the more esoteric soft costs, but the concept is still the same. Interestingly enough, these concepts are where most commercial appraisers trip up when valuing residential property. They are so used to applying different techniques than residential folks, that they often don't see the forest through the trees, and end up with a substantially less reliable answer to a given appraisal problem.

 

[residentialguy]

I understand what you and Denis are saying. Correct me if I'm wrong...and I certainly am open to that possibility, as CA on a condo is un-chartered territory. In a nut shell, let's say you have 100 unit skyscraper and for simplicity sake, they're all the same market value. You are taking the condo building cost to build, with depreciation and dividing it by 100 to find the cost of an individual condo. The problem is that the cost to build each condo is the cost of the entire land and build cost of the building. You can't have a 20th floor condo without building the condos on floors 1-19 and buying that huge piece of land zoned for condo use. Therefore, to build that 20th floor unit, the cost to build is the cost of the entire project.

 

[Meandering]

Kinda, almost.

An office building can be very different than a condo complex, as offices usually vary greatly in size, where as condos typically vary only a little, like 200-300 sf. So with the office building, the unit of comparison is probably better fit as per square foot, and then multiplied by the square footage of your unit.

But all of that is neither here, nor there, when discussing the replacement cost of a single condo unit, which does not have ownership rights to the improvements.

We can not lose focus as to WHOS ownership rights we are appraising, and exactly what those rights are.

You can't cost out building 1/132 of something as diverse as a condo complex and call it the replacement for a single unit. 1/132 of the roofs, 1/132 of the foundations, 1/132 of the pool, 1/132 of the parking lots, 1/132 of the land, 1/132 of the permits, 1/132 of the landscaping, 1/132 of the heating units, 1/132 of the air conditioning, 1/132 of the insulation, 1/132 of the exterior and interior walls, windows, doors, etc. It will get you a number, but take it to a builder and see if it can replace a single unit with your owned portion of the pool and parking lot and landscaping. It can't be done on an individual basis, and should not be done to represent the value of a single unit.

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[residentialguy]

Kinda, almost.

An office building can be very different than a condo complex, as offices usually vary greatly in size, where as condos typically vary only a little, like 200-300 sf. So with the office building, the unit of comparison is probably better fit as per square foot, and then multiplied by the square footage of your unit.

But all of that is neither here, nor there, when discussing the replacement cost of a single condo unit, which does not have ownership rights to the improvements.

We can not lose focus as to WHOS ownership rights we are appraising, and exactly what those rights are.

You can't cost out building 1/132 of something as diverse as a condo complex and call it the replacement for a single unit. 1/132 of the roofs, 1/132 of the foundations, 1/132 of the pool, 1/132 of the parking lots, 1/132 of the land, 1/132 of the permits, 1/132 of the landscaping, 1/132 of the heating units, 1/132 of the air conditioning, 1/132 of the insulation, 1/132 of the exterior and interior walls, windows, doors, etc. It will get you a number, but take it to a builder and see if it can replace a single unit with your owned portion of the pool and parking lot and landscaping. It can't be done on an individual basis, and should not be done to represent the value of a single unit.

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Agree. 1/132 might be replacement number if the building is already standing....but starting from vacant land...not so much. Kinda like God said in the story I posted in #38....Start from nothing and get your own condo complex to build in.