RESIDUAL METHOD
For rate land plots built-up with business objects and profitable real estate, the remainder method (the technique of the remainder of income for land) can be used. This method is also used for evaluating undeveloped plots where it is possible to develop them with income-generating improvements.
The remainder method is widely used to determine the most efficient use case. land plot.
According to the principle residual land productivity, buildings and structures built on land by attracting capital, work force and management are given priority in the distribution of income. The income remaining after covering all the costs of attracting other factors is attributed to the land.
In the IES this method called the "residual value method". When using the residual value method for the valuation of land, data on income and expenses are also used as analysis elements. Held the financial analysis net income that can be obtained from the use for the purpose of generating income. A deduction is made from net income, taking into account the financial return required by the improvements. The remaining income is considered residual attributable to the land account. It is capitalized to obtain a measure of value. Application of the method is limited to profitable property. It is most commonly used for new properties that require fewer assumptions.
When applying the remainder method, the following conditions must be met:
the existing buildings and structures correspond to the option of the most efficient use of the land plot. For example, a temporary structure made of lightweight structures surrounded by capital structures cannot be regarded as NEI;
the cost of buildings and structures located on a land plot, or the estimated costs of their construction, can be calculated quite accurately, as well as their service life;
the annual net operating income from the operation of a single property is known. At the same time, rental rates for premises should be calculated on the basis of market rental rates.
In practice, it is possible to use two variants of the remainder method. The first version of the remainder method provides for the determination of the balance of income attributable to the land plot, and the second option involves the calculation of the remainder of the value attributable to the land plot.
The sequence of calculating the value of a land plot when applying the first variant of the remainder method is as follows:
calculation of the cost of reproduction or replacement of improvements;
calculation of net operating income from a single property;
calculation of net operating income attributable to improvements for the year;
calculating the balance of net operating income for land;
calculation of the market value of the land.
Stage 1. Calculation of the cost of reproduction or replacement of improvements, corresponding to the most effective use of the assessed land plot.
Reproduction cost- the amount of costs in market prices existing on the date of the valuation for the creation of an object identical to the valuation object, using identical materials and technologies, taking into account the depreciation of the valuation object.
Replacement cost- the sum of the costs of creating an object, similar to the object of appraisal, in market prices existing at the date of the appraisal, taking into account the depreciation of the appraisal object.
Thus, the cost of reproduction is determined by the cost of building an exact copy of the object, and the cost of replacement is determined by the cost of creating a modern analogue object, taking into account wear and tear.
The cost of creating improvements consists of three parts: direct costs, indirect costs and the profit of the investor (entrepreneur).
Direct costs- costs directly related to construction works... Direct costs include: the cost of construction equipment and materials, wages construction workers, the cost of operating construction machinery, the cost of temporary structures and engineering networks during the construction period, profits and contractor overheads.
Indirect costs- expenses that are necessary to organize and support the construction process. Indirect costs include: design costs, preparation of the construction site, all types of taxes, land acquisition costs, interest on loans, advertising costs, insurance payments.
Investor profit- monetary remuneration that an entrepreneur expects to receive in the form of a bonus for using his capital, organizing and implementing a construction project. The profit can be calculated:
a) based on the rates of return on alternative investments;
b) as the difference between the sale price and the cost of creating similar objects or the cost of acquiring and modernizing a real estate object.
When determining the cost of reproduction or replacement the amount of accumulated wear of the improvements is taken into account.
Accumulated wear includes the amount of physical, functional and economic (external) wear and tear of buildings and structures located on the estimated land plot.
Physical deterioration- a decrease in the value of buildings or structures as a result of physical destruction, i.e. loss of their original properties by buildings and structures. Physical wear and tear occurs under the influence of operational or natural factors.
Functional wear- inconsistency of the characteristics of buildings or structures with modern market requirements for planning, technical equipment and design.
Functional wear occurs under the influence of scientific and technological progress in the field of architecture and construction and is manifested in the outdated architecture of buildings, old engineering support etc.
Economic depreciation is depreciation caused by unfavorable changes in factors external to a building or structure.
Economic depreciation leads to a decrease in the value of buildings and structures as a result of negative changes in the field of land legislation, taxation, insurance, environment, the general decline of the location area, and the like.
Physical and functional wear can be removable and irreparable, external wear is usually irreparable. At the same time, wear is removable if the cost of its elimination is less than the increase in the value of the property as a result of its elimination:
Accumulated depreciation = 1 - (1 - Physical depreciation) x (1 - Functional depreciation) x (1 - Economic depreciation).
The accumulated depreciation of improvements can be defined in whole or in monetary terms as the sum of physical, functional and part of the economic depreciation attributable to improvements.
The accumulated depreciation is most preferably determined as the difference between the cost of creating improvements excluding depreciation and the market value of the object at the valuation date. Accumulated depreciation can also be determined as a whole based on the life of the object.
After determining the amount of accumulated depreciation, it is deducted from the sum of the costs of creating buildings and structures to obtain the value of "their reproduction or replacement at the date of assessment.
Stage 2. Calculation of net operating income from a single property per year based on market rental rates. This calculation is carried out in three stages.
In the first stage estimated potential gross income(LDPE).
LDPE is the income that can be obtained from real estate with a full workload of areas intended for rent, excluding all losses and expenses. LDPE depends on the leased area (it can be all areas - a warehouse or a useful area - office space), and rental rates.
LDPE is calculated on an annual basis by following formula: LDPE - A x 5,
where S - area (sq. m), leased (or other unit of measurement that generates income); A is the rental rate for 1 sq. m area.
The calculation is based on an analysis of current rental rates and rates prevailing in this segment of the real estate market.
The most important characteristic lease agreement is the distribution of operating costs between the lessee and the lessor. At the same time, two types of lease agreements are polar:
gross (full) lease, when all costs are borne by the lessor;
absolutely clean rent when all costs are borne by the renter. In the event that operating costs are split between
both the lessee and the lessor, such a lease is called a net lease.
Distinguish the following types of rental rates:
contract rates, the amount of which is established by the lease agreement;
market rates, i.e. typical for a given market segment in a given region.
Market rental rate represents the prevailing rate in the comparable property market, i.e. is the most likely amount of rent for which a typical landlord would agree to rent, and a typical tenant would agree to lease the property.
By type of rental payments all leases are divided into the following large groups:
a) with a fixed rental rate (used in conditions of economic stability);
b) with a variable rental rate (revision of rental rates during the term of the agreement is used, as a rule, in conditions of inflation). This type of lease is beneficial for tenants starting a business in a new location. Also, this type of lease is used to reflect the expectations of future increases in property values, etc.
This group also includes contracts with indexed rent that provide for periodic adjustments of the rent in accordance with a pre-selected base index, such as the consumer price index, etc .;
c) with interest rate from the tenant's revenue (when a percentage of the income received by the tenant from the use of the leased property is added to the fixed amount of lease payments).
Amount of rent depends on the following factors:
the purpose of the property;
location of the object;
the degree of market saturation with similar objects;
the age of the building;
Constructive decisions;
planning solutions;
architecture and decoration;
infrastructure and service;
availability of parking;
lease term;
area of premises leased;
the quality of building management.
In the second stage estimated actual gross income(dvd).
DVD is the estimated income from real estate less losses from underutilization of space and losses from collection of rent, plus other income from the normal market use of the property.
Usually damages and losses expressed as a percentage of potential gross income. Losses are calculated at the rate determined for the typical level of governance in a given market, i.e. the market indicator is taken. But this is possible only in the presence of significant information base for comparable objects. If it is absent, then the appraiser analyzes the retrospective and current information on the appraised object to determine the underutilization ratio. Attention is drawn to the existing lease agreements in terms of validity, the frequency of their renewal, the length of the periods between the expiration of one lease agreement and the conclusion of the next one (the period during which the units of the real estate object are free).
Finally, taken into account Other income from the property. Other income includes income derived from the functioning of real estate and is not included in the rent. Typical other income items include:
a) income from the use of the garage and parking lot;
b) income from slot and vending machines;
c) income from the provision of lockers and security;
d) income from the rental of furniture and equipment;
e) income from maintenance and repair of household and office equipment;
f) income from the provision of excursion and transport services, income from the rental of recreational facilities, etc.
Other income depends on the type of real estate, for example, in a hotel, they include income from a restaurant or cafe, service enterprises, etc.:
DWD = LDPE - Losses + Other income.
In the third stage estimated operating and replacement costs are calculated.
Operating expenses- these are recurring expenses necessary to ensure the normal functioning of the property and the reproduction of income.
Operating expenses are usually divided:
on conditionally permanent;
on conditionally variables (operational).
Conditionally fixed costs include costs, the amount of which does not depend on the degree of operational workload of the facility or the volume of services provided. These are taxes on land and property, insurance payments, security costs, staff salaries, if it is fixed regardless of the building's load, plus taxes on this salary.
Conventionally variable costs include costs, the amount of which depends on the degree of operational load of the facility or the volume of services provided. For each type of real estate there are some differences in the composition of variable costs. At the same time, we can single out typical items of expenses that are typical for almost any object:
management costs;
costs of concluding lease agreements;
service personnel wages;
garbage collection costs;
utility costs - gas, electricity, water, heat, sewerage;
expenses for the maintenance of the territory and parking;
security costs;
other expenses.
TO replacement costs includes expenses that either occur once every several years, or the value of which varies greatly from year to year.
These are the costs of periodic replacement of wearing materials (furniture, carpets, kitchen equipment), as well as the replacement of building elements, the service life of which is shorter than economic life buildings (roofs, floor coverings); expenses for cosmetic repairs (painting the facade of buildings), plumbing and electrical repairs.
The replacement reserve is calculated by the appraiser taking into account the value of short-term assets, the duration of their useful life, as well as the interest accrued on the funds accumulated on the account. Excluding the provision for replacement, net operating income would be overestimated.
The replacement cost is calculated as an annual contribution to the replacement fund, i.e. money for these expenses should be reserved, although most property owners do not really do this.
The analysis of income and expenses is made on the basis of retrospective data of the accounting report or on the basis of forecast data. In this case, it is necessary to consider not a specific situation, but the typical conditions for the functioning of a real estate object, i.e. normalize the reported data.
Typical items of expenditure that are not included in the reconstructed statement of income and expenses:
amortization accrual. Considered in the calculation of the income approach as a return on investment and is considered part of the capitalization ratio, not operating costs;
income tax. Does not apply to operating expenses, since cash income is taxed, which may depend on factors not related to the property being valued (form of ownership, composition of property rights, tax status of the owner);
interest on the loan. Refers to financing costs, not operating expenses and are taken into account when determining the cash flow to the investor's own funds (income before tax), since as they are paid, the value of the investor's property rights increases.
After calculating operating costs and replacement costs, the projected net operating income(CHOD): CHOD = DVD - Operating expenses - Replacement costs.
Stage 3. Calculation of net operating income attributable to improvements per year, as the product of the cost of reproduction or replacement of improvements by the corresponding coefficient of capitalization of income from improvements.
Methods for calculating the capitalization ratio for improvements are selected depending on specific conditions in which the subject of assessment functions. This takes into account:
a) information on income and transaction prices based on a representative sample of comparable properties;
b) sources and conditions for financing transactions;
c) the possibility of a fairly accurate forecast of the value of the object at the end of the forecast period.
The two most commonly used methods for calculating the capitalization ratio for improvements are:
a) a method for analyzing market analogues (market squeeze);
b) the method for determining the capitalization ratio, taking into account the reimbursement of capital costs.
Market analogs analysis method. Based on market data for sales prices and net operating income of comparable properties, the capitalization ratio can be calculated. Defined in this way, it is called general. This method does not separately account for return on equity and return on equity.
With all the external simplicity of its application, this calculation method causes certain difficulties - information on CHOD and the sales price are classified as non-transparent information. Information on current and past sales and rental rates for similar objects is analyzed.
When calculating the capitalization ratio, the following conditions must be met:
the most effective use of comparable items is the same as for the item being assessed;
the terms of financing transactions for the sale of analogs are typical;
the location and decoration of the object of assessment and its analogues do not fundamentally differ.
The capitalization ratio is calculated as weighted average. In this case, the weights reflect the degree of similarity of analogs to the object of assessment in terms of the main pricing factors and are the result of the choice of the appraiser.
The method for determining the capitalization ratio, taking into account the reimbursement of capital costs. The capitalization ratio calculated by this method consists of two parts:
a) the rate of return (return) on capital, which is the compensation that must be paid to the investor for the use Money taking into account the risk factor and other factors associated with a specific investment;
b) the rate of return (reimbursement) of capital. The return of capital is understood as the repayment of the amount of the initial investment. Moreover, this element of the capitalization ratio is applied only to the wearable one, i.e. losing value, part of assets.
Capital return rate in the practice of Russian valuation, it is most often determined by the cumulative construction method, which allows the appraiser to make adjustments for the risks associated with investments in real estate and the management of these investments. The capital return rate includes:
risk-free rate of return;
risk premium for investments in the evaluated object;
premium for low liquidity of real estate;
investment management award.
The rate of return (reimbursement) of capital can be calculated by one of the following methods:
Ring method (straight-line capital return);
the Inwood method, or the return of capital on the reimbursement fund and the rate of return on investment (annuity method);
Hoskold's method, or the return of capital on a reimbursement fund and a risk-free rate of return.
Stage 4. Calculation of the balance of net operating income for land as the difference between net operating income from a single property and net operating income attributable to improvements.
Stage 5. Calculation of the market value of a land plot by capitalizing net operating income for land.
Reimbursement of investments is carried out according to the Ring method, a straight-line return on investment.
Initial data
A land plot with an area of 0.89 hectares with a newly built building is estimated at a cost of 173,268 OOO rubles.
The economically useful life of the building is 90 years, and the return on investment in the building is carried out according to the Ring method (straight-line method).
The rate of return on investment for this property is set at 20.5%.
The leased area of the building is 9,535 sq. m.
The rental rate is 5600 rubles. per sq. m per year, losses from underutilization 10%, operating and other expenses - 5,310,000 rubles.
Let's calculate the income from a single property:
LDPE - 9535 x 5600 - 53 396 LLC (rubles);
DVD - 53 396 LLC - (53 396 LLC x 0.1) - 53 396 LLC - 5 339 600 -
48 056 400 (rub.);
CHOD - 48 056 400 - 5 310 000 = 42 746 400 (rub.). The capitalization ratio for the building is 20.5% + ---- -21.61. 90 Income from the building = 173,268,000 x 0.2161 - 37,443,214.8 (rubles). Income from the site - 42 746 400 - 37 443 214.8 -5 303 185.2 (rubles).
Land value
5303185.2 0.205 = 25 869 196.1 (rub.).
Reimbursement of investments is carried out using the Inwood method, or annuity method. Initial data
The appraisal is a land plot with an area of 0.2 hectares provided for the construction of a modular gas station with six dispensers.
Capital investments for construction (taking into account the investor's profit) amount to 4,200,000 rubles.
The economic life is 20 years, the planned return on investment is 20%.
Analysis of the operation of existing gas stations with a similar location gives the following data:
400 liters of gasoline are sold from one dispenser during the day;
the weighted average income from the sale of one liter of gasoline and diesel fuel is 1 RUB. 20 kopecks;
taking into account the time for maintenance and other losses, the filling station operates 350 days a year.
Determine the cost of the land.
Solution
We find the capitalization ratio for structures:
Determine the annual net operating income generated by the facilities: 4,200 LLC x 0.20536 = 862,512 (rubles).
Determine the annual net operating income from the gas station (land plot and facilities): 6 x 350 x 400 xl, 2 - 1,008,000 (rubles).
We find the remainder of the net operating income attributable to the land plot: 1,008,000 - 862,512 - 145,488 (rubles).
The cost of the land plot is 145 488: 0.2 - 727 440 (rubles). The sequence of the second variant of the remainder method:
calculation of the cost of reproduction or replacement of improvements corresponding to the most efficient use of the assessed land plot;
calculation of net operating income from a single property based on market rental rates;
calculating the market value of a single real estate object by capitalizing net operating income;
4) calculation of the market value of a land plot by subtracting from the market value of a single real estate object the cost of reproduction or the cost of replacing improvements.
In the process of assessing the value of the land plot, information about the proposed construction provided by the investor was used, and market information was also taken into account, i.e. construction characteristics a modern residential complex under construction nearby, as well as the average number of storeys of buildings in the assessment area.
The cost of a single property consists of the sale of residential space and parking spaces in the underground garage.
On average, according to modern requirements, the ratio total area premises to the usable area of premises in residential buildings is 1.15.
Operating costs (operating costs, land payments, insurance payments, advertising, sales costs, etc.) are 2% of the total cost sale of residential space and parking spaces in the garage.
The cost of payment for credit resources is calculated under the following conditions:
we assume that all living space and parking spaces in the garage will be sold within 1 year;
the average rate on loans provided by credit institutions, enterprises and organizations in US dollars is 11.5% per annum with a maturity of 1 to 3 years.
Initial data
The total area of the object is 22 000 sq. m.
The total area of the aboveground part is 18,000 sq. m.
The total area of apartments (85% of the total area of the aboveground part) is 15 300 sq. m.
The total area of the underground part is 4,000 sq. m.
The total number of parking spaces (4,000/40) = 100.
The cost of selling 1 sq. m of residential space - $ 1,800.
The cost of selling 1 parking space in the garage - 15,000 dollars.
Determine the cost of a land plot for the construction of a residential building.
Solution
The sale price of all residential areas of the building by the owner is $ 27,540,000.
The cost of selling all parking spaces by the owner is $ 1,500,000.
Sales price, total - $ 29,040,000.
Operating expenses (2%) - 580 800 USD
The cost of sale, taking into account operating expenses - 28 459 200 dollars.
Construction cost of 1 sq. m of the ground part of the building - 1000 dollars.
The cost of building the ground part, total - 18,000,000 dollars. Construction cost of 1 sq. m of the underground part of the building - 800 dollars.
The cost of building the underground part, total - 3 200 000 dollars.
The construction cost of the entire building is $ 21,200,000. Interest on a loan (11.5%) - 2,438,000 dollars. The cost of construction, taking into account the cost of payment of credit resources, in total - 23 638 000 dollars.
The cost of the land plot is $ 4,821,200.
Remainder method- one of the types of property valuation (as a rule, a land plot), carried out taking into account certain factors of profit formation.
Remainder method- the method used for the assessment of built-up objects and undeveloped plots of land. In the latter case, we mean a plot that can be improved by erecting a real estate object on it or is able to bring it on its own. Using the residual method, you can determine the most efficient and profitable way to use a plot of land.
Residual method: essence, conditions of use
According to the laws of residual productivity, such types of property as real estate (structures and buildings), rebuilt with the involvement of labor and investment, as well as land are always given priority in the division of profits. The profit that remains after the main costs of attracting other factors will relate specifically to the plot of land.
In practice, this version of the calculation is called the remainder method (more full version- residual value method). In the case of applying the method of the remainder in the valuation of a land plot, you can use data on the costs and profits of real estate. To obtain such information, an analysis of the potential net income that can be expected is carried out. The funds required to improve the object are deducted from the calculated parameter.
The profit that is in the balance is called residual and falls on the account of the land plot. In the future, this type of profit is capitalized. In practice, the remainder method is used only for those objects that are capable of generating income. Moreover, it is often used when evaluating new objects when there is no need for a large amount of assumptions.
When using the remainder method, the following conditions must be met:
The available property (buildings and other structures) allows the most efficient use of the land plot;
The total cost of structures erected on the site, or the future construction costs of the facility, can be accurately calculated. At the same time, the specialist must know the potential life of the facility;
The net operating income that can be expected from the use of the property is known in advance. In this case, the rental rates for the object must be calculated taking into account market rates.
In practical terms, two types of the remainder method are generally used:
Calculation of residual profit attributable to the land plot;
- calculating the residual value attributable to land.
The first option, associated with the calculation of residual profit, received the greatest application. It is necessary to dwell on it in more detail.
Remainder method: calculation features
The cost of a land plot is calculated in several stages:
1. Calculation of the cost of replacing improvements or reproduction. It takes into account the fact that the improvements made will contribute to more effective use plot. In this case, the calculation of the cost of reproduction is made taking into account the costs of the construction of the building. As for the replacement cost, it, on the contrary, is determined by the costs of the construction of the property.
The total costs of carrying out improvements to the object are formed from 3 components - indirect and direct costs, as well as the potential income of a businessman (investor). When calculating the cost of replacement or reproduction, the total amount of accumulated depreciation of site optimizations (improvements) should be taken into account.
The parameter of the total accumulated depreciation can include such parameters as functional, physical and external (economic) depreciation of the property located on the land plot of interest. The calculation is made as follows:
Accumulated wear = 1 - (1 - Functional wear) * (1-Physical wear) * (1-External wear).
It is better to calculate the parameter of accumulated depreciation in financial or general terms. That is, the indicator is the sum of three types of wear (external, physical and functional). Moreover, they should all relate to improvements to the land plot.
The amount of accumulated depreciation should be calculated as the difference between the cost of improving the facility, excluding its market value and depreciation. Once the accumulated wear parameter is determined, it is subtracted from total amount expenses for the construction of a structure (building). The result is the cost of replacement or reproduction at the time of estimation.
2. Calculation of net operating profit from buildings and structures located on the site... One calendar year is taken as a starting point. In this case, the calculation process itself takes place in several approaches:
First, an assessment is made of the potential gross income, namely the funds that can be obtained from the property when it is rented out (and potential losses are not taken into account). As a rule, the LDPE parameter directly depends on the area of the object that is rented and the amount of the rent.
The formula for the calculation is as follows:
LDPE = S * A,
where S is the area of the building to be rented, m2;
A - the size of the rental rate for the "square" of the area.
All calculations are performed taking into account the analysis current tariffs and rental rates for a specific period of time and for a specific type of property;
Next, calculate the second most important parameter - the actual gross income. It characterizes the amount of funds that can be obtained from a land plot (with or without structures). At the same time, potential losses upon receipt of rental payments and the risks of underutilization of premises should be subtracted from the parameter, that is:
DWD = LDPE - losses.
Now accounting for other profits that the property can bring. This indicator directly depends on the type of building. For example, if it comes about a hotel (hotel), then other income includes funds received from the activities of a cafeteria or restaurant. The final formula looks like this:
DWD = LDPE + Other profit - Losses.
On the final stage the implied replacement costs and operating costs are calculated. In the latter case, the costs are meant that are needed for the normal operation of the building (structure) and the reproduction of profits.
Based on the calculation of operating profit and replacement costs, the projected NPR is calculated. The formula is as follows:
CHOD = DVD - Replacement Costs -.
3. Calculation of net operating income attributable to property improvements during the year... The NPR is calculated by multiplying two indicators - the profit capitalization ratio by the cost of replacement (reproduction) of improvements.
The methodology for calculating the capitalization ratio can be selected taking into account the conditions in which the facility operates. In this case, the following should be taken into account:
Data on the value of transactions and profits based on a representative sample for each of the objects;
- conditions and sources of financial injections;
- the ability to make an accurate forecast in relation to total price property at the end of the forecast period.
Of the most popular options for calculating the capitalization ratio, two can be distinguished:
Method of calculation when capital expenditure reimbursement is recorded;
- a method for analyzing market squeeze.
The calculation of the capitalization ratio should be carried out taking into account the following factors:
The application of this method is based on the principle of residual land productivity. The method is used to assess both free and fully or partially built-up land plots. At the same time, built-up land plots should be assessed as conditionally vacant when used in the most efficient way. For example, a warehouse or a temporary structure made of lightweight structures located on a land plot surrounded by capital multi-storey buildings, as a rule, cannot be considered as the most efficient use. Such structures should not be taken into account in the process of appraising a given plot; the appraisal of a land plot should be carried out as conditionally free. This method is also used to analyze the most effective use of a land plot as conditionally free by forecasting different options its building. The development option leading to the highest land value can be used to refine the assessment of its market value obtained using other informationally available valuation methods.
The residual method for land can only be used if there is information on lease transactions for buildings and structures on built-up and comparable land plots. In the absence of such information, it is possible to use data on business income. In this case, from the result of the assessment, obtained on the basis of data on business income, it is necessary to correctly deduct the value of assets that are not related to real estate (for example, intangible and movable assets).
In accordance with this technique, the market value of a land plot is estimated using the formula:
Y _ 1 - Y B x BB YL
where YL is the assessment of the market value of the land plot; I - net operating income; HC is the market value of the improvements; ВЬ - coefficient of capitalization of income from land; Вв - coefficient of capitalization of income from improvements.
Using the method assumes the following sequence of actions:
- selection of the most typical types of commercial use of the assessed land plot for the assessed territory;
- calculation of the residual value of the existing or full replacement cost of improvements predicted on the assessed site for the selected uses of the assessed land plot, including the existing one, taking into account legal, urban planning, functional and other restrictions established executive bodies authorities and relevant authorized bodies;
- calculation of the total net income from the property;
- calculation of the share of total net income attributable to buildings as the product of their full replacement cost by the capitalization ratio of income from improvements;
- calculation of the share of the total net income attributable to the land plot, as the difference between the total net income and the share attributable to buildings;
- calculating the value of a land plot by dividing the share of the total net income attributable to the land plot by the capitalization ratio of income from land.
The type of use of the land plot for which the maximum value was obtained is the most efficient use of the estimated land plot.
The assessment of the total net income is carried out by drawing up an income statement for the lease of buildings and premises.
The main articles of the income statement are:
- potential gross income;
- actual gross income;
- operating costs, consisting of operating costs, replacement costs and management costs;
- net operating income (net operating income).
Net operating income is the difference between actual gross income and operating expenses. However, only those operating expenses incurred by the lessor are deducted from the actual gross income.
Potential gross income is the income that can be obtained from renting out real estate when it is 100% occupied by tenants and there are no losses from non-payment for rent. When evaluating a land plot, rental rates for premises should be calculated solely on the basis of market rental rates. For premises that are vacant and used by the lessor for their own needs, as well as premises that are rented out for personal reasons at lower rental rates, market rental rates should also be used. Potential income should include other income derived from inseparable improvements to the property, but not included in the rent.
Actual gross income is equal to the difference between potential gross income and losses from downtime and losses from non-rent payments. Downtime losses are calculated as a percentage of potential income, and losses from non-payments are calculated as a percentage of the difference between potential income and losses from downtime.
There are two types of operating costs: fixed - not depending on the level of occupancy of the object, variables - depending on the occupancy. Operating costs are determined based on market lease terms.
Replacement costs are calculated based on the total replacement cost of building elements with short term economic life excluding wear and tear. The calculation is made by direct count: by dividing the total replacement cost of the elements of the object by the period of their economic life. In the process of performing these calculations, it is advisable to take into account the possibility of a percentage increase in cash to replace elements with a short service life by bank accounts... At the same time, it is necessary to take into account the possible inflationary rise in the cost of costs.
Administrative expenses are included in operating expenses regardless of whether the property is managed by the owner or the contract manager. The amount of management costs is determined either in monetary terms or as a percentage of actual gross income, depending on the type of property.
When calculating net operating income, the actual gross income should not be deducted depreciation deductions on real estate and the cost of servicing debt obligations on real estate, if any.
The capitalization ratio for improvements, as a rule, is calculated as the sum of the discount rate and the factor of the compensation fund. It is also possible to use other methods of calculating the capitalization ratio for improvements.
The value of the discount rate should be determined based on the analysis of the internal rate of return of similar and already implemented projects.
Calculations can be performed at current (excluding inflation) or forecast (taking into account inflation) prices, depending on the prices in which income and expenses are expressed. When valuing at current prices, the discount rate in real terms (excluding inflation) should be used. When valuing using projected prices, the nominal discount rate (adjusted for inflation) should be used.
In the process of land appraisal, it is advisable to use the rate of return on capital as the capitalization ratio of income from land, and for land improvements - the rate of return on capital, increased by the factor of the compensation fund, taking into account the risk-free interest rate and the remaining economic life of the improvements.
In the absence of an investment market, as the discount rate, you can use the double risk-free interest rate obtained on the basis of the analysis of the least risky investments in the territory of the given constituent entity of the Russian Federation.
An example of assessing the market value of land using the residual method
Example 1
Conditions of the problem. The cost of improvements including depreciation (full replacement cost minus depreciation) - $ 1,228,138. The total net operating income from the property is $ 725,760.
It is required to determine the value of the land
Solution:
1. Determination of the value of the capitalization ratio for improvements
For the purpose of assessing real land improvements, the value of the capitalization ratio is defined as a market extraction method. This method is based on the study of the relationship between the market price of similar properties and the amount of net operating income from similar properties. The application of this method is due to the availability of sufficient reliable information on this market segment.
The formula for determining the value of the capitalization ratio by the market extraction method is as follows:
to _ N01
U,
where; K is the capitalization ratio; N01 - net operating income from the property; Y is the market value of the property.
As of the date of the appraisal, offers for the sale and lease of the following real estate objects similar to the one under appraisal were identified:
№
object Offer price, $ Forecasted net operating income, $ / year * Coefficient
capitalization
1 1050000 220000 0,21
2 600000 120000 0,20
3 50000 12000 0,24
4 260000 50105 0,19
5 500000 105000 0,21
6 250000 50900 0,20
7 270750 49000 0,18
8 6126400 1097400 0,18
9 250000 79850 0,32
* net operating income was projected based on net lease terms.
As can be seen from the above data, the capitalization ratio ranges from 0.18 to 0.32. In this regard, we carried out a mathematical processing of the initial information by calculating the standard deviation. The value of the standard deviation is an indicator of the accuracy of the result obtained by averaging a number of values of the capitalization ratios. In accordance with the law of normal distribution, the normal distribution describes C ± 1.94a values of a number of numbers. This interval is used to filter out invalid data.
The formula for calculating the standard deviation is as follows:
a, E "2
V N,
where: a - standard deviation; C is the arithmetic mean of the series:
C = bC
C N
where; C1 - i-th value of the series; N is the number of members of the series.
C = (0.21 + 0.20 + 0.24 + 0.19 + 0.21 + 0.20 + 0.18 + 0.18 + 0.32) / 9 = 0.215
Hence it follows that the confidence interval of the values of the series is 0.215 ± 1.94 x a. For our sample, a = 0.043. Hence, the confidence interval of the values of the series is from 0.13 to 0.30.
Thus, the value of the series 0.32 may not be used in further calculations, as it does not reflect the typical level of the capitalization ratio at the time of assessment.
The value of the value of the capitalization ratio, determined by the market extraction method, is taken equal to the arithmetic mean value:
C = (0.21 + 0.20 + 0.24 + 0.19 + 0.21 + 0.20 + 0.18 + 0.18) / 9 = 0.202
2. Calculation of the amount of net operating income related to the land plot
1 Total net operating income $ 725,760
2 Cost of upgrades $ 1,228,138
3 Capitalization ratio for improvements 0.202
4 Net operating income attributable to improvements (2x3) $ 248,084
5 Net operating income attributable to land (1-4) $ 477676
3. Determination of the value of the capitalization ratio of income from land
The capitalization ratio of income from land is determined by the method of cumulative construction. Base (risk-free) rate equal to the rate of return on bank deposits the highest category reliability is 8% per annum in foreign currency. The typical premium for the risk of capital investment in land ownership is 8% per annum. This value was determined by a survey of potential buyers of ownership of land plots, as a result of which it was established that the proper compensation for the risk of investing in the purchase of a land plot is a two-fold excess of profitability over the risk-free one. Thus, the capitalization ratio is 16% per annum.
4. The final calculation of the cost of the land
Item no. Analysis element Value
1 Net operating income attributable to land $ 477,676
2 Capitalization ratio of income from land 0.16
3 Market value of land (1/2) $ 2,986,000
Adjusted for rounding off, the market value of title to the land plot is: three million (3,000,000) US dollars.
Example 2.
Conditions of the problem. The total replacement cost of the projected improvements is $ 537,895. The total net income from the non-movable property is $ 98,679. The discount rate is -16.83%. Reimbursement fund factor -0.086%.
Payment:
1 Capitalization ratio for improvements (16.83 + 0.086)% = 16.92%
2 Income attributable to improvements $ 537,895 x 0.1692 = $ 90,990
3 Income attributable to land $ 98,679 - $ 90,990 = $ 7,689
4 Market value of the land plot $ 90,990 / 0.1683 = $ 45,687.
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5. Residual method for land valuation
The remainder method is used for built-up and construction plots.
The most common application of the residual technique is in the analysis of the most efficient use of land and in the valuation of land in cases where there is no information on the sale of vacant land plots. Evaluation of a land plot using the residual technique is advisable when the buildings on it are new enough, that is, when the determination of the cost of construction is not difficult, and wear is insignificant.
When using the residual method, the assessment is carried out in the following stages:
a) calculation of the replacement cost or replacement cost of improvements existing on the land or improvements to be created;
c) determination of the amount of net operating income that can be obtained as a result of the use of a single property, based on market data on rent for objects comparable to a single real estate object, part of which is the assessed land plot;
c) determining the net operating income attributable to improvements as the product of the replacement cost or replacement cost and the capitalization rate for the improvements;
d) calculating net operating income attributable to land as the difference between net operating income generated by a single property and net operating income attributable to improvements;
f) determining the value of a land plot as the ratio of the net operating income attributable to the plot to the capitalization rate for the land plot.
The market value of a land plot is determined by the formula:
CHOD - net operating annual income from a single real estate object;
Сс - the market value of the improvements;
rc - income capitalization ratio for improvements
When determining the size of individual plots, physical, legal and economic factors affecting the adoption of this decision are taken into account, most often the sizes are determined based on the economic capabilities of potential investors.
New plots must meet the requirements of local public administration authorities in terms of area and infrastructure, and meet the requirements of the local market.
The land mass must be developed even before it is broken down and sold by separate plots. Therefore, in addition to the costs of acquiring the land itself, the new owner bears a number of other costs. Some of these costs are due to the resource quality of the land, while others are due to local regulations governing the allocation, or legislation to protect the "environment". The costs incurred even before the start of physical development are called "preliminary" costs.
The evaluator should familiarize himself with the local rules governing the process prior to splitting the array into a site. These rules determine what improvements should be made on the ground, what permission should be obtained, and finally what additional costs should be made. Usually, land planners or architects are invited to draw up a land-use plan, which provided for a breakdown of the array into the maximum number of plots to be built. It may be necessary to obtain advice from specialists on various engineering issues. All payments for obtaining various permits must be included in the estimate. Land clearing, surveying and surveying of future sites and roads, various planning and topographic surveys are carried out. Such activities require additional costs before the sale of the first site.
In addition to upfront costs, the primary developer must spend money on each of the lots sold. Most of these costs are incurred during the year the site is sold to the new owner. They include the costs of building additional streets, drainage works, the creation of sewerage and communication networks, and the sale of plots. In addition, the primary developer must properly allocate overhead costs and required profits.
2.8 Reconciliation of assessment results
The evaluation results obtained by three approaches - cost, comparative and profitable - give different values of the cost. In this regard, the results are agreed upon and the final value of the cost is established.
Coordination of the appraisal results and determination of the final value of the real estate object can be carried out by two methods: the arithmetic mean method or the weighted average method.
Arithmetic mean method
The cost of an object is determined by the formula:
С is the final market value of the appraisal object, lei;
The use of the arithmetic mean method quite often leads to underestimation or overestimation of the final assessment results.
The weighted average method for determining the final value of the cost is considered to be the most acceptable, since some results of the assessment can have greater importance than others.
The total cost of the object by the weighted average method is determined by the formula:
C = C1 x Q1, + C2 x Q2 + C1 x Q2
С - reasonable market value of the appraisal object, lei
C1, C2, C3 - the cost of the object, determined using the cost, comparative and income approach, respectively, lei.
Q1, Q2, Q3 - the significance of the cost, comparative and income approaches, respectively.
Determination of the weights of each of the assessment results can be carried out using a specific gravity coefficient, or on the basis of establishing a relative hierarchy of results.
The hierarchy analysis method is used to establish the weights of each of the results obtained different approaches... When analyzing the significance of the method, the scale of relations is applied
Table 5. Calculation of the final cost of the object
| Significance | The importance of the assessment method | Explanations |
| 1 | 2 | 3 |
| 1 | Equal importance | The two methods contribute equally to achieving the goal. |
| 3 | Slight prevalence of the importance of one method over another | There is a rationale in favor of one of the methods, but this is not convincing enough. |
| 5 | Substantial or Substantial Advantage | There is reliable data or logical judgments in order to show the preference of one of the methods |
| 7 | Obvious or clear advantage | Strong evidence for one method over another |
| 9 | An absolute advantage | Evidence for a preference for one method over another in the highest degree persuasiveness |
| 2, 4, 6, 8 | Intermediate values between two adjacent judgments | A situation where a compromise solution is needed |
| The reciprocals of the above zero values | If method i, when compared with method j, is set to one of the numbers defined above, then method j when compared with method i is set to the opposite value |
|
The weak point in the agreement of results is the establishment of the weights. It is subjective in nature and consists in comparing the merits and advantages of each approach in relation to the considered specific situation.
If the objects are unique in their type and purpose, for which there is no market or objects with insignificant wear or the results of the assessment are necessary for insurance, then it is better to choose the cost one as the leading approach. At the same time, the costly approach is associated with the problem of determining wear and limiting its use.
If the real estate object brings a stable income and is acquired for this very purpose, then the appraiser will consider the income approach as the main one. For example, in the process of determining the value of a commercial center, first of all, the income method will be applied, since such real estate objects are acquired to generate income. Even if three methods were used in the valuation process, the value of the final cost should be closer to the value obtained as a result of applying the income method, which is most adequate for this valuation. However, this method is based on subjective suggestions and estimates of future earnings and rates of return.
If a property is being evaluated and there is sufficient data on market sales, then the comparative approach that takes into account market trends and buyers' preferences is most credible for the evaluator. However, the use of the comparative approach is limited by the lack of reliable and complete information about comparable sales.
The accuracy and reliability of the final assessment largely depends on the qualifications and experience of the assessors, their objectivity. Sometimes referred to as the "Exam of Conscience"
