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.
[box title=”CASE EXAMPLE – Communication and Expectations” centered_title=”false” with_bg=”false”]A courthouse was valued to determine the insurable value; the property was well over 200 years old and had musket holes from three wars (1776, 1812, and 1864). In addition, the property had just been fully restored. The county that owned the property proudly boasted that they had spent over $15 million to restore the property and were upset the valuation came in at around $5 million. The original policy was for the “Functional Replacement Cost” with an option for Actual Cash Value, if the property was not replaced. The property was valued a second time. While working with their carrier to treat the property as “historical,” the valuation still did not meet the property owner's expectation – even though the value in the report more than doubled.
The solution was a combination of education and loss control. It is generally easier to create a replica of the property in the event of a total loss then to refurbish an existing property. Some of the elements of the property, such as the bullet holes, could never be replaced and so a display showing the holes was made and placed inside the property. A replaced section of the old courthouse was recovered and used to make the display.
We also recommended high quality documentation of the property, focusing on any filigree to help in restoration in the event of a loss. By working with the property owner and the carrier, we were able to meet their expectations and needs. More important, this valuable part of American history was better protected. Modern restoration needs to take into account not just the historical nature of the property but the green elements of construction; many of today’s restorations strive to be LEED certified buildings. ETS is uniquely qualified to help meet these needs too.[/box]
When a historical property is renovated and there is a focus on energy conservation and green construction, the property may qualify for Energy Tax Credits. While these credits cannot often be used by the holders of historical properties, they can be “gifted” to the architect or contractors involved in the restoration. These credits can range from between $0.60 and $1.80 per square foot.
[box title=”Who Needs An Insurance Appraisal?” centered_title=”false” with_bg=”true”][one_third]
Home Owner Associations
Golf and Tennis Clubs
Hotels and Resorts
Bed and Breakfast Inns
Colleges and Universities
ETS is a nationally recognized leader in the valuation of Historical Properties and Antique buildings. The valuation of historical properties is as much an art as a science. There are several different basis of value, and these must be matched with both the needs of the carrier and the expectations of the property owner. The variance in TIV between “Historical Reproduction” and “Historical Replacement” can be substantial. It is critical in meeting your valuation needs that appropriate valuation procedures be used and that the policy be reviewed.
How can Engineered Tax Services help you?
We can help determine the insurable value of your property, but more important we can help assure that the proper value is determined. We can help with the LEED certification and the Energy Tax benefits. These benefits may be shared or transferred to your architect (this can help offset some of their costs). ETS’s staff is comprised of Professional Engineers and our experts have been involved in hundreds of valuations for Historical and Antique buildings. There is no fee for our consultation; we will be happy to discuss your questions and to assist you in assessing your needs and requirements.