What is an Insurance Appraisal? An insurance appraisal is a replacement cost analysis which provides an accurate estimate of the amount of insurance required to replace each structure and/or amenity exactly as it stands on the day the report was prepared. The appraisal provides both a hazard and flood insurable value (if the property is in a flood zone). Engineered Tax Services (ETS) calculates each buildings reproduction cost on a component-by-component basis from the ground up. Our software processes the complex calculations needed to correctly estimate the labor and material costs for each building component and system. Our software also calculates the taxes, fees, overhead, and profit to provide an accurate estimate of what it would cost to reproduce the structure today. ETS may be able to take advantage of additional savings from our report as it relates to your property insurance. Our detailed engineering report can eliminate the guess work that goes into underwriting property casualty policies. Realistically, the guess work never works to your favor. There is also potential savings in shifting insurance rates from real estate assets to personal property assets.
Why Obtain an Insurance Replacement Appraisal?
Most property owners, managers, boards, and/or insurance agents believe that obtaining an insurance appraisal for their property is one of the best decisions they have ever made. The reasons for this are simple:
- Our reports are unmatched in the industry and can serve as a Cost Segregation Study as well as an appraisal. A Cost Segregation Study was initiated out of a 1999 IRS memorandum allowing taxpayers to segregate various building costs into shorter depreciable lives. This allowance was then combined with an additional memorandum which allowed personal property such as furniture, fixtures, and equipment to be depreciated over a 5-year recovery period.
- The IRS memorandum was significant to all real estate investors because the structure of a building does not only consist of the walls and roof and some interior rooms, but such other items as land improvements (storm sewers, curbs and sidewalks, parking lots, swimming pools, landscaping, etc.) and personal property (flooring, interior finishes, decorative lighting, kitchens, interior glass and electrical wiring for appliances, etc.).
- While a property’s structure is subject to a 39-year recovery period, land improvements qualify for a 15-year recovery period and personal property qualifies for a 5-year recovery period. The IRS allows owners through the process of a Cost Segregation Study to identify land improvements and personal property which can be separately depreciated over the shorter recovery period such as 5 years. A building will typically yield 25%-35% of the total costs that can be segregated into land improvements and personal property. This can translate to major tax savings for savvy real estate investors.
- Since depreciation is a non-cash flow item, application of this revenue ruling could provide a significant impact on this year's tax return. For example, a substantial tax benefit is achieved in the case where depreciation has not been taken on a building constructed for $8,000,000 with eligible improvements of $2,000,000 placed in service on January 1, 2000. The cumulative depreciation of $1,114,200 that was not taken previously can now be deducted in the first year of change. Additionally, the balance of the depreciable assets continues to be depreciated over the remaining life, these deductions, over the remaining useful life, provide an after tax present value benefit of $600,000.
Obtaining an insurance appraisal demonstrated due diligence on the part of the board members, property manager, and/or insurance agent.
- The owners, board members, manager, and/or agent have the peace of mind knowing that the property is accurately insured.
- An insurance appraisal assists your agent in placing the property coverage with a carrier by providing documentation that underwriters need to write coverage.
- Obtaining an insurance appraisal prevents under-insuring which puts the property at risk for having funds to rebuild in the event of a catastrophic loss; over-insuring would result in paying extra insurance premiums.
- An insurance appraisal provides a third party, unbiased valuation of the property’s replacement cost.
- If a loss occurs, an ETS appraisal, along with all data acquired in performing the appraisal, will be available to the client to help expedite the settlement of the claim.
- All digital photographs taken at the time of the physical inspection are electronically achieved for the clients use in the event of a loss.
- Having an up-to-date insurance appraisal provides accurate values for coverage, eliminating the possibility of a co-insurance penalty in the event of a loss.
What is involved in an ETS Insurance Appraisal?
- A full consultation with a representative of the property to discuss the scope of the work.
- An in-depth on-site inspection of the property by the appraiser.
- An examination of all construction plans for the structures included in the insurance appraisal.
- The production of an appraisal report with the construction plans utilizing state of the art engineering and construction cost data software programs.
The complete insurance appraisal includes:
- Definition of Hazard Valuation (any non-flood peril)
- Definition of Flood Valuation (based on National Flood Insurance Program Guidelines)
- Detailed Building Descriptions
- Property Location Map
- Photographs of Each Appraised Structure (High Resolution Digital Photographs)
- Recapitulation of Values
- Replacement Cost Estimates (Hazard and Flood)
- Insurable Replacement Cost Estimates (Hazard and Flood)
- Depreciated Replacement Cost Estimates (Hazard and Flood)
All digital photographs taken at the time of the physical inspection are electronically archived for the clients use in the event of a loss.