I was recently asked “a favour” to clarify whether soft costs were included in the base costs of replacement cost new estimates, with the caveat not to spend too much time on it. While I recognize that none of us wants to waste anyone’s time in our busy days this topic required a little more than a quick email response.
The term Soft Costs in real estate development generally refers to certain costs associated with a new construction development project, which are required to get the project to the final “move in” phase. These costs can include items such as:
You can think of soft costs as the Non Brick and Mortar expense of any real estate development and they can be a substantial contributor to the final project cost.
From the point of view of a property appraiser (me) who is providing an opinion of the insurable cost of a subject property my perspective is.
My subject property stands before me, it is complete and operational. My task is to calculate the cost to replace the subject as it stands. Aside from the brick and mortar (direct) obvious costs what are the not so obvious (indirect) costs associated with a replacement cost new insurance estimate?
An insurance appraisal is a cost appraisal, that is, “the cost to replace or reproduce the property in like kind.” Construction costs are broadly segregated into the direct and indirect costs associated with the assembly of the building. Cost estimates are developed through the examination of the direct and indirect costs associated with any facility. Direct costs represent the materials and labour necessary to construct and install the components of an operating facility. Indirect costs are the expenditures not directly associated with the facility construction and can include such items as architect fees, permits, consulting fees, or any other cost item not directly associated with the development of a building site. The sums of direct and indirect costs represent the total expenditures necessary to completely build a facility.
So, the question becomes what indirect (soft) costs are not applicable to the replacement of a subject property that has already gone through the development process? Lets start with the obvious.
There may well be more indirect costs, which would not be applicable to the replacement of a facility, but I think we have covered the big ones above.
Now, this is where the perspective comes in. That perspective is that we are not “developing” a property to bring it to market so much as we are reconstructing a property to replace a loss. So the indirect (soft) costs would be from the contractor’s point of view.
And now, the question becomes what indirect (soft) costs are applicable to the replacement of a subject property that has already gone through the development process? Lets look at some.
There may well be more indirect costs, which would be applicable to the replacement of a facility, but I think we have covered the big ones above.
As for the question of whether they (soft costs) are in the base costs depends on what cost estimating system you are using and how they organize their reporting outputs. Of the items noted above generally the following are included in base costs.
And the following are not included in the base costs.
So, the perspective for me as a property appraiser is to consider any and all indirect (soft) costs associated with the contractor’s construction process, but to exclude any and all direct and indirect costs associated with the development of a real estate project.
February 2012 Lewin, Wright & Company Inc.
Lawrence Lewin, ASA is the founder and principal of Lewin, Wright & Company Inc. a leading property appraisal firm in Canada. He is a certified property appraiser with the American Society of Appraisers with a designation in Machinery & Technical Specialties.
Mr. Lewin founded Lewin, Wright & Company Inc. in 1986 and has more than 30 years experience working in appraisal field. Mr. Lewin has appraised thousands of industrial commercial and institutional buildings during his career.
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http://ca.linkedin.com/groups/VeriCost-OnLine-Property-Appraisal-3980552
]]>Appraising apartment buildings for insurance replacement cost new is fairly common at Lewin, Wright & Company. Over the years we have appraised apartments for pre and post loss situations as well as having provided Actual Cash Value appraisal reports for both insureds and insurers.
The following link will bring you to a download folder where you can find a recent case study and replacement cost analysis.
http://www.lewinwright.com/downloads/
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The value of building permits rose 20.9% to $6.4 billion in May, following a 21.5% decline in April. Higher construction intentions, particularly for commercial buildings in Quebec and Alberta and multi-family dwellings in Ontario, were behind the advance.
Following two consecutive monthly declines, permits in the non-residential sector rose 50.9% to $2.7 billion. This gain came mainly from higher construction intentions in the commercial component in Quebec, Alberta and Ontario.
The value of permits in the residential sector increased 5.3% to $3.7 billion in May, following a 12.1% decline in April. The increase occurred largely as a result of advances in the value of multi-family dwellings in Quebec and Ontario.
Source: Statistics Canada
]]>An insurance appraisal is a methodical unbiased impartial opinion of replacement cost. This opinion or estimate is arrived at through a formal appraisal process that typically uses the three common approaches to value. They are the Cost Approach - which is what it would cost to replace the improvements. There is the Direct Comparison Approach - which involves making a comparison to other similar, nearby properties which have recently been built. The third approach is the Income Approach, which is not applicable as an indicator of cost it is of most importance in appraising income producing properties. Insurance appraisals are made by accredited professional appraisers who have acquired the knowledge and experience to complete an appraisal according to standards of professional appraisal practice and that will meet the test of peer review.
The appraiser you select should be involved in property insurance appraisals on a full time basis, as with any profession the more involved you are in a particular sector the more aware you are of current changes that can affect the appraisal process. Specialization is the path to expertise and efficiency. It is important to communicate that you want a senior appraiser with the necessary skills to perform your insurance appraisal. Your insurance appraisal should include a process for gathering all necessary information this can include a building drawings review and site statistics gathering, this can be done in person or remotely. An experienced appraiser will know exactly what to look for and how to efficiently gather the necessary information either on a site inspection or through data collection over the internet. Today one can efficiently complete an insurance appraisal on any property anywhere in North America through the use of current technology.
Once data gathering is completed the cost estimate portion of the process is begun, traditionally this has consisted of the selection of a cost reporting publication or software, the inputting of the parameters and the output of the resulting cost estimate. More recently the use of more than one cost reporting agency along with publically researched new construction project(s) have led to a stronger more defendable appraisal report. As with any construction project, cost estimates can and do vary widely, it is no longer a best practice to rely on a single source of information as the ultimate answer to your replacement cost question. Today at a minimum three cost sources should be referenced and analysed to a conclusion of cost preferable along with recent new project construction cost results, one can never have too much data to analyse.
The appraiser you select needs to be able to convey all that we discussed above into an insurance appraisal report. This report must explain the complete appraisal process from start to finish, it must identify the property appraised state what is included and what is excluded from the appraisal process, it must have a definition of replacement cost new, it should discuss the appraisal process, why one approach was selected over another or why more weight was placed on one cost source over another. It should include the qualifications and experience of the appraiser who completed the work and a bibliography of the data used in the appraisal report. Finally every professional appraisal report must have a signed certificate of appraisal. A strong indicator of the professionalism of any appraiser is the appraisal report they produce. Part of your selection process should include a request for an example report of a similar property to yours to review.
The entire appraisal process is placed into a work file, these work files are usually kept on file for extended periods of time. Within the work file is all the documentation created during the initial phase of the appraisal process and can include site plans, photos, data collection forms, cost calculation worksheet, original appraisal report and appraisal communications. These documents are then used when the original appraisal report is being updated in the future or when post loss support is required.
When selecting your appraiser look for accreditation, experience, professionalism, and someone who is using todays technology to the benefit of their clients and you will have found an appraiser you can work with and trust.
Lawrence Lewin is the principal of Lewin, Wright & Company Valuation Consultants Inc. he has been engaged as a professional certified property appraiser for more than 35 years. He has performed insurance appraisals on everything from apartment blocks to nuclear generating facilities throughout the world. On many occasions he has provided expert testimony before courts and tribunals on property appraisal matters.
]]>By: Lawrence Lewin, ASA
The co-insurance clause is the insurance industries protection that if a property is not insured to “full” value, the property owner will become a co-insurer. It prevents property owners from deliberately underinsuring because they feel they could never suffer a total loss. Since 98% of fire losses are only partial losses, it would be possible to underinsure a property, knowing full well that there was little chance of loss in excess of the insured value. Co-insurance is a device to discourage this practice and is used by insurance companies to limit their own liability.
Unfortunately, a great deal of the time, post loss is when “full” value comes into question and a “forensic” or “post loss appraisal” is required to establish the “full” value prior to the loss event.
The Client-Attorney-Appraiser Team
Successfully using forensic appraisals in court requires that the client-attorney-appraiser team understand the special issues involved with these types of appraisals, as they differ significantly from typical property appraisals. The differences cover the gamut of legal issues from communication between the client and the appraiser through the legal admissibility of appraisal methodologies.
Forensic appraisals must be performed in conformity with the rules of the court. Typically, this is most significant in relation to confirming the unit price for labour or materials used in the cost approach, or the method of depreciation calculations used. Further, the appraisal techniques utilized must conform the “Uniform Standards of Professional Appraisal Practice” as well as to court precedent.
The forensic appraiser should be a professional with significant experience in the type of property under review. An appraiser who testifies that he is appraising a property type for the first time can expect significant cross-examination.
Differences in appraisal theory may be damaging
Another area of experience revolves around whether the chosen appraiser has previously testified under oath in a similar assignment. Prior testimony and appraisals should be fully explored so they cannot be used by the opposition to damage the case being made by the client. This is especially important when an appraiser has worked on similar cases in the past. Differences in appraisal theory and methodology from case to case if taken out of context may be damaging.
Confirmation Means Documentation
Anytime labour and material costs are to be relied upon as fact in a forensic appraisal, those labour and material costs require proper confirmation. Confirmation means the appraiser must speak directly with the buyer, seller or manufacturer in the transaction and secure documentation of those costs if at all possible.
In addition, a proper description of the property should be detailed to the extent possible, including all of the building construction components from the foundations through to the roof as well as manufacturing or processing equipment. An appraiser should physically inspect the property in the appraisal. Such an inspection should include the exterior and interior as well as a review of any relevant drawings available. Besides a site inspection, the appraiser needs to determine if there are unusual conditions that could affect the cost or value of the property.
A critical difference stands between forensic appraisals and those not used in court. In court, an expert may not testify in terms of opinion or inference unless they provide the underlying facts and data used to form an opinion. This essentially means that a lifetime of experience is of no consequence to a forensic appraiser unless ample data to support each element of the opinion of value can be provided.
Privileged and Protected
Once a forensic appraisal assignment is outlined and explained to the appraiser, a minimal amount of communication should take place between the appraiser and the client regarding the elements of the assignment. This is due to the issue of attorney client privilege. Any communication between the client and the appraiser is not privileged and, therefore, subject to discovery. Any appraisal conclusions or opinions should be communicated only to the attorney. In that way, those conversations are privileged and protected.
The nature of the assignment and the appropriate legal precedents affecting value should be fully communicated to the appraiser by the attorney prior to the commencement of the appraisal. In this regard, some of the more critical elements that would be examined by the appraiser early in the appraisal process would include plans and specifications, prior modifications history, all previous appraisal reports, engineering reports, current systems survey and maintenance policy, as well as original construction costs if available.
A Successful Conclusion
A forensic appraisal requires close cooperation between the client, attorney and appraiser. A successful conclusion is enhanced when all three parties working hand-in-hand exercise proper diligence.
April 2011 Lewin, Wright & Company Inc.
Lawrence Lewin, ASA is the founder and principal of Lewin, Wright & Company Inc. a leading property appraisal firm in Canada. He is a certified property appraiser with the American Society of Appraisers with a designation in Machinery & Technical Specialties.
Mr. Lewin founded Lewin, Wright & Company Inc. in 1986 and has more than 30 years experience working in appraisal field. Mr. Lewin has appraised thousands of industrial commercial and institutional buildings during his career.
]]>So, you have been told your church needs to get an insurance appraisal before your next renewal.
Who do you talk to about insurance appraisals?
Your agent/broker should be able to refer you to an appraisal company, but if not ask them to call the insurance company to get the names of some capable appraisal companies from them. And finally you can contact the appraisal societies for referrals.
Church Buildings
Churches are rather unique insurance risks, as they tend to be of above-average construction, above average in ornamentation and, therefore, above-average buildings in replacement value. Establishing the buildings replacement value is the starting point in the process of insuring a place of worship and its contents. It is essential that the replacement value be accurate to ensure that the premium charged is fair and proportional, as replacement value forms the basis of the insurance premium charge for property coverage.
Architecture style plays a role in establishing replacement costs. Heavy timber framing is more costly than lightweight wood framing, and heavy steel construction is more costly than light steel framing. Horizontally and vertically reinforced masonry construction is superior to ordinary block and brick construction.
The cost of fire alarm systems, sprinklers, burglar alarms and surveillance systems add to the replacement cost of a building. Adding protective coverings to stained glass adds to the over all replacement cost of the windows.
Getting it right.
Getting the replacement value of a building right is becoming a major issue in underwriting the risk for insurance companies and re-insurers alike. Large losses have made insurance companies very cautious when it comes to building values.
A detailed survey.
Certain components in a building, such as stained glass, pews, and pipe organs are usually considered to be part of the building value rather than contents of a building. As such, these elements must be identified and included in an appraisal. A complete survey of the building is necessary to develop an accurate appraisal.
A physical survey of the building begins with measuring the building and drawing a diagram of the building. Characteristics, including square footage, height of walls, type of construction, building-material quality, perimeter footage of footings, number of sections within a building, fire divisions, fire alarm systems and sprinklers, balconies and occupancy types, are recorded.
Location is recorded in order to input local material costs and labour costs specific to any area in North America. A replacement value is calculated based on the total inputs. Special features such as footage of pews, number of theatre seats, number of ranks to a pipe organ, pulpit, baptismal and altars are individually added as itemized elements that are attached to the building.
Quality of materials.
A "Quality Ranking" is applied to the building section by section. The Quality Ranking is a measurement determined by observation. Determining what is “economical”, "average", or “superior” is where this task requires experience.
Exactly what is an average stained glass window? What is an average steeple? What is an average mural, mosaic, statue, carving, millwork detail, window opening size, chandelier, door or any other building element? This determination is subjective. The appraiser uses his or her own experience to establish the quality rank, in comparison to all the other churches he or she has inspected.
It is important to add extra value for "above average" items because ordinary replacement-value policies replace with only enough money to buy the average product with the same "utilitarian" quality or usefulness. An average replacement value insurance policy is adequate only for average- or below-average stained glass... as well as any other building element. If your stained glass is above average, the normal replacement-value policy might be inadequate.
Historic Buildings
Buildings on a national or local registry of historic places are required to replace with building elements like the original. This is a contractual requirement placed on the owner by the registry agreement. Insurance companies must underwrite accordingly if there is to be sufficient coverage to cover damage at the time of the loss... or else the owner is left responsible for the difference.
Pipe Organs
Although a fire's destructive capabilities are obvious, water damage can be just as destructive. Often even small amounts of water can wreak havoc on an organ. Water damages pipes, action, leather, and wood. Excessive water will seep into even the most solidly constructed wind chest and cause damage to pipe work and internal leather. Only after slow careful drying can the true damage be realized. Possible warping and glue failure in critical areas can also occur. It takes foresight to be adequately insured to cover such tragedies.
First, a knowledgeable appraiser should appraise your instrument. This assessment is essential to having the proper insurance coverage. An experienced appraiser will want to know certain information about your organ such as manufacture, model, serial number, number of stops, number of ranks, date of installation, dates of any upgrades, original cost and cost of upgrades. All of this information will be of assistance when the appraiser contacts the manufacturer to inquire about new replacement costs today.
Stained Glass
Insuring valuable stained glass is something that has caused many questions and has stirred much debate among insurance professionals and building owners. Some insurance companies insure stained glass as part of the building; others insure it under a special "fine arts" insurance policy, and still others may include the stained glass windows as contents within an insurance policy. To add to the confusion, how a claim is paid also differs among companies and policies. Some insurance policies pay claims at full reproduction value, others at replacement value, and still others at actual cash value.
An underinsured customer could be charged a coinsurance penalty at the time of a loss, and a customer with an actual-cash-value policy will be subject to depreciation in the replacement value at the time of a loss.
There are two basic factors used to determine if one should insure stained glass as part of the building replacement value or separately, as a fine arts floater:
1. Is the stained glass above-average quality?
2. Is the stained glass designed by a known artist and/or of original artistic merit?
Not every stained glass window in existence is original or unique. Some are indeed average, but that does not mean poorly crafted or poorly designed. The average stained glass studio or stained glass artist can replace good-quality stained glass windows. Standard replacement-value insurance coverage will normally cover the replacement costs.
Replacement Costs
An insurance appraisal is a cost appraisal, that is, “the cost to replace or reproduce the property in like kind.”
What does it cost to construct a church today? Where do those construction costs come from and how accurate are they?
The base costs for the typical building types come from several well recognized published sources previous client’s construction costs, and our own experience with this type of construction. All available information is reviewed in relation to the types of construction as encountered on a project and a set of base construction costs per square foot is developed and adjusted for location anywhere in North America.
Basements
Not all properties have excavated basements therefore a cost component should be developed for basements and applied where applicable to each property. Further adjustments to the base can be made for height, finish and quality of finish.
Church Models
Not all churches are constructed the same, therefore costs should be developed for specific church models, these basic models are then adjusted for height, finish and quality of finish on a per property basis. Additional cost items such as elevators, sprinklers, alarm systems, balconies, stained glass, pipe organs, bell towers and bells if present can then added to the base model cost to arrive at a total cost per property.
Auxiliary Buildings
Not all congregations have the same auxiliary building mix, therefore costs should be developed for basic auxiliary models, and these basic models are then adjusted for height, finish and quality of finish on a per property basis. Additional cost items such as elevators, sprinklers, and alarm systems, if present are then added to the base model cost to arrive at a total cost per property. Through a careful selection process of the above building models that matches to a specific property and after making adjustments for additional items, height, finish and quality of finish one can arrive at a reasonable estimate of the replacement cost new of a property. This replacement cost new is meant to reflect the cost to replace a property completely as it stands today at one time.
Summing is up.
A written appraisal is necessary to establish the value of the property. This is done by a professional appraiser and submitted to the carrier by the customer at added expense to the customer. Getting accurate appraisals is not an easy task, especially for rural churches. It takes a specialist who is capable of appraising many churches to really know the cost of replacing the same quality of property.
Remember that the insurance policy is actually a legal and binding contract. Both the insured and the insurer have specified responsibilities. There are dozens of optional coverage’s, variations and differences to consider.
Church insurance is difficult to write if the agent/broker does not know the exact needs of the customer, and every church is a bit different. Arbitrary values and under-estimated value can result in inadequate coverage.
Knowing what kind of property your church is, is the first step in knowing what kind of insurance best fits your needs. Selecting the services of a specialized appraiser can prevent future problems and ensure your church will have enough money to replace your valuable and beloved stained glass windows, organ, bell, and buildings if they are damaged or destroyed.
Lawrence Lewin is the founder and principal of Lewin, Wright & Company Inc. a leading appraisal firm of church properties. Mr. Lewin founded Lewin, Wright & Company Inc. in 1986. Mr. Lewin has appraised hundreds of places of worship throughout North America during his career.
© Copyright June 2004, Lewin, Wright & Company Inc. Last Modified: 03/2011
]]>The clause exists in all insurance policies and works with your Replacement Cost Cover or your Actual Cash Value Cover, and can affect your claims settlements in a very dramatic way. When you purchase insurance on a building, insurance companies will expect that you insure the entire building, for its true complete "value" (read cost). In fact, when premiums are determined for the risk, insurance companies may not expect to lose the entire building and premiums and rates reflect this, but all premiums and rates are based on the premise that the amount of insurance carried equals the value of the complete building.
The co-insurance clause is the insurance company's protection that if you have not insured the "complete" building, you will become a co-insurer. It prevents you from deliberately underinsuring because you feel you could never suffer a total loss. Since 98% of fire losses are only partial losses, it would be possible to underinsure a property, knowing full well that there was little chance of loss in excess of the insured value. Co-insurance is a device to discourage this practice and is used by insurance companies to limit their own liability.
The co-insurance clause stipulates that in order to be fully reimbursed for a loss, even a partial one, the insured must carry insurance for at least a specified percentage of the total value of the property, these days that specified percentage can be as high as 90 percent. If the property is insured for less than that amount, the insured assumes some of the risk and becomes a co-insurer with the insurance company for losses within the policy coverage amount. This decision by the insured also has the effect of reducing the policy premium.
If the prospect of bearing part of the loss fails to fill you with enthusiasm you should file a statement of value with your insurer. The statement should be backed up by a professional appraisal and this too should be filed with your insurance company. It is then unlikely to be challenged if you subsequently have a claim.
The insurance company will not compensate the owner of a property who suffers a partial fire loss, the full amount of that loss, even if the loss is less than the insured value, unless he carried insurance at least equal to the co-insurance requirement. When determining what proportion of a claim will be paid for a partial loss, the insurer divides the amount of insurance carried, by the amount of insurance that should have been carried.
It is the insured’s responsibility to ensure that the value of the coverage accurately reflects the true value of the property. If the property is undervalued inadvertently, or in a deliberate attempt to reduce insurance premiums, the insurance company will pay the claim only in proportion to the amount of coverage carried.
For example, if your policy has an 80% co-insurance clause and the building is valued at $1,000,000, it should carry insurance in the amount of $800,000. If it then sustained a loss of $500,000, the claim would be paid in full:
$800,000
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$800,000 x $500,000 = $500,000
Had you only carried insurance coverage of $600,000, then the formula would apply as follows:
$600,000
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$800,000 x $500,000 = $370,500
Even though the $500,000 loss falls within the monetary limits of the policy, you would receive only three quarters of the amount claimed, or $370,500. If the building had been insured for at least $800,000 (or 80% of its value), the insurer would have reimbursed you for the full amount of the loss.
You are required to carry insurance equal to specified percentage of the value of your property. If you do not, your losses are reduced proportionately by the percentage you are underinsured.
Make sure that the amount of insurance and the type of clauses in the policy match. In other words, don't permit a replacement cost endorsement to be in your policy if your insurance values are equal to the actual cash value of the property.
Try to determine as best you can the true value of your property; the actual cash value and the replacement cost. Determine what form of insurance you wish to carry and govern such a decision based on what you might do should the property be destroyed.
Talk to a qualified commercial insurance broker. One who understands these clauses and can help you through the maze of determining just how you should insure your buildings. Obtain an appraisal if you can which shows you the replacement cost figure, the actual cash figure, as well as the market value figure.
Finally, update your appraisal; once you have gone through the process don’t let all your hard work become obsolete. We recommend having your appraisal report re-valued every 3 to 5 years. This is particularly useful for insurance valuations since we can arrange for these updated costs to be provided automatically at specified intervals.
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Have you noticed how things come in bunches? Well, lately I have been appraising a bunch of historical or historically designated or historically significant buildings, and there always seems to be confusion on how to appraise such buildings for insurance purposes. So, here’s the answer on how to appraise these kinds of buildings.
To begin with buildings are designated by municipal, regional or national bodies each body has their own mandate and their own rules regarding the protection and the allowable changes to those properties. What we are talking about here is remodelling, retrofit, or redevelopment of those buildings. The rules of these bodies are meant to protect the buildings significant architectural features, or a districts look and feel and any changes have to be completed in conformity with the established conventions for that locale.
From an insurance appraisal standpoint we are concerned with estimating the funds necessary to replace or reproduce a property “in like kind”. So, what does that mean “in like kind” in relation to a historical building? Does it mean that you have to replace a rubble stone foundation with another rubble stone foundation? Does it mean you have to replace the wood post and beam structural framing with another wood post and beam structural frame? Does it mean you have to replace coal fired furnace with another coal fired furnace? I think you can see where I am going here.
In reality all buildings in this North America are governed by building codes, local, regional and national. Those building codes are updated on a regular basis and are there for the protection of the general public. All buildings in use must comply with those building codes. You cannot repair a building unless it complies with the current building codes; you cannot rebuild a building unless it conforms to the current building codes. Which means you cannot build a building today on a rubble stone foundation and so on.
So, how do you properly appraise this class of building? Well, you start with the replacement cost new of a functional replacement model which will conform to current building codes, then you adjust that replacement model (usually upward) for the architectural features required to maintain the architectural integrity of the building or district in which it is located. The result a new building with a concrete foundation, and a gas fired heating system, but that has the look of the previous building.
You cannot drive a 1957 Chevy on the highways today unless you have a seatbelt and running lights, so to you cannot build an old building today the way they did back in the day.