DRC Method

Question 1

When is the depreciated replacement cost method used?

Answer 1

For owner-occupied or specialised properties that are rarely sold on the open market, e.g. schools and hospitals

Question 2

What is the depreciated replacement cost principle?

Answer 2

Based on the principle that a buyer will pay no more for an asset than the cost of acquiring an asset of equal utility, whether by purchase or construction. Includes a depreciation factor to reflect the age and condition of the existing building

Question 3

What are the five stages of the depreciated replacement cost method?

Answer 3

Estimate replacement cost of the asset; Adjust for contract size and professional fees; Adjusted Replacement Cost - Apply depreciation to reflect age, condition, and obsolescence; ; Add land value, including any allowances or deductions for site issues (e.g. obsolete buildings); Decapitalise at appropriate rate: 2.9% for churches, education and health buildings; 4.6% for other property types (Contractor’s valuations only); Stand back and review the valuation for reasonableness

Question 4

What capitalisation rates are used in the DRC method?

Answer 4

2.9% for churches, education and health buildings; 4.6% for other property types; Applies to contractor’s valuations only

Question 5

What is the difference between depreciated replacement cost and the contractor’s method?

Answer 5

Depreciated replacement cost is used for financial reporting and Red Book valuations, focusing on the cost to replace the asset with one of equal utility, less depreciation. Contractor’s method is used for rating valuations, applying similar principles but includes decapitalisation to derive annual value

Question 6

What are the key factors that impact obsolescence?

Answer 6

Functional: outdated technologies or regulatory changes;
Economic: market conditions, taxes, and interest rates;
Physical: deterioration or surrounding environment.

Question 7

How is the depreciation factor calculated?

Answer 7

Depreciation factor = estimated remaining life of the building ÷ total life of the building from new

Question 8

What are the drawbacks of the depreciated replacement cost method?

Answer 8

Cost does not always equal value — must consider wider economic context; Depreciation factor is often an estimate and may lack precision; Land value can be affected by zoning and planning constraints; Reason for occupation may not be based on financial rationale

Question 9

Talk through a contractor’s valuation.

Answer 9

Estimate replacement cost: area × e.g. thick wall allowance × rate; Adjust for contract size and professional fees; Apply depreciation for age and functional obsolescence; Add site works per m² and add land value using rate per m²; Add Ebdon allowance where applicable; Decapitalise the net value to derive annual value; Stand back and review the valuation for reasonableness

Question 10

What is the Ebdon allowance?

Answer 10

A deduction from land value to reflect encumbrance by obsolete buildings; Applied where site is affected by structures no longer fit for purpose

Question 11

What index is used to adjust construction cost information for time?

Answer 11

Use the BCIS “All-in” Tender Price Index; For the 2023 Revaluation tone date, the adopted index point is “359”

Question 12

How is location accounted for in contractor’s valuations?

Answer 12

Apply BCIS “Location Factors” after adjusting for time; For Scottish Mainland at tone date, use location factor of 0.91

Question 13

What is the adopted normal contract size for valuation purposes?

Answer 13

£4,000,000 is the standard contract size used for analysis and valuation; Adjustments are made using a recommended contract size adjustment table

Question 14

How are fees treated in contractor’s valuations?

Answer 14

Professional fees are added after adjusting for contract size; Typically based on BCIS guidance and reflect standard industry practice