Part 8 Cost approach

Question 1

The cost approach is a set of procedures through which a value indication is derived for the _____ interest in a property.

Answer 1

fee simple

Question 2

The process begins with an estimate of the current cost to construct the existing structure plus

Answer 2

any entrepreneurial incentive.

Depreciation is deducted from this derived cost
and the estimated improved land is added.

Question 3

The _____ approach is the only approach that requires a separate value for the land.

Answer 3

Cost approach

Question 4

“The actual or estimated amount required to create, reproduce, replace, or obtain a property” (USPAP, definition)

Answer 4

Cost

Question 5

What are the four reasons appraisers must be proficient in cost analysis

Answer 5

1. Cost can be a proxy for value
2. it allows the appraiser to evaluate individual component costs.
3. Is often used in other approaches as a basis of analysis or used as a crosscheck for adjustments
4. standards require competent analysis

Question 6

When is the cost approach applicable?

Answer 6

when improvements are proposed or have been recently completed

Question 7

The more _______ present, the less reliable the value indication, and hence the less applicable the cost approach becomes.

Answer 7

depreciation

Question 8

8 step process for cost approach

Answer 8

1. Estimate the value of the site as though vacant
2. Estimate the direct and indirect costs of the improvements.
3. Estimate the entrepreneurial incentive
4. Add steps 2 and 3 together
5. Estimate the depreciation from three sources
   a. physical deterioration
   b. Functional obsolescence
   c. External obsolescence
6. Deduct the depreciation from total current cost to derive the depreciated cost of improvements.
7. Add the contributory (as is) value of any site improvements.
8. Add the site value to the total depreciated costs.

Question 9

The cost of constructing an improvement may be developed as either the ______ or the _______

Answer 9

1. reproduction cost

2. replacement cost

Question 10

__________ is an exact replica of the current improvements.

Answer 10

Reproduction

Question 11

_______ is equivalent in utility to the current improvements

Answer 11

Replacement

Question 12

The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, super adequacies, and obsolescence of the subject building.

Answer 12

Reproduction cost

Question 13

The estimated cost to construct, at current prices as of a specific date, a substitute for a building or, using modern materials and current standards

Answer 13

replacement cost

Question 14

These are hard cost expenditures for the labor and materials used in the construction of improvements.

Answer 14

Direct costs

labor
materials
building permits
security during construction performance bonds

Question 15

These are soft cost expenditures that are necessary components but are not typically part of the construction contract.

Answer 15

Indirect costs

Architectural fees, plats of survey
appraisal, consulting accounting legal fees
insurance

Question 16

Most appraisers use cost services such as Marshall & Swift-core Logic) for cost estimates.

Answer 16

True

Question 17

Hard (direct)costs are typically found as part of

Answer 17

the contract between a homeowner and a general contractor that would be paid for by the general contractor.

Question 18

Soft (indirect) cost are typically paid for

Answer 18

by the homeowner

Question 19

_________ is a market-derived figure that represents the amount an entrepreneur expects to receive for providing coordination and expertise with the development of a project.

Answer 19

Entrepreneurial incentive

forward thinking (the profit he wants to get)

Question 20

______ the amount an entrepreneur receives

Answer 20

Entrepreneurial profit

the money he actual gets

Question 21

Entrepreneurial profit may be measured as

Answer 21

a percentage of direct costs
a combination of direct and indirect cost
based on the value of the completed project

Question 22

What is generally not included in the rates provided by professional cost service providers?

Answer 22

Entrepreneurial incentive

Question 23

Commercial property appraisers derive the entrepreneurial incentive from____

Answer 23

the local market and add it to the cost.

Question 24

What are the 3 methods of estimating cost

Answer 24

1. Comparative-unit method
2. Unit-in-place method
3. Quantity survey method

The first two methods can be obtained using a cost-estimating service.
The third method is developed by a professional cost estimator, and rarely by an appraiser.

Question 25

What is the most commonly used and accepted cost-estimating method?

Answer 25

The Comparative-unit method

Question 26

When an appraiser estimates replacement cost by using a cost-estimating service; looks up the cost per square foot; and makes adjustments for location, size, time, and quality,

Answer 26

that appraiser is using the comparative unit method of cost estimating.

Question 27

Cost per square foot can also be obtained from an analysis of

Answer 27

the cost of recently constructed buildings

Question 28

The method requires the appraiser to compare the subject building with
similar, recently constructed buildings for which cost data is available.

Answer 28

comparative unit method of cost estimating.

Question 29

Cost-service manuals are most commonly utilized in this method.

Answer 29

comparative unit method of cost estimating.

Question 30

In this method, the total building cost is estimated by adding together the
unit costs for the various building components as installed (e.g., the roof,
walls, foundation, excavation, electrical system, etc.).

Answer 30

unit-in-place method

Question 31

In this method, the quantity and quality of all materials used and all
categories of labor required are estimated and unit cost figures are applied
to arrive at a total cost estimate for labor and materials.

Answer 31

quantity survey method

Question 32

It is the most comprehensive, time consuming, and detailed method of
measurement. It frequently requires the services of an experienced cost
estimator and is rarely used in routine appraisal assignments.

Answer 32

quantity survey method

Question 33

Costs for cubic yards of concrete, board feet of lumber, pounds of nails, feet of re-enforcing bar, and hours of labor are examples of the costs used in this method.

Answer 33

quantity survey method

Question 34

One of the most important factors influencing an appraisal using the cost approach method is

Answer 34

an accurate representation of the building’s measurements.

Question 35

The standard by which single-family residential improvements are measured is called

Answer 35

gross living area or GLA

Question 36

The gross living area is the

Answer 36

1. Total area of finished, above grade residential space
2. Measured by the outside perimeter of the structure

Finished basements and attics are not included in GLA

Question 37

For attached residential structures (e.g., townhouses and twin homes), exterior dimensions are measured to

Answer 37

the center point of the common wall

Question 38

For condominium units, the GLA is based on

Answer 38

interior dimensions of the unit’s overall perimeter shell

The GLA represents the floor area of the condominium “air space” ignoring all interior wall partitions

Question 39

Minimum ceiling height plays a role in what areas qualify for inclusion in GLA.
Generally, the minimum height clearance is

Answer 39

7 feet

Question 40

Some finished basement areas (such as a walkout basement) might have
significant value in the market, particularly when it has ample natural light
and is finished in the same quality as the main level.
b. In other cases, the market may give little or no value to a below-grade
area.

Answer 40

In either scenario, the area is still excluded from GLA.

Question 41

Floor area

under the sloped ceiling can be included until the clearance falls below

Answer 41

5 feet.

Finished area below that minimum clearance is excluded from the GLA.

Question 42

protocol for measuring single-unit residences

Answer 42

ANSI Z765−2013

Question 43

Professional appraisal standards do not require the ANSI Z765−2013
protocol for measuring.

Answer 43

True

Question 44

Exterior dimensions are based on the outside edge of the siding and are
measured to

Answer 44

the nearest inch or tenth of a foot. Final square footage is
reported to the nearest whole square foot.

Question 45

Open (non-floored) areas, sometimes found in foyers adjacent to stairs
leading to the second floor,

Answer 45

are not included in the GLA

Question 46

Prior to 1996, no nationwide standard existed for measuring single-family residences.

Answer 46

true

Question 47

As you may have already guessed, commercial and industrial buildings have their own method of measurement. An almost universal method is called

Answer 47

Gross Building Area (GBA)

Question 48

This is the total floor area of a building, including below-grade space but excluding unenclosed areas, measured from the exterior of the walls.

Answer 48

Gross Building Area (GBA).

Question 49

Gross building area for office buildings is computed by

Answer 49

measuring to the outside finished surface of permanent outer building walls without any deductions.

All enclosed floors of the building including basements, mechanical equipment, floors, penthouses, and the like are included in the measurement. Parking spaces and garages are excluded.

Question 50

office buildings have a unique method of measurement called

Answer 50

Net Rentable Area (NRA), which is the amount of space on which the rent is based, calculated according to local practice.

Question 51

Rentable area and net rentable area are often used interchangeably.

Answer 51

true

Question 52

Local practice may define NRA as

Answer 52

the floor area of a building that remains after the square footage of vertical penetrations, such as elevator shafts, etc., has been deducted.

** Common areas and mechanical rooms are included, ** no deductions made for necessary columns and projections of the building.

Question 53

Retail properties are measured in terms of their

Answer 53

Gross Leasable Area (GLA)

Question 54

the total floor area designed for the occupancy and exclusive use of tenants, including basements and mezzanines, and measured from the center of interior partitioning to outside wall surfaces. This is the standard measure for determining the size of shopping centers where rent is calculated based on the GLA occupied.

Answer 54

Gross Leasable Area (GLA)

Question 55

As with residential buildings, there is no single nationalized standard for measuring commercial and industrial structures, although there are standards published by professional organizations.

Answer 55

true

Question 56

Industrial warehouses are often measured

Answer 56

from the exterior wall to the

center of the demising wall without deductions.

Question 57

Retail space is commonly measured in the same manner as warehouses.

Answer 57

true

Question 58

Chandra is appraising a residential property. The house was built in 1981 and is
in average condition. The appraiser is using a cost-service provider to develop the
cost approach. What type of cost is she using in this appraisal?

Answer 58

replacement cost

Question 59

The cost estimating method that considers all materials used and all categories of
labor required to construct the improvement is called

Answer 59

quantity survey method.

Question 60

Which of the following is NOT an identified type of accrued depreciation applicable
to property improvement?

Answer 60

• A. entrepreneurial obsolescence
  B. external obsolescence
  C. functional obsolescence
  D. physical deterioration

Question 61

Labor and materials are an example of what kind of cost

Answer 61

• A. direct cost
  B. indirect cost
  C. replacement cost
  D. reproduction cost

Question 62

A buyer will not pay more for a property than the cost to construct one of equal
desirability and utility without undue delay. What principle does this illustrate?

Answer 62

A. balance
B. highest and best use
* C. substitution
D. supply and demand

Question 63

What type of property is the gross living area (GLA) generally based on interior
dimensions?

Answer 63

A. cluster home in a PUD
* B. condominium
C. manufactured home
D. twin home

Question 64

An appraiser is analyzing the soft costs in a building project. In this analysis, what
might the appraiser consider in this category?

Answer 64

• A. architectural fees
  B. building permits
  C. material storage facilities
  D. security during construction

Question 65

What is left when the total cost of development is deducted from the sale price of
a property?

Answer 65

A. administrative expenses of the developer
B. entrepreneurial coordination
* C. entrepreneurial profi t or loss
D. contractor’s overhead

Question 66

Existing improvements have a value equal to the
amount they contribute to the improved land (site), or they may be penalized
by an amount equal to the cost to remove them from the site

Answer 66

Highest and best use

Question 67

Shifts in supply and demand cause costs to increase
and decrease and alter the need for supply of different types of buildings.
Changes in the amount of new construction may affect the value of existing
buildings.

Answer 67

Supply and demand

Question 68

This principle affirms that no prudent buyer would pay more for a
property than the cost to construct one of equal desirability and utility without
undue delay.

Answer 68

Substitution

Question 69

An improper balance may result in an overimprovement or

underimprovement for a property. This imbalance results in a loss in value.

Answer 69

Balance

Question 70

Gains or losses from external factors may accrue to both
unimproved or improved land and improvements (buildings). External
conditions may cause a newly constructed building to be worth more or less
than its cost.

Answer 70

Externalities.

Question 71

The second step of the cost approach is to estimate direct (hard) and indirect (soft) costs as of

Answer 71

the effective date of the appraisal.

Question 72

An estimate of reproduction cost includes which of the following?

Answer 72

the estimated cost of all items as of the effective date of appraisal with materials as they were installed
Reproduction cost includes the cost to build a replica using the same construction materials and techniques, but at costs on the effective date of value, not the date of construction.

Question 73

After an intense natural disaster creates the need for massive rebuilding, the cost of building materials increases. Which economic principle does this illustrate?

Answer 73

supply and demand
Shifts in supply and demand cause costs to increase and decrease while also altering the need for a supply of different types of buildings. Changes in the amount of new construction may affect the value of existing buildings.

Question 74

If an appraiser estimates the current cost of individual units of construction and adds them up, what method is the appraiser using?

Answer 74

The appraiser is using the unit-in-place method, which segregates the building into units of construction (e.g. exterior wall, foundation, insulation, etc.)

Question 75

Chandra is appraising a residential property. The house was built in 1981 and is in average condition. The appraiser is using a cost service provider to develop the cost approach. What type of cost will she be using in this appraisal?

Answer 75

replacement cost
Chandra will be using replacement cost. Most cost services usually provide replacement cost data, not reproduction cost data. Also, since the home is not historic or specialized, it likely does not warrant developing a reproduction cost.

Question 76

Which of the following statements best describes entrepreneurial incentive?

Answer 76

the amount of money entrepreneurs expect to receive as a reward for their efforts
Entrepreneurial incentive must be present in order to entice a developer to construct the improvements. It is illogical to assume that a developer would anticipate expending a certain amount of time, energy, expertise, and money to construct a property, only to sell it for the same amount of money that had been expended. Profit must be present as the incentive for the developer.

Question 77

The first step of the cost approach is to estimate

Answer 77

the value of the site as if vacant and available to be put to its highest and best use.

Question 78

The federal government increases interest rates by a 1/4 point, causing a newly constructed building to be worth less than its cost. What principle does this illustrate?

Answer 78

externalities
Externalities refer to market forces such as rising interest rates, or factors outside property boundaries such as close proximity to an airport. External conditions may cause a newly constructed building to be worth more or less than its cost.

Question 79

What method is being used when an appraiser estimates the cost of construction by considering the quantity and quality of all materials, as well as all categories of required labor, and unit costs are applied?

Answer 79

quantity survey
Generally performed by professional cost estimators (and rarely by appraisers), the quantity survey method is the most comprehensive, time-consuming, and detailed method of cost estimating.

Question 80

Which of the following best describes gross living area (GLA) in single-unit residences?

Answer 80

GLA is the above-grade, finished, habitable, residential space measured from the outside.
As defined, GLA is habitable, finished (heated and/or air-conditioned), above grade space, measured from the outside of the residence.

Question 81

When measuring a commercial office structure, an appraiser identifies the amount of space on which the rent is based. Which measurement is the appraiser using?

Answer 81

net rentable area
The appraiser is using net rentable area, which is the amount of space on which the rent is based, calculated according to local practice.

Question 82

A buyer will not pay more for a property than the cost to construct one of equal desirability and utility without undue delay. What principle does this illustrate?

Answer 82

Substitution affirms that no prudent buyer would pay more for a property than the cost to construct one of equal desirability and utility without undue delay.

Question 83

The total construction cost of a structure requires consideration of which of the following?

Answer 83

direct and indirect costs along with entrepreneurial incentive
Direct and indirect costs are not enough. Entrepreneurial incentive must be present in order to entice a developer to construct the improvements.

Question 84

When an appraiser estimates cost using a cost manual, which method is being used?

Answer 84

The use of a cost manual is an example of the comparative unit method of cost estimating. For example; per square foot.

Question 85

In terms of cost, what type of cost are appraisal fees?

Answer 85

indirect costs only

Question 86

To which kind of cost should an appraiser attribute labor and materials to?

Answer 86

direct cost

Direct costs are typically part of the construction contract and include material and labor.

Question 87

Which of the following best describes direct costs

Answer 87

expenditures for the labor and material used in the construction of the improvements
Direct costs are typically part of the construction contract and include material and labor.