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.