Case Study #1 Overview and Instructions:
Cost Approach
Overview:
Case Study #1 is an existing 115-unit apartment project. Each group/individual will analyze the
information given and derive an opinion of value via the Cost Approach. The case is designed to
determine the As Is Market Value of the subject.
For this case study, you must do the following:
1. Write an introduction explaining why the cost approach is being developed and the steps
taken to indicate an opinion of value
2. Summarize in paragraph form what is included within the replacement cost new including
direct and indirect costs and how the costs were derived (Marshall & swift,
3. Write a reconciliation and justification for an estimate of entrepreneurial incentive and
apply it in the appropriate manner to derive an estimate of replacement cost new.
4. Write a narrative explanation of the process used to extract and estimate of total
depreciation from the depreciation comparables provided.
5. Write a paragraph explaining the reconciliation process used to derive a final estimate of
depreciation for the subject.
6. Explain how you applied the breakdown and/or other depreciation techniques to allocate
the total depreciation between physical deterioration, functional obsolescence, and
external obsolescence, if appropriate.
7. Prepare a graph summary of the cost approach.
Suggestions for Completion:
1. No more than one paragraph should be used to support your entrepreneurial incentive
conclusion
2. Use all of the information given in estimating the replacement costs new
3. When extracting depreciation from the market using the depreciation comparables given,
explain the procedure and present the application to all of the comparables in a table
4. It should not take you any more than one paragraph to reconcile the range of total
depreciation estimates to the subject property. Be sure to reconcile your final estimate
within the range and explain why and which comparable(s) was/were given more weight
5. Use a simple age/life method procedure to determine the physical deterioration for the
short-lived items. All information about the physical deterioration is given.
6. Use the breakdown method in allocating the individual types of depreciation. Create a
separate paragraph to explain each application. Use charts, tables and graphs
throughout.
7. In setting up the narrative and various graphs, tables, charts, etc…you may use examples
given or develop one of your own.
8. There is no single solution to the case study and there will be differences in value
conclusions. This is acceptable and expected.
9. Your results must be well supported and provide for a credible opinion of value.
Steps:
1. Replacement cost new
a. Direct and indirect costs are given
b. Entrepreneurial incentive must be estimated
2. Depreciation
a. Extract from three sales given
i. Reach a conclusion of depreciation rate per year
ii. Explain which elements of depreciation are captured by this estimate (ie.
Includes total depreciation)
b. Use total depreciation estimate from extraction serve as the basis for the
breakdown method. Take the percent from extraction and consider it the total of
all physical deterioration
i. Physical curable is given
ii. Short lived items are summarized in the case
1. Calculate both percent of depreciation and dollar amount of short
lived
iii. Long lived is the difference between the total from exaction and the totals
already calculated for the curable and short lived items
c. Estimate any curable or incurable functional obsolescence
d. Indicate total depreciation
3. Reach a conclusion of site value from the information given
4. Include a summary table to show your final value conclusion to the reader
Property Description:
On February 27, 2019, you were asked to appraise a 115-unit existing apartment project that
contains the following unit mix:
The improvements were constructed 15 years ago and are built of good quality materials and
competitive with other high-end apartment communities within the market area. The
improvements are situated on a 11.85-acre site with amenities consisting of a swimming pool, two
tennis courts, and a 2,500 square foot clubhouse. The building has been well maintained since
its construction 15 years ago. Its in good condition and the effective age is about the same as
the actual age.
Functional Utility: The subject property is currently centrally metered for landlord paid water utility
charges. However, the market is currently witnessing an increasing number of properties
changing to individually metered and tenant paid water. A reliable contractor has provided a cost
to install individual water meters at $50,000. The decrease in utility expenses from a change to
tenant paid water recoups this cost to cure. Other than the water service, the functional utility of
the improvements is good. The floor plans and availability of amenities are competitive with those
of competing properties.
Land Value Analysis:
Analysis of land sales in the area indicates that the subject underlying land is worth $10,000 per
apartment unit.
Cost Data:
The replacement cost for the project via information provided by Marshall Valuation Service is
$80.00 per square foot (NRA), including direct and indirect costs, but excluding site
improvements, appliances, and amenities. The current cost update multiplier is indicated at
1.081.
Site improvements, appliances, and amenity costs were compiled from interviews with various
developers within the market. According to this information, general site improvements for the
subject are adopted at $20,000 per acre, appliance costs are adopted at $3,500 per unit, and
amenities (in total) are reported $300,000. These construction costs include all time, location,
and physical multipliers.
Entrepreneurial Incentive:
A local developer of a similar recently constructed apartment project indicated she was motivated
by a 12% entrepreneurial incentive based on the sum of direct and indirect costs. She actually
exceeded her projections, receiving a 14% entrepreneurial profit. Another local developer
indicated a range of 10% to 12% of costs.
| # of Units | Unit Type | Unit Size (SF) |
| 35 80 | 1 BR / 1 BA 2 BR / 2 BA | 750 1,000 |
Deferred Maintenance (Curable Physical Depreciation):
– A fixed pane window has a broken seal that must be replaced at a cost of $800
– Two of the units need repainted at a cost of $500 per unit
– The kitchen flooring in one of the units needs replaced at a cost of $1,000
– Two air-conditioning units need replaced at a cost of $600 each
– One set of kitchen appliances needs replacing at a cost of $3,500
Market Extraction:
Comparable A: This is a 112-unit, 12-year old similar constructed apartment complex which sold
recently for $9,500,000. Its site value at the time of sale was $1,900,000; its replacement cost
was $9,800,000.
Comparable B: This is the sale of a 118-unit, 18-year-old, similar constructed apartment complex
which sold recently for $8,260,000. Its site value at the time of sale was $1,570,000; its
replacement cost at the time of sale was $10,800,000.
Comparable C: This is the sale of a 124 unit, 18 year old, apartment complex containing minimal
amenities that sold recently for $5,735,000. Its site value at the time of sale was $1,640,000; its
replacement cost at the time of sale was $9,300,000.
Short Lived Items:
Short lived items are as follows. Replacement costs include direct costs, indirect costs and profit.
Item
Effective Age
(Years)
Total Economic
Life (Years)
Total Cost to
Replace
Roof Cover 15 20 $140,000
Carpeting 5 8 $120,000
Appliances 5 10 $100,000
Air Conditioners 15 20 $40,000
Parking Lot 15 25 $175,000
Total $575,000
Short Lived Items