1. You have received instructions from the proprietor of a school to provide an estimate of the market value of a four-storey school complex. The building, which is situated on a 3-acre parcel of land, has a total gross building area of 2,400m2. You have determined that the building, which was constructed 10 years ago, has an effective age of 8 years. Evidence gathered from the market indicates that a similar property with a gross building area of 2,000m2 was recently constructed at a cost of GH¢6,000,000. Land values within the neighbourhood of the school are currently estimated at GH¢350,000 per acre. A similar building with a replacement cost (as new) of GH¢5,500,000 was recently sold for GH¢5,200,000. At the time of sale, the building had an effective age of 12 years while the 2.5-acre land on which the building is situated was estimated at GH¢800,000.
Question
- You have received instructions from the proprietor of a school to provide an estimate of the market value of a four-storey school complex. The building, which is situated on a 3-acre parcel of land, has a total gross building area of 2,400m2. You have determined that the building, which was constructed 10 years ago, has an effective age of 8 years. Evidence gathered from the market indicates that a similar property with a gross building area of 2,000m2 was recently constructed at a cost of GH¢6,000,000. Land values within the neighbourhood of the school are currently estimated at GH¢350,000 per acre. A similar building with a replacement cost (as new) of GH¢5,500,000 was recently sold for GH¢5,200,000. At the time of sale, the building had an effective age of 12 years while the 2.5-acre land on which the building is situated was estimated at GH¢800,000.
Solution
To estimate the market value of the four-storey school complex, we need to consider both the value of the building and the value of the land it is situated on.
Step 1: Determine the cost per square meter of a similar building. The similar building cost GH¢6,000,000 and has a gross building area of 2,000m2. Therefore, the cost per square meter is GH¢6,000,000 / 2,000m2 = GH¢3,000/m2.
Step 2: Estimate the cost of the school building. The school building has a gross building area of 2,400m2. Therefore, the estimated cost of the building is 2,400m2 * GH¢3,000/m2 = GH¢7,200,000.
Step 3: Adjust the cost of the building for its age. The school building is 10 years old but has an effective age of 8 years. A similar building with a replacement cost of GH¢5,500,000 was sold for GH¢5,200,000 when it was 12 years old. This suggests that the value of a building decreases by about GH¢25,000 per year of effective age (GH¢5,500,000 - GH¢5,200,000 = GH¢300,000 / 12 years = GH¢25,000/year). Therefore, the adjusted cost of the school building is GH¢7,200,000 - (8 years * GH¢25,000/year) = GH¢7,000,000.
Step 4: Determine the value of the land. The land is 3 acres and land values in the area are estimated at GH¢350,000 per acre. Therefore, the value of the land is 3 acres * GH¢350,000/acre = GH¢1,050,000.
Step 5: Add the value of the building and the value of the land to get the total estimated market value of the school complex. GH¢7,000,000 (building) + GH¢1,050,000 (land) = GH¢8,050,000.
Therefore, the estimated market value of the four-storey school complex is GH¢8,050,000.
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