Life Cycle Flow (LCF) Application to Evaluate the Real Estate Investment in Residential Buildings with Tax Benefit Incentives in Cases of Positive Externalities

Abstract

Investing in the main home is an important form of investment for families and represented one of the main family assets in Italy in the second half of the 20th century. The evaluation of the convenience of the house purchase needs to consider that technologies in construction have undergone a rapid change in recent times that proposes an approach to sustainable building technologies, such as dry construction systems that can reduce energy consumption over time. Moreover, these construction systems are encouraged with tax deductions from the state, that is, financing with public spending via a tax benefit, which recognizes the role of externalities of investments in sustainable construction. The article would apply Life Cycle Flow (LCF) model to a residential building; LCF is based on the Life Cycle Cost (LCC) model and adapted to assess a real estate investment, such as a residential building for private use, taking into account the effects of a tax benefit. The model quantifies the cost of satisfying consumers' housing needs in the long run. The model takes into account the absorption of financial resources at all stages of property investment. The proposed LCF approach quantifies an average discounted cash outflow per year and an average discounted cash outflow per year per surface unit in square meters; thus, it is possible to compare project alternatives and choose the alternative that minimizes the absorption of financial resources in the long run. In this article, the LCF model is applied to three project alternatives and highlights the energy savings in the long run for consumption choices and the importance of tax benefits for the reduction of the cash outflow for a family in long-term housing. Given the results of the research, the proposed LCF model can be applied on a larger scale, in particular, to quantify social welfare generated by tax benefits financed with public spending, in terms of economic activation and assessing environmental externalities.

Evaluation of Investment in Renovation to Increase the Quality of Buildings: A Specific Discounted Cash Flow (DCF) Approach of Appraisal

“…Traditional LCCs were improved with a recently developed life cycle cost approach (LCF) aiming to quantify not the cost absorption of an investment over time but the cash outflow related to the investment [17]. The LCF application to building investment develops a previous approach [18] applied to food processing and follows the LCC method developed by other researchers [19] who have followed a traditional cost accounting approach. The LCF is based on the life cycle cost (LCC) and has been adapted to assess real estate investment in residential buildings for private use, even considering the effects of a tax deduction.…”