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Real Estate Appraisers & Consultants*

Definitions

Appraisal: A formal opinion of value: prepared as a result of a retainer; intended for reliance by identified parties, and for which the appraiser assumes responsibility – as defined by Canadian Uniform Standards of Professional Appraisal (CUSPAP).

Market Value: is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.  Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  1. buyer and seller are typically motivated;
  2. both parties are well informed or well advised, and acting in what they consider their best interests;
  3. a reasonable time is allowed for exposure in the open market;
  4. payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto; and
  5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

The Cost Approach: The Cost Approach to value assumes that a prudent purchaser will not pay more for a property than the cost to recreate it in its present condition provided there are no costly delays or economic factors which might influence value.  The approach involves the determination of the replacement cost of the improvements, less depreciation, plus the value of the land, as though vacant.

The Direct Comparison Approach: This approach to value is based on the Principle of Substitution, which affirms that a prudent purchaser will not pay more for a property than the price of an equally desirable substitute property available under similar conditions.  This approach provides a reliable indication of value, particularly in an active market, given a reasonable availability of market data having a sufficient degree of comparability to the Subject.

The Income Approach: The Income Approach involves a conversion of anticipated future benefits to be derived from the ownership of property into a value estimate through a capitalization process, which converts the anticipated future income and/or reversions to a present worth estimate.  Within the Income Approach, the two methods, which are conventionally used, are the Direct Capitalization Method and the Discounted Cash Flow (DCF) Method.

Capitalization Rate: A rate of return on a real estate investment property based on the expected income that the property will generate. The Capitalization rate is used to estimate the investor’s potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property. If you want to get technical, it is basically the discount rate of a perpetuity.
Capitalization Rate = Yearly Income/Total Value – as defined in Urban and Real Estate Economics (BUSI 300 Textbook)– by Robert W. Helsley

Exposure Time: The estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of appraisal.

Highest and Best Use: As stated in the 2010 report on Canadian Uniform Standards of Professional Appraisal (CUSPAP), published by the Appraisal Institute of Canada’s Standards Committee, Highest and Best use can be defined as:

“The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.”

It is to be recognised that in cases where a site has existing improvements on it, the highest and best use may very well be determined to be different from the existing use. The existing use will continue, however, unless and until land value in its highest and best use exceeds the total value of the property in its existing use.

The four criteria the highest and best use must meet are physical possibility, legal permissibility, financial feasibility and maximum profitability. Implied within these criteria is recognition of the contribution of that specific use to community environment or to community development goals in addition to wealth maximisation of individual property owners.

Reconstruction Cost: is the cost to replicate, at current prices, using the like kind and quality materials, construction standards, design/layout, and quality of workmanship.  Reconstruction costs also include a number of site-specific and process-related costs that are experienced when rebuilding after a loss.  These additional expenses are related to repair/restoration contractors, construction process, time urgency, limited site mobility, adjoining non-construction areas, insured’s property, economies of scale, dangerous/hazardous materials, and mold concerns.  “As Defined by Marshall and Swift / Boeckh”

Reconstruction recognizes that, due to a variety of factors, it is more costly to rebuild a structure in the case of a loss than to construct a structure under the conditions which are typically present during new construction.

Reconstruction cost as defined herein is different that the appraisal term “Replacement Cost”

Replacement Cost: is the estimated cost to construct, at current prices, as of the effective date of the appraisal, a building with utility equivalent to the building being estimated, using modern materials and current standards.  “As Defined by the Canadian Uniform Standards of the Appraisal Institute of Canada

Bylaw Upgrades: The requirement to incur reconstruction costs for construction aspects which are not incorporated into the current improvements, but which are required by current zoning bylaws.  An example of this would be underground parking where none currently exists and where not enough surface stalls are available or the preservation of heritage façade.

Demolition and Debris Removal Cost: is the estimated cost to demolish that which remains of a structure in the event of a total loss, including the costs of removing all materials from the site.

Depreciable amount: The cost of an asset, or other amount substituted for cost (in the financial statements), less its residual value. – International Accounting Standards(IAS)-16, para.6

Depreciation: The systematic allocation of the depreciable amount of an asset over its useful life.- 2 IAS-16, para.6; IAS 36, para.6

[1] Appraisal Institute of Canada, “Canada Uniform Standards of Professional Appraisal Practice, 2008 Canadian Supplement.”