Schedule of Market Values Appraisal of Buildings.pptx

The Schedule of Market Values (SMV) is a document used in the appraisal and assessment of real properties, typically prepared by local government units or authorized agencies (such as the Assessor's Office) in many countries. It serves as a guide in determining the fair market value of land, buildings, and other real properties for taxation and other purposes.

1. SMV: Appraisal of Buildings BSREM - 4

2. Definition of Terms MASS APPRAISAL : It is the practice of appraising multiple properties as of a given date by a systematic and uniform application of appraisal methods and techniques, employing common data that allow for statistical review and analysis of results. SCHEDULE OF MARKET VALUES (SMV) : It refers to a table of market values of real properties within a local government unit prepared by assessors pursuant to existing laws, rules and regulations. The SMV , as set out in the Philippine Valuation Standards, is synonymous to the Schedule of Fair Market Values ( SFMV ) referred to in the Local Government Code.

3. Buildings shall be generally classified in accordance with the structural designs for which they were intended, regardless of their actual use. So, the classification may be residential, commercial, industrial or agricultural. Residential Single Detached Duplex Apartment of Row Houses Townhouses Condominiums Commercial Office Bank Theater Hotel/Motel Parking Buildings Industrial Factory Warehouse/Bodega Agricultural Barn Poultry house Stable Hog house Greenhouse

4. For purposes of establishing the schedule of base unit construction cost (BUCC), each type of building shall be further grouped in accordance with the kind and quality of material used in the construction. Type I . ( Buildings of wood construction ). The structural elements may be any of the materials permitted as follows: Nipa houses and similar structures fall under this type. Type II . ( Buildings of wood construction with protective fire-resistant materials and capable of being one-hour fire resistive throughout ). Except, that permanent, non-bearing partitions may use fire-retardant treated wood within the framing assembly. Type III . ( Buildings shall be of masonry and wood construction ). Structural elements may be any of the materials permitted by the NBC: Provided, that the building should be one-hour fire resistive throughout. Exterior wall should be of incombustible fire-resistive construction. Type IV . ( Buildings of steel, iron, concrete, or masonry construction ). Walls, ceilings, and permanent partitions should be of incombustible fire resistive construction: Except, that permanent non-bearing partitions of one-hour fire-resistive construction may use fire-retardant treated wood within the framing assembly. Type V . ( Buildings should be fire-resistive ). The structural elements should be of steel, iron, concrete, or masonry construction. Walls, ceilings, and permanent partitions should be of incombustible fire-resistive construction.

5. Valuation of Commercial & Industrial Buildings The value of buildings can be determined by a number of methods including: Depreciated Replacement Cost Capitalization of Income (less land value) Discounted Cash Flow (less land value) Hypothetical Methods

6. Depreciated Replacement Cost Sometimes referred to as the RCN less Depreciation . The most common method of determining the value of buildings or other improvements for LGU purposes. If the expected economic life of the building can be determined, depreciation can be allocated by a “ straight line method ” over the life of the building, or more correctly linked to the real rate of depreciation as can be calculated based on sales of properties (buildings) of the same nature and of various ages.

7. Building cost information is a regular element in SMV and other valuation tasks. Information with regard to all elements of materials and labor in the construction process of various buildings is collected regularly by appraisers, which allows total construction cost of a model building to be calculated as new. The CRN must include any and all costs of design and plans or drawings, consultant fees, permit costs and other related expenses and profits a builder or developer would make. It should also include costs of additional improvements such as paving, fencing, and other structures that form part of the property.

8. Ultimately, the aim is to establish some reliable costs per square meter for those types of buildings within the LGU. Once these new costs are established, they can be applied directly to new construction or can be adopted using a depreciation rate for older buildings. EXAMPLE: A retailer has purchased a shop site in an expanding retail area. The retailer then constructs a two-level building comprised of an open floor space, a small kitchen and staff comfort room at each level. The retailer pays a builder of P3.0 Million to design and construct this building of 400 square meters in total area.

9. EXAMPLE: A commercial property comprising of 600 sq.m . of land and a new two- storey building of 800 sq.m . was sold recently for P20 Million . The seller owned the land for several years prior to developing and later selling the whole property. The land has a value of P6 Million based on a recent comparable sales. The seller entered into an agreement with the builder to carry out the works for a contract price of P11 Million .

10. Building – 14 M Land – P6M Building – ? Profit – ? Land – P6M Building – 11M P11M/800m 2 = P13,750 per m 2 Profit – 3M

11. Depreciation If the building is new, appropriate to the site, and contribute to the HABU of the property, then the building will generally have an added value in its construction cost. However, when a building is not new, then it adds something less than its replacement cost due to depreciation. DEPRECIATION is the loss of value from “cost-new” to its present day value. Accrued depreciation includes loss in value from physical deterioration, functional, and external or economic obsolescence. The issue in an appraisal situation is whether or not commercial or industrial buildings depreciate at EVEN rate over their economic life. In which case, a “straight line” depreciation from the time they were built until they shall have been completely wasted would indicate that there is no additional value to the land.

12. Rapid depreciation occurs if the use of buildings is no longer relevant. Consider a building designed for processing of local agricultural products or perhaps an abattoir . Over a period of time, the locality changes and the area no longer produces these products. Although the building is still in perfectly good condition and can function, there is no demand in the local market for this type of facility. Resultantly, the building asset depreciated substantially due to economic obsolescence.

13. Consider this fully functional gas station , which is not particularly old. However, the nature of location changed due to a road diversion and the site use is no longer appropriate. The buyer demolished the gas satiation in order to build a retail store . In majority cases, this rapid change will not occur. The task of the appraiser is to reduce the value of the building over a period in order to reflect the drop in value over time.

14. Consider a building with a 40-year life span depreciating at 2.5% per year. If a building costs are increasing at 10% over the period of three years between the general revision, the following would be the case: Base year new building costs P1.0 Million . Building contributes fully to HABU. Thus, cost equals value. Depreciation is at 2.5% straight line over the lifespan of the building. The building is now 3 years old (7.5% total depreciation). Thus, the added value of the building at revision time could be P925,000 . Building costs over the have risen by 10%. Thus, the RCN of the building at the time of revision would be P1,100,000 . Depreciation would still be at 2.5% per year, or P27,500 x 3 = P82,500 . Thus, the depreciated value of the building is: P1,100,000 – P82,500 = P1,017,500 Hence, despite the revision, the building value itself is increasing.

15. Capitalization Approach Capitalization is the valuation of property on an income basis or a potential income basis. Capitalization is the term used in converting a regular income into capital value. The appraiser is concerned with the present worth of the future potential benefits derivable from the property. The capitalization rate expresses a fixed relationship between the two qualities of income and value, and is used as a measurement in the valuation process. In essence, capitalization determines and expresses the market value as a multiplier of the annual income. It expresses the income as a percentage of the value.

16. Capitalization Approach EXAMPLE: A property worth P2,000,000 with a return of P250,000 per annum would have a capitalization rate of 12.5% (P250,000/P2,000,000 = 0.125 = 12.5%)   Meaning, the annual income is 12.5% of the selling price (value). Thus, the 12.50 capitalization rate.

17. Depreciation in Mass Appraisal Establish market depreciation measures (depreciation benchmarks and depreciation schedules) for the reappraisal area. Depreciation is the difference between the RCN and the present value of an improvement . Depreciation can be divided into three (3) main categories: Physical deterioration –due to wear and tear, assorted damage, vermin/pest infestation, weather, etc. Functional obsolescence –changes in the desirability or inadequate design for modern times. Economic obsolescence – results from the changes in the industry perhaps re-zoning. It usually comes out as a result of changes outside the property where the building may still be fine, but no longer economically usable or profitable.

18. Present Condition (Remaining Percent Good)

19. Depreciation Table Based on Effective Age Once the depreciation benchmarks are completed, the market value present condition indicators (remaining percent good) must be incorporated in the Depreciation Table. One method of constructing a Depreciation Table is to tabulate the preliminary depreciation benchmarks to give a range for each class, type and age. Thereafter, the proper remaining percent good can be chosen for each actual age grouping. From this base information, a Depreciation Table for all actual ages can be developed.