Case Study #1 Overview | My Assignment Tutor

Case Study #1 Overview and Instructions:Cost ApproachOverview:Case Study #1 is an existing 115-unit apartment project. Each group/individual will analyze theinformation given and derive an opinion of value via the Cost Approach. The case study is designed todetermine 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 takento indicate an opinion of value2. Summarize in paragraph form what is included within the replacement cost new including directand 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 inthe 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 depreciationfrom the depreciation comparables provided.5. Write a paragraph explaining the reconciliation process used to derive a final estimate ofdepreciation for the subject.6. Explain how you applied the breakdown and/or other depreciation techniques to allocate thetotal depreciation between physical deterioration, functional obsolescence, and externalobsolescence, 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 conclusion2. Use all of the information given in estimating the replacement costs new3. When extracting depreciation from the market using the depreciation comparables given, explainthe procedure and present the application to all of the comparables in a table4. It should not take you any more than one paragraph to reconcile the range of total depreciationestimates to the subject property. Be sure to reconcile your final estimate within the range andexplain why and which comparable(s) was/were given more weight5. Use a simple age/life method procedure to determine the physical deterioration for the shortlived items. All information about the physical deterioration is given.6. Use the breakdown method in allocating the individual types of depreciation. Create a separateparagraph 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 ordevelop 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 newa. Direct and indirect costs are givenb. Entrepreneurial incentive must be estimated2. Depreciationa. Extract from three sales giveni. Reach a conclusion of depreciation rate per yearii. Explain which elements of depreciation are captured by this estimate (ie. Includestotal depreciation)b. Use total depreciation estimate from extraction serve as the basis for the breakdownmethod. Take the percent from extraction and consider it the total of all physicaldeteriorationi. Physical curable is givenii. Short lived items are summarized in the case1. Calculate both percent of depreciation and dollar amount of short livediii. Long lived is the difference between the total from exaction and the totals alreadycalculated for the curable and short lived itemsc. Estimate any curable or incurable functional obsolescenced. Indicate total depreciation3. Reach a conclusion of site value from the information given4. Include a summary table to show your final value conclusion to the readerProperty Description:On February 27, 2019, you were asked to appraise a 115-unit existing apartment project that contains thefollowing unit mix:The improvements were constructed 15 years ago and are built of good quality materials and competitivewith other high-end apartment communities within the market area. The improvements are situated ona 11.85-acre site with amenities consisting of a swimming pool, two tennis courts, and a 2,500 square footclubhouse. The building has been well maintained since its construction 15 years ago. Its in goodcondition 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, themarket is currently witnessing an increasing number of properties changing to individually metered andtenant paid water. A reliable contractor has provided a cost to install individual water meters at $50,000.The decrease in owner 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 andavailability of amenities are competitive with those of competing properties.Neighborhood:The subject property is located within an established and stable apartment market. Multifamily demandexceeds the existing supply and the limited availability for new competition has resulted in high occupancyrates and rising rental rates. These trends should have a positive impact on the subject neighborhood andit is anticipated that property values will increase in the near future.Land Value Analysis:Analysis of land sales in the area indicates that the subject underlying land is worth $10,000 per apartmentunit.Cost Data:The replacement cost for the project via information provided by Marshall Valuation Service is $80.00 persquare foot (NRA), including direct and indirect costs, but excluding site improvements, appliances, andamenities. The current cost update multiplier is indicated at 1.081.Site improvements, appliances, and amenity costs were compiled from interviews with various developerswithin the market. According to this information, general site improvements for the subject are adoptedat $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. # of UnitsUnit TypeUnit Size (SF)35801 BR / 1 BA2 BR / 2 BA7501,000 Unit MixEntrepreneurial Incentive:A local developer of a similar recently constructed apartment project indicated she was motivated by a12% entrepreneurial incentive based on the sum of direct and indirect costs. She actually exceeded herprojections, receiving a 14% entrepreneurial profit. Another local developer indicated a range of 10% to12% of costs.Curable Physical Depreciation (Deferred Maintenance):– 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 $3,500Market Extraction:Comparable A: This is a 112-unit, 12-year old similar constructed apartment complex which sold recentlyfor $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 whichsold recently for $8,260,000. Its site value at the time of sale was $1,570,000; its replacement cost at thetime of sale was $10,800,000.Comparable C: This is the sale of a 124 unit, 18-year-old, apartment complex of low-quality constructioncontaining 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. ItemEffective Age(Years)Total EconomicLife (Years)Total Cost toReplaceRoof CoverCarpetingAppliancesAir ConditionersParking Lot15551515208102025$140,000$120,000$100,000$40,000$175,000Total$575,000 Short Lived Items


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