Physical deterioration of the property may be indicated. Methods for assessing land plots. Methods for calculating external wear
Determining the wear and tear of a property
Depreciation is a decrease in the value of a property due to various reasons. The concept of “wear and tear” used in valuation activities must be distinguished from the concept of “depreciation” used in accounting. Depreciation in accounting is the process of distributing the initial costs associated with the acquisition of an object over its entire service life, without determining the current value. In valuation activities, depreciation is considered as the main factor for determining the current value, regardless of its original cost.
In the cost approach, depreciation is used to account for the differences and characteristics of the new property and the specific property being valued. Accounting for the depreciation of an object is a kind of adjustment to the value of a newly reproduced building (determined using the cost approach) to determine the current value of the valued object,
There are three types of wear and tear: physical, functional and external (or economic).
Physical deterioration reflects changes in the physical properties of a property over time (for example, defects in structural components). Physical wear is of two types: the first occurs under the influence of operational factors, the second - under the influence of natural and natural factors. Physical wear and tear is taken into account in depreciation rates.
There are four main methods for calculating the physical depreciation of buildings: expert, cost, regulatory (or accounting) and the method of calculating the life of the building. The percentage of physical wear and tear, for example, of a residential property, assessed by an expert method, is determined on the basis of the “Rules for assessing the physical wear and tear of residential buildings VSN-53-86 “Gosgrazhdanstroy”.
The service life of buildings as a whole depends on the durability of its components.
Physical wear and tear of building elements (Fike) is calculated using the formula:
where UVke is the specific gravity of the structural element;
PIke is the percentage of wear of a structural element.
It should be noted that in the practice of valuation activities, a distinction is made between removable and irremovable physical wear and tear.
Removable physical deterioration assumes that the cost of ongoing repairs is less than the added value of the object.
Physical deterioration is considered irreparable when the cost of correcting the defect exceeds the value it would add to the property. Any defect in an object can, in principle, be corrected, but the costs of correction should not exceed the expected benefit.
To determine irreparable physical wear and tear, building elements are divided into two categories: long-term and wear-out.
The wear of long-term elements, such as foundations, walls, floors, etc., can be calculated in groups by calculating their effective service life and the remaining physical life under real conditions.
To calculate the physical wear and tear of long-term elements, you can also use the method of determining the costs of reproduction of building elements (or the cost method).
In the more accurate adjusted cost method of calculating physical depreciation, the percentage of deterioration of building elements is determined as a weighted value.
The categories of rapidly wearing elements of a building include elements whose service life is shorter than the estimated economical life of the building. This is roofing, decorative finishing, painting, etc., i.e. elements that can be repaired (restored) through routine repairs.
The normative (or accounting) method for determining the physical deterioration of buildings involves the use of the currently valid “Unified norms of depreciation charges for the complete restoration of fixed assets in the Russian Federation”, approved by Resolution of the Council of Ministers of the USSR of October 22, 1990 No. 1072.
Functional obsolescence (or functional wear and tear of an object) is when the object no longer meets modern standards in terms of its functional usefulness. This type of wear and tear (which, for example, can manifest itself in outdated architecture, planning, building engineering, etc.) is mainly due to the influence of scientific and technological progress in the field of architecture and construction. Functional wear and tear in domestic practice is called obsolescence and, just like physical wear and tear, it can be borderline and irreparable.
Removable functional wear and tear includes the restoration of built-in cabinets, water and gas meters, technical equipment, floor coverings, etc. The criterion for wear and tear, from the point of view of removability, is a comparison of the amount of repair costs with the amount of additional cost received. If the additional value received exceeds the cost of restoration, then functional wear is removable. The amount of removable functional wear and tear is determined as the difference between the potential value of the building at the time of its assessment with updated elements and its value at the same date without updated elements.
Irremovable functional wear and tear refers to a decrease in the value of a building due to factors associated with both excess and deficiency of the quality characteristics of the building. For example, in the residential rental market, two-room apartments are in greater demand compared to one-room apartments. The amount of irreparable functional wear and tear is calculated as the amount of losses from rent when renting out these apartments, multiplied by the rent multiplier (the ratio of the sale price of the property to the potential rent for it) characteristic of this type of apartment. Thus, the amount of irreparable functional wear and tear is determined by capitalizing rental losses.
External wear and tear, or external wear and tear, is a decrease in the value of a building due to a negative change in its external environment caused by economic, political or other factors. The reasons for external wear and tear are: the general decline of the area in which the object is located; actions of the government or local administration in the field of taxation, insurance; other changes in the employment, leisure, education, etc. markets.
A significant factor influencing the amount of external wear and tear is the environmental component of the object’s location: close proximity to “unattractive” natural or artificial objects - swamps, wastewater treatment plants, gas stations, railway stations, industrial enterprises, etc.
If physical and, to a certain extent, functional wear and tear can be eliminated by reconstructing or modernizing a building, then wear and tear from external influences in most cases cannot be eliminated.
A way to measure external wear and tear is to analyze paired sales (when two comparable objects are sold on the real estate market, one of which has signs of external wear and tear, the other does not). The difference in prices allows us to draw a conclusion about the amount of wear and tear from the external influence of the object being evaluated.
Another way to measure external depreciation is to compare the rental income of two properties similar to the one being assessed, one of which is negatively impacted. Capitalization of income losses from comparing these two objects will characterize the amount of wear and tear from external influences.
Determination of the total value of the property and land plot
At the last stage of the cost approach, the required total cost is determined by summing the cost of the property without wear and tear, obtained at the previous stage and the cost of the land plot, obtained at the first stage, implementing the cost approach.
The total cost of reproduction or replacement is the sum of the costs of reproduction (replacement) of a new building in prices valid on the date of assessment. Therefore, it is necessary to take into account the differences in the characteristics of the new property and the property being assessed.
Wear in valuation means loss of utility, and therefore value, of the object of valuation for any reason. Depreciation (as loss of value) can be expressed in absolute and relative units. If depreciation is expressed in absolute units (monetary units), then it is deducted from the total cost of reproduction.
Vrep = Vprep – And or Vrep = Vprep – And, (6.5)
where SV is the cost of reproduction of the object;
V replacement – the cost of replacing improvements to the object;
Vр reproduction – the total cost of reproduction of the object;
Vп replacement – the total cost of replacing the object;
And – depreciation of the valuation object, expressed in monetary units.
If wear is expressed in relative units (percentage), then the following formula is applied:
Vп reproduced = V reproduced ∙(1 – И), (6.6)
where I is the wear and tear of the assessed object, expressed in relative units.
There are two ways to determine wear:
lifetime method;
method of dividing into types of wear.
Depreciation, as a loss of value, can be expressed both in relative terms (in relation to the full cost of reproduction or the full cost of replacement) and in absolute terms.
Calculation of wear and tear using the lifetime method
Wear and tear is a function of the time of an object.
Determining the depreciation of buildings using the life-span method is based on an examination of the structures of the object being assessed and the assumption that the effective age of the object is related to the typical economic life span as accumulated depreciation is to the cost of reproduction (replacement) of the building.
When calculating wear using the life-cycle method, the following concepts are used:
The physical life of a building (T n) is the period of operation of the building during which the condition of the load-bearing structural elements of the building meets certain criteria (structural reliability, physical durability, etc.). The physical life of an object is laid down during construction and depends on the capital group of the building. Physical life ends when the object is demolished.
Chronological age (T fact) is the period of time that has passed from the commissioning of the object to the date of assessment.
Effective age (T eff) is calculated on the basis of the chronological age of the building, taking into account its technical condition and the economic factors prevailing on the date of assessment that affect the value of the assessed object. Depending on the operating characteristics of the building, the effective age may differ from the chronological age up or down. In the case of normal (typical) operation of a building, the effective age is usually equal to the chronological age.
Rice. 6.1. Periods of a building’s life and characterizing them
assessment indicators
Indicators of physical wear and tear, effective age and economic life span are in a certain ratio, which can be expressed by the formula
I = (Teff / Tn) ∙ 100%, (6.7)
where And – wear, %.;
Tef – effective age, determined by an expert based on the technical condition of the elements or the building as a whole;
Tn – typical period of physical life.
I = (T fact / T n) ∙ 100%, (6.8)
where T fact is chronological age.
The use of formula (6.8) is relevant when calculating percentage adjustments for wear and tear in compared objects (comparative sales method), when it is not possible for the appraiser to inspect selected analogues to determine the indicators used in formula (6.7).
Example. Determine the value of the property being assessed. A plot of land with a building built in 1980 is being assessed. The standard service life of the building is 150 years. The market value of the land plot was determined by comparing sales and is equal to 4.5 million rubles. The total cost of replacing the structure was determined by the comparative unit method at the level of 11.4 million rubles. Valuation date: January 30, 2010.
Solution.
The chronological age of the building is 30 years. To calculate the wear and tear of a structure, we use formula (6.8), since the effective age is not given.
I = (T fact / T n) ∙ 100% =30/150*100% = 30%.
To calculate the value of the object being valued, we apply formula 6.2.
V= 4,500,000 + (11,400,000 – 0.3*11,400,000) = 12,480,000 rubles.
Thus, the cost of the assessed object, calculated within the cost approach, amounted to 12,480,000 rubles.
Breakdown method consists in a detailed consideration and accounting of all types of wear, which include (Fig. 2):
- removable and irreparable physical wear and tear;
- removable and irreparable functional wear;
- external wear.
Irremovable (irreparable) wear is wear, the elimination of which is either physically impossible or economically impractical, i.e. the costs incurred to eliminate one or another type of wear and tear do not contribute to increasing the value of the object as a whole.
Rice. 4 Classification of depreciation of real estate objects
To apply the breakdown method when determining accumulated wear and tear, it is necessary to have data on the cost of new construction, broken down by structural elements, as a calculation base.
Physical deterioration– gradual loss of the technical and operational qualities of the object originally laid down during construction under the influence of natural and climatic factors, as well as human activity. Physical deterioration reflects changes in the physical properties of a property over time (for example, defects in structural elements).
There are four main methods for calculating physical depreciation:
- expert (normative);
- cost;
- method for calculating the life of a building.
This method involves the use of various regulatory instructions at the intersectoral or departmental level. An example is VSN 53-86, used by the technical inventory bureau to assess the physical deterioration of residential buildings during technical inventory and planning major repairs of the housing stock, regardless of its departmental affiliation. These rules describe the physical wear and tear of various structural elements of buildings and their assessment.
The physical wear and tear of a building is determined as follows:
F f – physical wear and tear of the building, (%);
F i – physical wear of the i-th structural element (%);
L i – coefficient corresponding to the share of the replacement cost of the i-th structural element (section) in the total cost of the building;
n – number of structural elements in the building
The shares of the replacement cost of individual structures, elements and systems in the total replacement cost of the building should be taken according to aggregated indicators of the replacement cost of residential buildings, approved in the prescribed manner, and for structures, elements and systems that do not have approved indicators - according to their estimated cost.
Example 30. Determine the physical wear and tear of a residential building if it is known that its inspection revealed physical wear and tear of all structural elements:
- foundations – 10%;
- walls – 15%;
- overlaps – 20%;
- roofing – 10%;
- floors – 35%;
- windows – 40%;
- finishing coatings – 30%;
- internal plumbing and electrical installations – 50%;
- others – 25%.
1. Let us determine the specific gravity of structural elements in accordance with Sat. No. 28 UPVS.
2. Results of assessing the physical wear and tear of elements and systems, as well as determining their share in terms of replacement cost:
Name of building elements | Specific gravity of structural elements, % | Specific gravity x wear percentage |
|
| foundations | |||
| walls | |||
| floors | |||
| roof | |||
| floors | |||
| window | |||
| finishing coatings | |||
| interior plumbing and electrical installations | |||
| other | |||
| - |
Thus, the physical wear and tear of the building is 23.25%
Cost method for calculating physical wear and tear is based on the assumption that physical deterioration at the time of assessment is expressed by the ratio of the cost of objectively necessary repair measures to eliminate damage to the structure, element or building as a whole, and their replacement cost.
Example 31. Determine the physical wear and tear of a residential building if it is known that the replacement cost of structural elements and the objectively necessary costs for their repair are respectively: foundations - 3,200 thousand rubles, 640 thousand rubles; walls – 4,000 thousand rubles, 1,200 thousand rubles; ceilings - 800 thousand rubles, 160 thousand rubles; other – 8,000 thousand rubles, 2,800 thousand rubles.
Let's determine the amount of physical wear and tear. The results of assessing the physical wear of elements, as well as determining their specific weight at replacement cost:
Name of building elements | Replacement cost of the element, thousand rubles. | Objectively necessary repair costs, thousand rubles. | |
| foundations | |||
| walls | |||
| floors | |||
| other | |||
Thus, the physical wear and tear of the building is 30%
This method allows you to immediately calculate the wear and tear of elements and the building as a whole in cost terms. Since the impairment calculation is based on the reasonable actual costs of bringing worn-out items to “substantially new condition,” the result of this approach can be considered fairly accurate. The disadvantages of the method are the required detail and accuracy in calculating the costs of repairing worn-out building elements.
Method for calculating the life of a building is based on the assumption that the relationship between physical depreciation (PH) and replacement cost (RC) is determined by the ratio between effective age (EA) and typical economic life (EF):
Example 32. Determine the physical wear and tear of a residential building if it is known that the replacement cost, actual age and total physical life of its structural elements are respectively: foundations - 1,200 thousand rubles, 10 years, 15 years; walls – 400 thousand rubles, 5 years, 10 years; ceilings – 300 thousand rubles, 6 years, 15 years; others – 900 thousand rubles, 1 year, 10 years.
Let's determine the amount of physical wear and tear. Results of assessing the physical wear of elements:
Name of building elements | Actual age, years | General physical life, years | Depreciation, thousand rubles |
||
| roof | |||||
| floors | |||||
| window | |||||
| finishing coatings | |||||
| - | - |
Determining the amount of physical wear consists of several successive steps:
- determination of the amount of correctable physical wear;
- determination of the amount of irreparable physical wear in short-lived elements;
- determination of the amount of irreparable physical wear in long-lived elements.
Irreparable physical wear and tear corresponds to items for which repair is currently practically impossible or economically impractical. The amount of this type of wear and tear is determined based on the difference between the total replacement (or replacement) cost and the amount of removable physical wear and tear.
For the purpose of calculating wear, elements of a structure that have irreparable physical wear are divided into long-lived and short-lived.
For long-lived elements, the expected residual life coincides with the residual economic life of the entire structure. Short-lived elements have less residual economic life than the entire structure.
To assess irreparable physical wear and tear in short-lived elements, the method of calculating the life of a building is used: the difference between the total replacement (or replacement) cost of the element and the amount of correctable wear of the element is multiplied by the ratio of the actual age to the total physical life of the element.
In this case, the overall physical life of the element is determined from reference data, taking into account periodic repairs and maintaining normal operational characteristics.
To assess irreparable physical wear and tear in long-lived elements, the method of calculating the lifespan of a building is also used: the amount of correctable physical wear and tear and the sum of the replacement cost of short-lived elements with irreparable physical wear are subtracted from the total replacement (or replacement) cost and the result is multiplied by the residual replacement (or replacement) cost ) long-lived elements, as well as the relationship of actual age to the overall physical life of the building.
The overall physical life of a building is determined depending on the type of main structural elements for different categories of buildings according to durability. The classification of residential and public buildings by durability is given in the regulatory literature.
Example 33. Determine the physical deterioration of a residential building. We will present the initial data as the calculation progresses.
1. Based on the estimate documentation, we will determine the cost of new construction to assess accumulated wear and tear:
Name of building elements | Replacement cost, thousand rubles. |
| Direct costs (materials and equipment, labor, overhead and contractor's profit), | |
| foundation installation | |
| construction of external walls | |
| floor arrangement | |
| roofing | |
| installation of partitions | |
| installation of suspended ceilings | |
| flooring | |
| interior and exterior decoration | |
| sewerage system | |
| power supply system | |
| heating system | |
| Ventilation and air conditioning | |
| Indirect costs | |
| Entrepreneur's profit | |
| Total replacement cost |
2. Determine the amount of correctable physical wear:
Thus, the cost of correctable wear and tear is 3,000 thousand rubles.
2. Let us determine the amount of irreparable physical wear in short-lived elements:
Name of building elements | Replacement cost of the element, thousand rubles. | Actual age, years | General physical life, years | Depreciation, thousand rubles |
|
| roof | |||||
| floors | |||||
| finishing | |||||
| sewerage | |||||
| power supply system | |||||
| heating system | |||||
| Ventilation and air conditioning | |||||
| Total: | - | - |
Thus, the cost of irreparable physical wear in short-lived elements is 22,967 thousand rubles, the replacement cost of short-lived elements with irreparable physical wear is 33,000 thousand rubles.
Depreciation is characterized by a decrease in the usefulness of a property, its consumer attractiveness from the point of view of a potential investor and is expressed in a decrease in value over time (depreciation) under the influence of various factors. As the facility is used, the parameters characterizing the structural reliability of buildings and structures, as well as their functional compliance with current and, especially, future use associated with human life, gradually deteriorate. In addition, the value of real estate is no less influenced by external factors caused by changes in the market environment, the imposition of restrictions on certain uses of buildings, and so on.
Depreciation (I) is usually measured as a percentage, and the monetary expression of depreciation is depreciation (O).
Depending on the reasons causing the depreciation of a property, the following types of wear and tear are distinguished: physical, functional and external (Fig.).
Physical and functional wear and tear are divided into removable and irreparable.
Removable wear is wear, the elimination of which is physically possible and economically feasible, that is, the costs incurred to eliminate one or another type of wear contribute to increasing the value of the object as a whole.
Identification of all possible types of wear and tear is the accumulated wear and tear of a property. In monetary terms, total depreciation is the difference between the replacement cost and the market price of the valued object.
The cumulative accumulated wear is a function of the object's lifetime. Let us consider the basic evaluative concepts that characterize this indicator.
The physical life of a building (PL) is the period of operation of a building during which the condition of the load-bearing structural elements of the building meets certain criteria (structural reliability, physical durability, etc.). The physical life of an object is laid down during construction and depends on the capital group of the buildings. Physical life ends when the object is demolished.
Chronological age (CA) is the period of time that has passed from the date of commissioning of the object to the date of assessment.
Effective age (EA) is calculated based on the chronological age of the building, taking into account its technical condition and the economic factors prevailing on the valuation date that affect the value of the assessed object.
Economic life (EL) is determined by the operating time during which the object generates income. During this period, improvements made contribute to the value of the property. The economic life of an object ends when the operation of the object cannot generate the income indicated by the corresponding rate for comparable objects in a given segment of the real estate market. At the same time, the improvements carried out no longer contribute to the value of the object due to its general wear and tear.
The remaining economic life (REL) of a building is the period of time from the valuation date to the end of its economic life (Fig.).
Physical wear and tear is the gradual loss of the technical and operational qualities of an object originally laid down during construction under the influence of natural and climatic factors, as well as human activity.
Methods for calculating the physical deterioration of buildings are as follows:
· method of technical expertise;
· cost;
· lifetime method.
Technical expertise method for calculating physical wear and tear involves the use of various regulatory instructions at the intersectoral or departmental level. As an example, we can cite the Rules for Assessing the Physical Wear of Residential Buildings (VSN 53-86) of the State Committee for Civil Engineering and Architecture under the USSR State Construction Committee. – M., 1990, used by BTI for the purpose of assessing the physical deterioration of residential buildings during technical inventory, planning major repairs of the housing stock, regardless of its departmental affiliation.
These rules describe the physical wear and tear of various structural elements of buildings and their assessment.
The physical wear and tear of a building should be determined using the formula:
,
where F f – physical wear and tear of the building, %;
F i – physical wear of the i-th structural element, %;
L i – coefficient corresponding to the share of the replacement cost of the i-th structural element in the total replacement cost of the building;
n is the number of structural elements in the building.
The shares of the replacement cost of individual structures, elements and systems in the total replacement cost of the building (in percentage) are usually taken according to aggregated indicators of the replacement cost of residential buildings approved in the prescribed manner, and for structures, elements and systems that do not have approved indicators - according to their estimate cost.
Method implementation sequence:
1. A visual inspection and instrumental-full-scale examination of the structural elements and engineering systems of the building being assessed is carried out.
2. During inspection, signs of physical wear are identified and their quantitative characteristics are established:
Number of damaged areas
Determining the size of the damage - area, length or depth.
3. Comparison of the detected indicators of damaged areas with their quantitative values given in the corresponding standard tables. (VSN 53-86)
4. Filling out the appropriate tables for calculating physical wear and tear.
The described technique is used exclusively in domestic practice. Despite all the clarity and persuasiveness, it has the following disadvantages:
· due to its “normativity”, it initially cannot take into account the atypical operating conditions of the object;
· labor-intensive application due to the necessary detailing of the structural elements of the building;
· impossibility of measuring functional and external wear;
· subjectivity of specific weighing of structural elements.
At the core cost method for determining physical wear and tear lies physical depreciation, expressed at the time of its assessment by the ratio of its cost of objectively necessary repair measures to eliminate damage to structures, an element, a system or a building as a whole, and their replacement cost.
The essence of the cost method for determining physical depreciation is to determine the costs of recreating building elements.
This method allows you to immediately calculate the wear and tear of elements and the building as a whole in cost terms. Since the impairment calculation is based on the reasonable actual cost of bringing worn-out items to “substantially new condition,” the result of this approach can be fairly accurate. The disadvantages of the method are the required detail and accuracy in calculating the costs of repairing worn-out building elements.
Determination of physical deterioration of buildings lifetime method. Indicators of physical wear and tear, effective age and economic life span are in a certain ratio, which can be expressed by the formula
I = (EV:FJ)*100 = [EV: (EV + OSFJ)]*100,
where I is wear, %;
EV – effective age, determined by an expert based on the technical condition of the elements or the building as a whole;
VF – typical period of physical life;
RSF – remaining period of physical life.
I = (HV: VF) * 100,
where I is wear, %;
CH – chronological age.
The percentage of depreciation of elements or the building as a whole calculated in this way can be translated into monetary terms (depreciation):
O = BC * (I: 100),
where I is wear, %;
BC – replacement cost.
Functional wear. Signs of functional wear and tear in the assessed building are non-compliance of the space-planning and/or design solutions with modern standards, including various equipment necessary for the normal operation of the structure in accordance with its current or intended use.
Functional wear is also divided into removable and irreparable.
Removable functional wear and tear is determined by the costs of the necessary reconstruction, which contributes to more efficient operation of the property.
Irremovable functional wear and tear is caused by outdated space-planning and/or structural characteristics of the buildings being assessed relative to modern construction standards. A sign of irreparable functional wear and tear is the economic inexpediency of spending on eliminating these deficiencies.
Correctable functional wear is measured by the cost of its correction and is caused by:
- shortcomings that require adding elements;
- deficiencies requiring replacement or modernization of elements;
- "super-improvements."
- Rent loss capitalization method
- Method for capitalizing excess operating costs
External (economic) wear and tear– depreciation of an object due to the negative influence of the external environment in relation to the object of assessment: the market situation, easements imposed on a certain use of real estate, changes in the surrounding infrastructure and legislative decisions in the field of taxation, etc. External wear and tear of real estate, depending on the reasons that caused it, in most cases is irreparable due to the unchanged location, but in some cases it can “remove itself” due to a positive change in the surrounding market environment.
Methods for determining functional wear:
- method of capitalizing loss of income attributable to external influences;
- a method for comparing sales of similar objects with and without external influences.
Disadvantages of the cost approach:
1. Costs are not always equivalent to market value.
2. Attempts to achieve a more accurate assessment result are accompanied by a rapid increase in labor costs.
3. The discrepancy between the costs of purchasing the property being valued and the costs of new construction of exactly the same property, because During the appraisal process, accumulated depreciation is deducted from the construction cost.
4. The difficulty of calculating the cost of reproduction of old buildings.
5. The difficulty of determining the amount of accumulated wear and tear of old buildings and structures.
6. Does not reflect the investor's profit.
Ph.D. Yaskevich E. E.Depreciation is associated with the overall loss of value of a property under the influence of various factors. Accounting for depreciation is carried out mainly in the cost and comparative approaches; in the income approach, certain costs for repair and restoration work are taken into account.
In monetary terms, total depreciation is the difference between the replacement cost and the market value of the valued object /1/.
The methodology of the cost approach consists in determining all the costs incurred to take ownership (lease, use) of a land plot (hereinafter referred to as land plot), determining the cost of new construction of objects with the introduction of wear and tear. It is common to calculate the cost approach (for example, a building with a plot of land) based on the following expressions:
1). In monetary terms of wear and tear and the absence of their influence on each other:
Construction cost * PP - Physical Wear - Functional Wear - External Wear + Cost of land rights (formula 1)
2). With relative values of wear, taking into account their influence on each other:
Construction cost * PP * (1 - Physical Wear) x (1 - Functional Wear) x (1 - External Wear) + Cost of land rights (formula 2)
PP is the entrepreneur's profit.
Depreciation is usually attributed only to the cost of construction of objects.
At the same time, it is generally accepted to divide physical and functional wear and tear into removable and irreparable according to their impact on the value of real estate objects (whether it is advisable or inappropriate to incur repair costs from the point of view of increasing the value of objects.).
Physical Wear = Removable Physical. Wear + Fatal Phys. Wear.
A similar expression applies to functional wear.
The methodology of the comparative approach when making adjustments to the cost of analogues suggests that we use methods based on the analysis of paired sales, expert methods and statistical methods. The least developed are statistical methods.
The methodology of the income approach when accounting for the costs of maintaining buildings and structures suggests that we use monetary expressions that take into account the costs of various types of repairs.
A number of works discussed the correctness of using expressions for the cost approach (Yu.S. Zaitsev, P.V. Kartsev) and the place in them " The value of land rights"(V.G. Mosinets), however, everything that is proposed theoretically must always be supported by practical data, which, unfortunately, is rarely seen lately.
We will try to conduct a general analysis of expressions based on the use of the market extraction method (we will analyze data from the purchase and sale market for real estate objects).
The purpose of the research was to study the nature of the dependence of the value of various real estate objects on wear and tear (checking the reliability of the above formulas).
The most developed real estate market is the market of Moscow and the Moscow region. In this market, you can find samples of data on the comparative value of real estate objects with reasonable consideration of only certain types of wear and tear (for example, physical, abstracting from functional and external wear and tear). Based on the analysis of sample data on this market, the relationships between the depreciation of objects and their value, defined below, were constructed. The market analysis was carried out based on the cost of proposals, based on the volume of data presented on the websites: http://www.stn.ru/, http://www.izrukvruki.ru/ for March - June 2003.
The analysis was carried out using a sample of data for the “average” direction of Moscow - the Southern Administrative Okrug (SAD) and, partially (for apartments) in the South-Western (SWAD). Accounting for the cost of land plots was carried out in a differentiated manner; objects located on plots of land were selected, the cost of long-term lease (49 years) of which ranged from 450,000...600,000 dollars/ha. To reduce the influence of land plots on the cost of objects (except for country estates), objects were selected in multi-storey (more than 5 floors) buildings. Suburban properties were analyzed with the cost of land plots “under buildings” using the “paired sales” method.
This goal implied the solution of the following tasks:
determination of research directions;
a selection of cost data for apartments, office premises, industrial premises, retail premises located in the South-Western Administrative District, Southern Administrative District of Moscow, and suburban properties located at a distance of 25...40 km. from the Moscow Ring Road in a southern direction;
statistical processing and comparative analysis of data taking into account random measurement errors;
constructing graphical dependencies of the cost of premises on their wear and tear and selecting approximating formulas using methods of correlation and regression analysis;
analysis of the obtained dependencies and general conclusions.
Determination of research directions:
The ultimate goal when applying the cost, comparative and income approaches is to reach the market value of real estate. Depreciation is associated with a loss of market value, so its contribution to the value of objects can be verified using comparable data samples using the market extraction method.
Direction No. 1. The influence of physical wear and tear on the cost of objects.
1.1. Definition of contribution "Removable physical wear and tear" into the total market value of real estate.
1.2. Determination of the contribution of the total "Physical wear and tear" into the market value of real estate.
Direction No. 2. The influence of functional wear and tear on the value of real estate.
Direction No. 3. The cumulative impact of wear and tear on the value of real estate. Mutual influence of wear.
1. Determination of the contribution of “Removable Physical Depreciation” to the total market value of real estate properties
The contribution was approximately determined by the difference in the market value of the premises according to the proposals “the premises require cosmetic repairs” and “the renovated premises”; for apartments - according to the difference in prices in the primary (“without finishing”) and secondary (“with finishing”) market. To eliminate the influence of functional and external wear, market extraction was used for the Southern Administrative District of Moscow /6/.
Apartments.
To carry out the analysis, we used data on one-room apartments in panel houses (17...22 storey series P-44...P-3), located over 8 km. from the Center, with the representativeness of the compared samples - over 25 samples.
Administrative and office premises
To carry out the analysis, we used data on administrative and office premises of class “B2” and “C” in the area range of 800…1500 sq. m. m. We selected objects located in capital buildings of capital groups I and II (structural systems KS-1 and KS-4), located at a distance of over 8 km from the Center with a representativeness of the compared samples - over 15 samples.
Industrial premises
To carry out the analysis, we used data on production premises located in capital buildings of capital groups I and II (structural systems KS-1 and KS-4). in the area range of 1000…2500 sq. m. Objects located at a distance of more than 8 km were selected. from the Center with the representativeness of the compared samples - over 12 samples.
Retail premises
To carry out the analysis, we used data on retail premises (shops) located in capital buildings of capital groups I and II (structural systems KS-1 and KS-4). in the area range of 400...800 sq. m. Objects located at a distance of more than 8 km were selected. from the Center with the representativeness of the compared samples - over 15 samples.
Country estates.
To carry out the analysis, we used data on country estates (two-level brick cottages) in the area range of 160...280 sq. m. m (plots with an area of 8...14 acres), located at a distance of 25...40 km. from the Moscow Ring Road in southern directions with the representativeness of the compared samples of “paired sales” - over 12 pairs.
For ease of use, we will operate with unit costs per unit area (dollars/sq. m)
Table 1 shows the average data for the samples, as well as the ratio of average costs before and after repairs, the difference in average costs, the estimated costs of repairs (finishing) and the ratio of the difference in the cost of repairs to the estimated cost of repairs:
Table 1.
Property |
Average cost of an object in need of repair, USD/sq.m. m |
Average cost after renovation, (After) USD/sq.m. m |
Correlative |
Difference, (Avg) USD/sq. m |
Orientation |
Correlative |
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1-room apartments |
Prefabricated reinforced concrete |
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Office rooms |
Brick and Sat. reinforced concrete |
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Industrial premises |
Prefabricated reinforced concrete |
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Retail premises |
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Country property |
Table 1 shows data on the estimated cost of repairs. These values were determined based on the following data:
1). The cost of repairs according to estimates from Moscow insurance companies:
- Simple - $75/sq. m.
- Superior - $200/sq.m. m.
- European-quality renovation - $400/sq.m. m.
The given data are overestimated and do not reflect a clear gradation in the types of repairs.
2). Costs of repairs according to Moscow construction companies (used in calculations):
- Simple - 40...60 dollars/sq. m.
- Superior - 80...140 dollars/sq.m. m.
- European-quality renovation - 150...350 dollars/sq.m. m.
- High quality - 400...800 dollars/sq.m. m. and above (using natural materials - wood, stone...).
From the above table 1 it follows:
The smallest contribution to the market value of premises is made by removable wear and tear for industrial and office premises (apparently new owners always strive to equip office premises to suit their design, and for industrial premises the relative cost of finishing is low);
The greatest contribution to the market value of premises is made by removable wear and tear for country properties, while new finishing significantly increases the market value of objects;
The secondary housing market (using the example of 1-room apartments in standard panel buildings) shows a higher cost of finished premises;
Within the limits of calculation accuracy, the contribution of removable wear and tear to the market value of premises should be taken into account proportionally for residential, commercial premises and country estates. For office and industrial premises, the contribution of removable wear and tear is insignificant (Accounting " Removable Phys. Wear" should be carried out with reduction factors of 0.2...0.35).
2. Determination of the contribution of general “Physical Depreciation” to the market value of real estate
Methods for calculating physical wear /1/:
- regulatory (for residential buildings);
- cost;
- lifetime method, etc.
Normative methods are based on the use of various normative materials. As an example, we can name the “Rules for assessing the physical deterioration of residential buildings” (VSN 53-86) of the USSR State Construction Committee.
It should be noted (clause 1.1 of VSN 53-86) that in this case “physical wear and tear at the time of its assessment is expressed by the ratio of the cost of objectively necessary repair measures to eliminate damage to the structure, element, system or building as a whole, and their replacement cost.”
The question arises: how is the cost of repair costs, related to the replacement cost, related to the market value of the object?
The basis of cost methods for determining physical wear and tear is also the determination of direct costs for carrying out repair activities.
Again the question arises about the connection between the cost of repair work and the market value of the property.
The lifespan method is based on the relationship between the effective lifespan of structural elements of a building ("short-lived" and "long-lived") or the entire building with their typical physical lifespan.
Again the question is: how are these ratios related to the market value of the property?
Let's consider the "Methodology for determining the accident rate of buildings" MGSN 301.03-97 (Table 3), where physical wear and tear is determined by the lifespan method:
Let us pay attention to the “dilapidated” condition, in which the cost of major repairs exceeds the replacement cost: the cost approach under these conditions will only give the cost of the storage unit with individual improvements, and the comparative approach will show a much higher cost. We will get a cost difference in the approaches that arose due to incorrect consideration of the impact of wear and tear.
It should be noted that in accordance with MGSN 301.03-97 "Methodology for determining the accident rate of buildings" clause 1.5 "... the emergency condition of residential buildings or a separate structure, the wear of which affects the strength and stability of the entire building, can occur with physical wear of more than 70% for stone buildings and 65% for wooden houses...".
It is well known that the cost approach and the comparative approach give similar values of cost for new real estate, if the cost approach correctly takes into account the entrepreneur’s profit (or external wear and tear) /6/.
It is likely that, as facilities operate, correct consideration of the impact of various types of wear and tear should also lead to similar results in the cost and market approaches.
The contribution of physical wear and tear was approximately determined by the difference in market value between new objects and
objects with average service life (wear of about 30% is determined by the life cycle method);
objects with service life close to the dilapidated state of buildings (wear and tear of about 70%). To exclude the influence of functional and external wear and tear, market extraction was used for selected objects located in the South-Western Administrative District (apartments) and the Southern Administrative District of Moscow.
The liquidation value of “unusable” objects was determined in accordance with the recommendations of SN 436-72 “Approximate norms for the yield of materials obtained from dismantling buildings during their demolition.”
The apartments were selected in 5-story panel buildings (in the South-Western Administrative District, the cost of new apartments was taken according to the collection "Rway" No. 97, the cost of "dilapidated" apartments was taken from 5-story buildings in the "Novy Cheryomushki" areas designated for eviction). The representativeness of the sample is at least 20 samples.
The remaining types of real estate (industrial, office, retail premises) were selected in the Southern Administrative District with the same conditions and representativeness of the samples as for determining the contribution " Removable Phys. Wear", with the exception of “dilapidated” objects “under reconstruction” (the representativeness of the samples dropped to 11…14 samples due to the small search base). Country estates were selected based on the above conditions. The selection was carried out in pairs.
Table 2.
Property |
Location |
Costs (dollars/sq. m) and relative costs (p.u.) for wear and tear: |
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1-room apartment |
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Office rooms |
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Industrial premises |
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Retail premises |
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Country estates |
25…40 km from MKAD |
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From the table 2 it follows that we are dealing with the nonlinear nature of the dependence of the market value of objects on physical depreciation.
As an example, graphs are given for reducing the cost of apartments and office premises depending on their wear and tear, determined by the lifespan method.
To determine the nature of the relationship between relative cost and relative wear, data from several studies were analyzed. For example, in work /5/ it was proposed to make a discount to the cost in proportion to the square of the ratio of the time elapsed from the beginning of the object’s existence to the maximum service life.
To approximate the dependencies, linear and quadratic-linear regression formulas were used:
The presence and type of relationship between the relative cost of objects (RO) and relative physical depreciation (RP) was established.
In table Figure 3 shows the approximating dependencies and correlation coefficients.
Table 3.
linear dependence |
linear-quadratic dependence |
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coefficient correlation- |
coefficient correlation- |
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Apartments |
OS=1.24 - 0.91*OR |
OS= 1.10 - 0.92*OR 2 |
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Office rooms |
OS=1.14 - 1.02*OR |
OS= 1.02 - 0.91*OR 2 |
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Industrial premises |
OS=1.09 - 0.93*OR |
OS= 0.98 - 0.94*OR 2 |
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Retail premises |
OS=1.10 - 0.90*OR |
OS= 0.97 - 0.91*OR 2 |
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Country estates |
OS=1.15 - 0.98*OR |
OS= 1.05 - 0.99*OR 2 |
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As can be seen from Table 3, the most acceptable correlation coefficients (0.93...0.97) were obtained with a linear-quadratic approximation of the dependencies. Linear dependencies have low correlation coefficients (0.82...0.85) and are rejected.
Statistically obtained linear-quadratic dependences "OS - OP" can be used when calculating the impact of physical wear and tear on the market value of objects, both in the cost and comparative approaches (when adjusting analogues).
3. Determination of the contribution of functional wear and tear to the total market value of real estate.
The cost expression of functional wear is the difference between the cost of reproduction and the cost of replacement, which excludes functional wear from consideration /1/.
Removable functional wear and tear is determined by the costs of the necessary reconstruction, which contributes to more efficient operation of the property.
The question arises again: how are reconstruction costs related to the market value of the property?
Irremovable functional wear and tear is caused by outdated space-planning and/or structural characteristics of the buildings being assessed relative to modern construction standards.
The cost of irreparable functional wear and tear can be determined in two ways:
capitalization of rental losses;
capitalization of excess operating costs necessary to maintain the building in proper order.
In this case, the method of direct market extraction is used - therefore, the direct proportionality of the contribution of irremovable functional wear and tear to the market value of objects is beyond doubt, with the exception of the issue of mutual influence of wear and tear.
The effect of avoidable wear was tested selectively on the following comparable objects:
3-room apartments (Southern Administrative Okrug) in standard modern panel houses (difference in finishing of the “improved” and “European finishing” types with a representative sample of over 19 paired samples. The estimated difference in cost is about 120 dollars / sq. m. - there are differences up to 98 dollars/sq. m (98/120 = 0,82 ).
Office premises of class B2 and C (difference in air conditioning systems, reception and security services. The estimated difference in cost is about 38 dollars / sq. m., - there is a tendency for small differences to be up to 21 dollars / sq. m. ( 21/38 = 0,55 ) based on the average values of paired samples (for the Southern Administrative District) with a representative sample of more than 15 pairs, but the difference in cost is within the accuracy of measurements for the samples;
Production premises (difference in finishing for food production and non-food production. The estimated difference in cost is about 41 dollars/sq. m. - significant differences in market value that exceed the accuracy of measurements could not be found. Representativeness of paired samples - over 12 pairs;
Retail premises (difference in finishing for trade in food products and industrial goods. The estimated difference in cost is about 85 dollars/sq. m., - there is a difference in cost up to 62 dollars/sq. m. (62/85 = 0,73 ) according to the average values of the samples (Southern Administrative District) with a representative sample of more than 14 pairs.
Based on the data obtained, a table was constructed. 4:
Table 4.
Name |
Number of "paired sales" |
Approximate average calculated value of functional wear, (Srfi) dollars/sq. m |
Average cost difference (SFI) USD/sq. m |
Sfi/Srfi relationship |
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3-room apartments |
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Office rooms |
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Industrial premises |
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Retail premises |
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The coefficient of variation |
In general, individual sample data show that the impact of removable functional wear can be taken into account in proportion to the determined costs of its elimination, taking into account the reduction factor. As a first approximation, with a sufficient degree of reliability, this coefficient can be taken to be approximately 0,75.
4. Determination of the mutual influence of physical and functional wear.
The mutual influence of wear was determined methodically as follows:
Option No. 1 (taking into account removable functional wear):
For objects of new and close to new construction, there was a difference in simple finishing and European finishing (removable functional wear). Then, for similar objects, but with sufficient degrees of physical wear and tear, the difference was found in simple finishing and European finishing. The influence of external wear was eliminated whenever possible. Based on “Formula 1,” the difference in market value, taking into account the variety of finishes, should be maintained. Based on “formula 2,” the difference in market value should decrease (which characterizes the mutual influence of wear and tear).
The markets for offers for the sale of apartments, office and retail premises were studied. The method of “paired sales” (offers for sale) was used.
Apartments: the relative costs of one-room apartments were analyzed in the South-Western Administrative District of Moscow. New apartments and apartments were explored in the areas of “New Cheryomushki” (but at a distance from “Tsarskoe Selo”).
Office premises: The relative costs of premises with an area of 112...576 square meters were analyzed. m. in the Southern Administrative District of Moscow in multi-storey administrative and office buildings of class B2 (close to new) and class C (having a lot of wear and tear).
Retail premises: The relative costs of built-in and built-in-attached premises in residential buildings with an area of 256...1112 square meters were analyzed. m. in the Southern Administrative District of Moscow for panel (close to new) and panel-block (having a lot of wear) buildings.
Table 5 shows the average results for comparative samples.
Table 5.
Name |
New, close to new, (Сн) dollars/sq.m. m |
Represent |
Having high wear (0.6...0.7) (Сс) dollars/sq. m |
Represent |
Ratio of cost differences (Сс/Сн) |
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1-room apartments (South-Western Administrative District) |
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Office premises cl. V2…S (Southern Administrative District) |
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Relative cost after "European-quality renovation" |
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Relative cost after simple repairs, |
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Relative Value Difference |
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Retail premises (Southern Administrative District) |
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Relative cost after "European-quality renovation" |
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Relative cost after simple repairs, |
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Relative Value Difference |
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As can be seen from Table 5, for all objects there is a general tendency for the difference in the cost of finishing to decrease with an increase in the physical wear and tear of objects. There is a clear mutual influence of wear.
Unfortunately, the author was unable to select a large representativeness of the samples (the search time for analogues was a priori limited to 3 months in the spring-summer season of 2003 due to seasonal fluctuations in the prices of proposals) and completely eliminate the influence of individual factors on the relative costs during pairwise comparison (especially in terms of office premises), so for now we can talk about the tendency of mutual influence of wear, or about a higher confidence probability when using “formula 2”.
Option No. 2 (taking into account irreparable functional wear).
The following assumption was investigated:
For offices in buildings of new and close to new construction, there was a difference in the unit cost of space when they were located in the basement (semi-basement) part of the building and on the first floor. Then the same difference was determined for office premises in buildings that had significant (30...35%) wear and tear.
Table 6.
As can be seen from Table 6, there is a tendency for mutual influence of wear.
GENERAL CONCLUSIONS:
1). The influence of physical and functional wear and tear on the market value of real estate is complex, and to date there is no practically proven theoretical model for describing the influence of individual wear and tear on the market value of objects, as well as their mutual influence.
2). The tendency toward mutual influence of wear and tear noted in the article suggests that the most likely formula to use (when taking into account only physical and functional wear and tear) is a formula that takes into account the mutual influence of wear and tear (formula 2 given at the beginning of the article).
3). In the cost approach, when using the “normative” method and the “lifetime” method for calculating physical wear and tear, it is advisable to introduce amendments that take into account the nonlinear nature of the relationship between wear and tear and the market value of objects. Approximate formulas for taking into account amendments were calculated for various types of real estate using mathematical statistics methods and are given in Table 3.
4). In the comparative approach, when adjusting analogues, the approximate formulas for taking into account the amendments given in Table 3 can be used.
5). The article provides data on the impact of physical and functional wear and tear on the market value of real estate, which requires in-depth study taking into account the influence of the entrepreneur’s profit and external wear and tear.
6). Correctly taking into account the impact of physical and functional wear and tear on the value of real estate will help obtain closer results from the cost and comparative approaches.
LIST OF INFORMATION SOURCES USED:
1. Real estate valuation./Sub. ed. A.G. Gryaznova, M.A. Fedotova. - M., "Finance and Statistics", 2002, - 495 p.
5. “On the issue of discounts for disrepair”, Statistical Department of the Yaroslavl Provincial Zemstvo. 1913, issue 91 (http://www.valmaster.ru/).
6. Yaskevich E.E. Determination of entrepreneur's profit and external wear and tear for real estate, http://www.appraiser.ru/, 03/28/2003, collection "RWay" No. 97, 2003.