REPLACEMENT COST NEW (RCN) METHOD

If a building is new and represents the highest and best use of the land, then its value is equal to replacement cost new (RCN). RCN is more than the builder's contract price and is determined as follows:

BUILDER'S CONTRACT PRICE including builder's profit:	100 000
Period to build: 8 months
LOSS OF INTEREST @ OPPORTUNITY COST
A rule of thumb is to use loss of interest over half the period to build: 100 000 * 4 months @ 1% per month =	4 000
HOLDING CHARGES
Rates and taxes for full period @ $200 per month: 8 * $200 =	1 600
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TOTAL COST TO BUILD:	$105 600
DEVELOPER'S OR (OWNER'S) PROFIT @ 15%:	15 840
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REPLACEMENT COST NEW (RCN):	$121 440

NB. Loss of interest on land is ignored on the assumption that capital gains approximate that loss.

Rather than using the direct comparison approach in the summation method in determining the value/m² of the building, the cost to build method can be used. This method uses of the builder's contract price as the starting point of value (although strictly, it isn't the correct cost to build) and then an amount for accrued depreciation is deducted to find the value of the building.

However, this method does not really achieve a great deal over the more direct comparison of value/m² approach shown above because the valuer has to analyse the depreciation rate from sales by finding the value being paid/m2. Therefore, this method is not recommended.

See cost method