RURAL
- MANMADE IMPROVEMENTS
Physical
improvements are the manmade components of the farming system. Rural
physical improvements are only a small part of the total market value
of broadhectare farming but are the most important part of intensive
farm systems such as piggeries and broiler farms. Since the physical
improvements for such intensive land uses are very
specialised,
the value of the improvements for broadhectare farms only will be
considered here. For broadhectare farms the most common physical or
structural improvements in order of importance (generally) are:
- Fencing
- Water
improvements
- Yards and sheds
- Silos
- Homestead and
ancillary buildings.
The
above order applies to a property with little or no urban influence
but whose value is determined largely, by agricultural factors. For
example, a 2.5 ha hobby farm near a large provincial city would have
the homestead as the major physical improvement and on some hobby
farms near Sydney rural improvements such as an orchard's packing
shed may even be detrimental to the property's value because they
will not be used by the hobby farmer and have little value for
alternative uses.
DEPRECIATION
The
components of the farm system can be subdivided into two broad
classifications:
- Physical
improvements
- Land (including
merged or site improvements such as clearing and drainage).
The
major distinction between the two is that physical improvements
depreciate in value from date of completion whereas the land
component generally, does not depreciate in an expanding economy.
That is, in an expanding economy the owner enjoys capital gains
or
an unearned increment in value.
THE
COST RULE
The
value of a just completed physical improvement is equal to its
cost
so long as it represents or is part of the highest and best use of
the land. Its value at any time after that date is always less than
cost and is equal to its cost of construction less any accrued
depreciation. In valuation practice the cost of construction is
the true cost being the sum of:
- Contract price
with the builder
- Loss of
interest on the land component during period of construction.
- Loss of
interest on the progress payments during the period of construction.
- Pro rata
holding charges such as rates and taxes during the period of
construction.
- A supervision
fee (usually about 10% of the contract cost)
- Less any tax
benefits from construction (eg for the cost of internal fencing).
Therefore,
the cost of construction is substantially more than the contract
price alone. Real cost can be tested in the market place by comparing
sales of sites with and without (or obsolete) improvements.
The
rate of depreciation of an improvement is a function of:
- The intensity
of use
- The type of use
- Climate.
EXAMPLE
The
highest rate of depreciation for physical rural improvements is for
intensive uses such as a piggery. Piggeries generate corrosive waste
products that affect particularly galvanised steel parts of the
building or yards. On the other hand there are examples of old hay
sheds in dry inland areas that were built in the 1890s (with imported
galvanised steel) and in the 1910s that are in good condition.
TYPES
OF DEPRECIATION
PHYSICAL
Physical
depreciation is the loss in value caused by wear and tear and the use
of the improvement. It is tangible and observable on inspection.
Accrued physical depreciation can be either curable (for example, in
need of painting) or incurable (for example, expensive damage to the
footings).
FUNCTIONAL
Functional
depreciation or obsolescence is the loss in value of the improvement
caused by poor, inefficient and/or obsolete design. For example, old
shearing sheds designed around the need to accommodate an engine room
and belt driven shearing equipment.
ECONOMIC
A
loss in value caused by some external economic or legal factor. The
most important economic depreciation is caused by technological
change. For example, the use of ringlock (packaged) fencing largely
replacing old net fencing. The use of high tensile steel in fencing
has made older fences with a higher number of strainer posts less
valuable.
Arguably,
the use of "pour on" drenches has made dip trenches
obsolete.
Economic
depreciation is also be caused by legal factors. For example, when
the local authority disallows an intensive the land use for
environmental reasons or the loss in value of dairy improvements when
a dairy is not allowed for environmental reasons.
Whether,
or not such an improvement has some value will depend on whether or
not it can be converted to the higher and better use. If it can, then
the improvement has a base or in situ salvage value. If it
cannot, then it has demolition value only.
See
fencing
See
water improvements
See
yards
See
woolshed
See
sheds
See
silos
See
homestead
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