1. INTRODUCING THE COST APPROACH Chapter 11

2. Base cost Builder’s profit Building shell Building size and shape Comparative square-foot method Construction classification Cost approach Cost manuals Design type or Use type Developer or entrepreneurial profit Direct costs Historic costs Index method Indirect costs Lump-sum costs Quantity survey method Replacement cost Reproduction cost Story height Unit-in-place method 2 CHAPTER TERMS AND CONCEPTS

3. LEARNING OUTCOMES 1.List the five basic steps in the cost approach. 2.Define the terms reproduction cost and replacement cost, and explain their use in appraisals. 3.Name four methods of estimating costs and explain when each is used. 4.List the direct and indirect costs that make up a building’s total costs. 5.Name the important site, location, and design features that influence the construction costs of a building. 3

4. WHAT DOES COST MEAN? For Business and Accounting COST = Price Wholesale Price Retail Price Original Price Book Cost 4

5. WHAT DOES COST MEAN? For Appraisal COST = Cost on Value Date Typical Cost Consumer Level Cost Cost as New 5

6. Steps in the Cost Approach 1.Estimate the value of the land as if vacant and available for use. Generally, this is accomplished by the market comparison approach. 2.Estimate the total cost to reproduce or replace the existing improvements as of the date of value. 3.Decide on appropriate amounts for accrued depreciation (loss in the market value of the improvements). 4.Deduct the accrued depreciation from the cost new of the improvements. 5.Add the depreciated cost of the improvements to the estimated land value, in order to arrive at the property value as indicated by the cost approach. 6

7. COST ESTIMATES IN APPRAISALS Generalized Economic Costs: 1. Cost levels as of the date of value, not “book” costs or historic costs for the building. 2. Typical costs to build a building, rather than the actual construction costs. These two costs could be the same, of course. 3. Costs that include all of the charges to the consumer, not just the cost to the developer or builder. All-inclusive costs are sometimes referred to as “turn-key” costs, where all that the first occupant has to do is to turn the key and move in. 7

8. Defining Reproduction Cost Estimates The cost of a duplicate or nearly identical structure, every physical component must be included. 8

9. Defining Replacement Cost Estimates the cost to build a structure of similar utility. 9

10. REPRODUCTION VS REPLACEMENT COST 10 Reproduce a Replica Subject Property Replace the Utility

11. PRIMARY PURPOSES OF THE COST APPROACH Value a New Property Value Special Use Properties Use as a Check Against Other Approaches 11

12. COST-ESTIMATING METHODS 1.The comparative square-foot (or comparative unit) method. 2. The unit-in-place method. 3. The index (or cost service index) method. 4. The quantity survey method. 12

13. STEPS IN THE COST APPROACH 13

14. FOUR COST METHODS Comparative Square Foot  Price per square foot Unit-in-Place  Price per section of improvements Index  Price according to original cost Quantity Survey  Contractor’s method o Carpentry (Rough & Finish) o Plumbing (Rough & Finish) o Grading (off and on Sites) o Electrical Work o Roofing, etc. 14

15. DIRECT COST ELEMENTS Construction Costs Include: Direct Costs  Labor  Material  Equipment  Design & Engineering  Subcontractor’s Fees 15

16. INDIRECT COST ELEMENTS Indirect Costs  Legal Fees, Appraisals, etc.  Interest  Insurance  Taxes  Overhead & Profit  Selling Costs 16

17. PRIMARY COST VARIABLES What Affects Construction Costs?  Design or Use-Type  Construction Class  Quality  Size  Shape  Height  Yard Improvements 17

18. The Effect of Size on Square-Foot Costs 18 Example 11-5

19. Effect of Shape on Square-Foot Costs 19 Example 11-6

20. TYPICAL HOUSES SHAPES 20

21. Using Online Cost Services 21 The increased use of office computers and online data services by appraisers has extended to the task of cost estimating. A number of construction cost providers offer online services that can calculate and report building cost estimates upon order, using specifications that are input by the user.

22. SUMMARY 22 Cost estimating plays a role in each of the three approaches to value. In appraisals, the concept of cost is related to its economic impact. This means that cost estimates are made at price levels as of the date of value. Also, they must reflect the total amount of typical costs that are passed on to consumers. The cost approach is used primarily to estimate the value of nearly new, new, or special-use properties. It can also be a check against the other value approaches. Manuals and cost services provide average cost figures for many types of buildings and can be expected to include photographs, specifications, and cost-estimating techniques as well.