DRC Method

Question 1

What is the DRC method also known as?

Answer 1

Contractors method.

Question 2

What section of the Red Book is relevant to DRC?

Answer 2

Guidance Note 2 - Depreciated replacement cost method of valuation for financial reporting.

Question 3

What does UK Guidance Note 2 state about when the DRC method should be used?

Answer 3

Where direct market evidence is very limited or unavailable for specialised properties.

Question 4

What could specialised properties include?

Answer 4

Sewerage works

Lighthouses

Oil refineries

Docks

Schools

Submarine base

Question 5

What can DRC valuations be used for?

Answer 5

Owner occupied property.

Accounts purposes for specialised properties.

Rating valuations of specialist properties.

Question 6

What is the methodology for a DRC valuation?

Answer 6

1. Value of land in existing use (assume planning permission exists).
2. Add current cost of replacing building plus fees, less a discount for depreciation and obsolescence.

USE BCIS THEN JUDGE LEVEL OF OBSOLESCENCE

Question 7

What is physical obsolescence?

Answer 7

Result of wear and tear over years.

Question 8

What is functional obsolescence?

Answer 8

Where design/specification of asset no longer fulfils function originally designed.

Question 9

What is economic obsolescence?

Answer 9

Due to changing market conditions for use of asset.

Question 10

Can DRC be used for Red Book compliant valuations for secured lending purposes?

Answer 10

NO - valuation for financial statement only.

Question 11

What should be stated when reporting a DRC valuation?

Answer 11

MV for any alternative use if higher

If appropriate, a statement that the MV on cessation of the business would be materially lower.

A statement that it is subject to the adequate profitability of the business/continued occupation and use.