Appraisal of Manufacturing Buildings Through the Depreciated Replacement Cost Approach

Abstract

It is well-known that the persisting crisis of the real estate market, in the wake of the large-scale financial and economic crisis starting from the year 2008, is leading to diminishing property values. An earlier and more pronounced effect lies in the lower number of transactions resulting in the scarcity of sales that characterizes several sub-markets, including the one concerning the manufacturing buildings. Within the real-estate appraisal discipline, the aforementioned framework entails growing difficulties—if not even the inability—to find an appropriate number of so-called comparables, to implement the market-value estimation process. This condition involves the need to identify alternative estimation procedures. Some specific features of manufacturing buildings pave the way to the adoption of the Depreciated Replacement Cost method. Indeed, due to the evolution of the construction techniques, the old factory buildings are frequently classed as ‘out of production’. Meanwhile, the poor market conditions make them prone to be treated as out of the market. The depreciated replacement cost procedure has been debated occasionally within the literature, both national and international. Nonetheless, its application still deserves further research due to the fact that it entails several relevant issues. This study focuses on three of them. The first concerns the estimation of the useful life and the residual life of the buildings characterized by heterogeneous structures, finishes, and installations, due to their realization or replacement during different time periods. The second topic refers to the distinction between land value and improvement value. Finally, the third issue relates to the relationships among the results of the estimation procedure, the real-estate appraisal discipline as a whole, and the accounting principles, on which companies’ balance sheets rely

Applying the Depreciated Replacement Cost Method When Assessing the Market Value of Public Property Lacking Comparables and Income Data

“…Regarding the use of the results of this paper within the research in progress on the subject, we should stress that at present there is a small number of studies on the DRC method [33][34][35][36][37][38][39][40][41]; the methodology presented here, is, thus, one of the first available operational variations of DRC, which is already held as one of the three methodologies currently provided by the real estate valuation discipline for the estimate of the MV of a property.…”

“…The analysis carried out on the application methodologies of DRC showed that there is strong potential for implementing this procedure in real estate evaluation [33][34][35][36][37][38] and in facility management [39][40][41][42][43]; in the first field, DRC may be used, as already argued, when comparables are missing and when other estimation procedures cannot be used. In facility management, DRC makes it possible to evaluate the convenience of a maintenance program, which is a function of the market value of the building, which, in turn, depends on factors that affect the urban rent [42].…”

“…In facility management, DRC makes it possible to evaluate the convenience of a maintenance program, which is a function of the market value of the building, which, in turn, depends on factors that affect the urban rent [42]. The present research work falls within the scope of the studies relating to real estate valuation; to date (2020), Scopus and Web of Science databases store a rather limited number of articles on this subject, and predominantly theoretical rather than operational in their approach [33][34][35][36][37][38][39][40][41][42][43]; this state of the art is the ground for the methodological-operational study proposed in this article.…”

Depreciated Replacement Cost: Improving the Method Through a Variant Based on three Cornerstones

“…Regardless of the methodological issues discussed in the previous sections, DRC is ever more widespread in the professional practice because of operational reasons, not least the lack of transaction data due to the real estate market recession (COPIELLO et al 2017). Since there are situations wherein making use of DRC is unavoidable, we aim to discuss several improvements to be brought to the method.…”