Part 8 Cost approach Flashcards
1
Q
The cost approach is a set of procedures through which a value indication is derived for the _____ interest in a property.
A
fee simple
2
Q
The process begins with an estimate of the current cost to construct the existing structure plus
A
any entrepreneurial incentive.
Depreciation is deducted from this derived cost
and the estimated improved land is added.
3
Q
The _____ approach is the only approach that requires a separate value for the land.
A
Cost approach
4
Q
“The actual or estimated amount required to create, reproduce, replace, or obtain a property” (USPAP, definition)
A
Cost
5
Q
What are the four reasons appraisers must be proficient in cost analysis
A
- Cost can be a proxy for value
- it allows the appraiser to evaluate individual component costs.
- Is often used in other approaches as a basis of analysis or used as a crosscheck for adjustments
- standards require competent analysis
6
Q
When is the cost approach applicable?
A
when improvements are proposed or have been recently completed
7
Q
The more _______ present, the less reliable the value indication, and hence the less applicable the cost approach becomes.
A
depreciation
8
Q
8 step process for cost approach
A
- Estimate the value of the site as though vacant
- Estimate the direct and indirect costs of the improvements.
- Estimate the entrepreneurial incentive
- Add steps 2 and 3 together
- Estimate the depreciation from three sources
a. physical deterioration
b. Functional obsolescence
c. External obsolescence - Deduct the depreciation from total current cost to derive the depreciated cost of improvements.
- Add the contributory (as is) value of any site improvements.
- Add the site value to the total depreciated costs.
9
Q
The cost of constructing an improvement may be developed as either the ______ or the _______
A
- reproduction cost
2. replacement cost
10
Q
__________ is an exact replica of the current improvements.
A
Reproduction
11
Q
_______ is equivalent in utility to the current improvements
A
Replacement
12
Q
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.
A
Reproduction cost
13
Q
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
A
replacement cost
14
Q
These are hard cost expenditures for the labor and materials used in the construction of improvements.
A
Direct costs
labor
materials
building permits
security during construction performance bonds
15
Q
These are soft cost expenditures that are necessary components but are not typically part of the construction contract.
A
Indirect costs
Architectural fees, plats of survey
appraisal, consulting accounting legal fees
insurance
16
Q
Most appraisers use cost services such as Marshall & Swift-core Logic) for cost estimates.
A
True
17
Q
Hard (direct)costs are typically found as part of
A
the contract between a homeowner and a general contractor that would be paid for by the general contractor.
18
Q
Soft (indirect) cost are typically paid for
A
by the homeowner
19
Q
_________ 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.
A
Entrepreneurial incentive
forward thinking (the profit he wants to get)
20
Q
______ the amount an entrepreneur receives
A
Entrepreneurial profit
the money he actual gets
21
Q
Entrepreneurial profit may be measured as
A
a percentage of direct costs
a combination of direct and indirect cost
based on the value of the completed project
22
Q
What is generally not included in the rates provided by professional cost service providers?
A
Entrepreneurial incentive
23
Q
Commercial property appraisers derive the entrepreneurial incentive from____
A
the local market and add it to the cost.
24
Q
What are the 3 methods of estimating cost
A
- Comparative-unit method
- Unit-in-place method
- 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.
25
What is the most commonly used and accepted cost-estimating method?
The Comparative-unit method
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,
that appraiser is using the comparative unit method of cost estimating.
27
Cost per square foot can also be obtained from an analysis of
the cost of recently constructed buildings
28
The method requires the appraiser to compare the subject building with
similar, recently constructed buildings for which cost data is available.
comparative unit method of cost estimating.
29
Cost-service manuals are most commonly utilized in this method.
comparative unit method of cost estimating.
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.).
unit-in-place method
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.
quantity survey method
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.
quantity survey method
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.
quantity survey method
34
One of the most important factors influencing an appraisal using the cost approach method is
an accurate representation of the building's measurements.
35
The standard by which single-family residential improvements are measured is called
gross living area or GLA
36
The gross living area is the
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
37
For attached residential structures (e.g., townhouses and twin homes), exterior dimensions are measured to
the center point of the common wall
38
For condominium units, the GLA is based on
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
39
Minimum ceiling height plays a role in what areas qualify for inclusion in GLA.
Generally, the minimum height clearance is
7 feet
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.
In either scenario, the area is still excluded from GLA.
41
Floor area
| under the sloped ceiling can be included until the clearance falls below
5 feet.
| Finished area below that minimum clearance is excluded from the GLA.
42
protocol for measuring single-unit residences
ANSI Z765−2013
43
Professional appraisal standards do not require the ANSI Z765−2013
protocol for measuring.
True
44
Exterior dimensions are based on the outside edge of the siding and are
measured to
the nearest inch or tenth of a foot. Final square footage is
reported to the nearest whole square foot.
45
Open (non-floored) areas, sometimes found in foyers adjacent to stairs
leading to the second floor,
are not included in the GLA
46
Prior to 1996, no nationwide standard existed for measuring single-family residences.
true
47
As you may have already guessed, commercial and industrial buildings have their own method of measurement. An almost universal method is called
Gross Building Area (GBA)
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.
Gross Building Area (GBA).
49
Gross building area for office buildings is computed by
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.
50
office buildings have a unique method of measurement called
Net Rentable Area (NRA), which is the amount of space on which the rent is based, calculated according to local practice.
51
Rentable area and net rentable area are often used interchangeably.
true
52
Local practice may define NRA as
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.
53
Retail properties are measured in terms of their
Gross Leasable Area (GLA)
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.
Gross Leasable Area (GLA)
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.
true
56
Industrial warehouses are often measured
from the exterior wall to the
| center of the demising wall without deductions.
57
Retail space is commonly measured in the same manner as warehouses.
true
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?
replacement cost
59
The cost estimating method that considers all materials used and all categories of
labor required to construct the improvement is called
quantity survey method.
60
Which of the following is NOT an identified type of accrued depreciation applicable
to property improvement?
* A. entrepreneurial obsolescence
B. external obsolescence
C. functional obsolescence
D. physical deterioration
61
Labor and materials are an example of what kind of cost
* A. direct cost
B. indirect cost
C. replacement cost
D. reproduction cost
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?
A. balance
B. highest and best use
* C. substitution
D. supply and demand
63
What type of property is the gross living area (GLA) generally based on interior
dimensions?
A. cluster home in a PUD
* B. condominium
C. manufactured home
D. twin home
64
An appraiser is analyzing the soft costs in a building project. In this analysis, what
might the appraiser consider in this category?
* A. architectural fees
B. building permits
C. material storage facilities
D. security during construction
65
What is left when the total cost of development is deducted from the sale price of
a property?
A. administrative expenses of the developer
B. entrepreneurial coordination
* C. entrepreneurial profi t or loss
D. contractor’s overhead
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
Highest and best use
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.
Supply and demand
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.
Substitution
69
An improper balance may result in an overimprovement or
| underimprovement for a property. This imbalance results in a loss in value.
Balance
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.
Externalities.
71
The second step of the cost approach is to estimate direct (hard) and indirect (soft) costs as of
the effective date of the appraisal.
72
An estimate of reproduction cost includes which of the following?
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.
73
After an intense natural disaster creates the need for massive rebuilding, the cost of building materials increases. Which economic principle does this illustrate?
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.
74
If an appraiser estimates the current cost of individual units of construction and adds them up, what method is the appraiser using?
The appraiser is using the unit-in-place method, which segregates the building into units of construction (e.g. exterior wall, foundation, insulation, etc.)
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?
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.
76
Which of the following statements best describes entrepreneurial incentive?
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.
77
The first step of the cost approach is to estimate
the value of the site as if vacant and available to be put to its highest and best use.
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?
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.
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?
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.
80
Which of the following best describes gross living area (GLA) in single-unit residences?
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.
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?
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.
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?
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.
83
The total construction cost of a structure requires consideration of which of the following?
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.
84
When an appraiser estimates cost using a cost manual, which method is being used?
The use of a cost manual is an example of the comparative unit method of cost estimating. For example; per square foot.
85
In terms of cost, what type of cost are appraisal fees?
indirect costs only
86
To which kind of cost should an appraiser attribute labor and materials to?
direct cost
| Direct costs are typically part of the construction contract and include material and labor.
87
Which of the following best describes direct costs
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.
