Assessment of Construction in Progress

Unfinished cottage

Today, one of the most important indicators of investment in fixed assets, housing construction and other programs is the market situation of construction-in-progress objects. The investment potential of this market is huge.

Construction in progress can be considered as an unsuccessful implementation of investment projects, when specific investors exposed to increased risk, in an unfavorable investment climate, could not achieve their goals. In order to return at least part of the invested funds, many of them are ready to abandon the projects they have started and sell unfinished construction projects on the open market to more enterprising owners. Practice shows that the assessment of objects under construction at the cost of costs does not reflect the interests of modern market participants. Therefore, the market for construction-in-progress objects has been stagnating for a long time, and construction-in-progress objects cannot find an effective owner. In rapidly changing market conditions, evaluating construction – in-progress objects is a very relevant and complex task that requires special knowledge and experience from appraisers.

Evaluation of objects under construction is carried out for the following purposes:

  • By placing an object under construction on the organization’s balance sheet.
  • Determination of the real market value of an object under construction, which reflects the construction and market price situation.
  • Making a decision on the further use of the object under construction. The answer to the question of further functioning of the facility depends on the degree of its completion and on the possibility of changing its operational purpose. Sometimes the frame system of “unfinished construction” allows you to build on its basis a completely different construction than it was supposed to be ten or fifteen years ago.
  • In case of reorganization transformations (creation of a holding company, separation of divisions, bankruptcy).
  • Purchase or sale of an object under construction. Often, the new owner will face additional costs associated with the registration of documents, technical expertise and connection of various communications. Today, a modern investor is more willing to purchase an object under construction together with a package of documents put in order.
  • In order to effectively dispose of the land plot on which the object under construction is located. In most cases, the value is made up of land plots on which objects of unfinished construction are located. With the help of an assessment, you can determine the options for the most efficient use of the land plot on which a long construction site is located.

As a rule, the construction-in-progress assessment is applied to objects such as buildings or structures. In order for the assessment of construction in progress to be objective, it is necessary to correctly classify the object of assessment of construction in progress. Construction-in-progress assessment uses several ways to classify objects that are under construction. The most significant classification for the appraiser is from the point of view of whether an unfinished object has the ability to act as profitable real estate. Most public buildings and structures, as well as residential buildings, can be used as income-generating real estate. Evaluating construction-in-progress with these types of unfinished properties tends to use a cost-effective and profitable approach.

Industrial buildings and structures, in turn, can be divided into two large groups. The first group includes buildings and structures for specialized purposes, where there are practically no opportunities to change the functional purpose due to the peculiarities of design solutions. The second group includes objects that can be used to accommodate various types of production facilities, and, therefore, have more universal spatial planning and design solutions. Evaluation of construction in progress in the form of objects belonging to the first group uses mainly a cost-based approach. The assessment of construction in progress in the form of objects belonging to the second group is determined using both a cost-based and revenue-based approach. Construction-in-progress assessment uses virtually no approach based on comparative sales analysis.

Construction-in-progress assessment determines the real market value of an object under construction, which reflects the construction and market price situation. In addition, an assessment of construction in progress can help determine options for the most efficient use of the land plot on which construction in progress is located.

It should be noted that one of the most important components of the initial permit documentation is the conditions for engineering support of the object, that is, the conditions for connecting the object to the water supply, sewerage, gas supply, power supply, etc. Agreed by the city (district) services. as a rule, technical conditions for engineering support of objects under construction have a limited validity period. This period averages 3-5 years. If the validity period of the original permit documentation has expired or the planned change in the functional purpose of the object requires additional capacity in terms of engineering support, then the costs associated with obtaining a new set of original permits should be taken into account again.

List of documents required for building evaluation:

  • Certificate of registration of ownership of an object under construction (if registration has been made).
  • Documents confirming the rights to the land plot.
  • Construction permits.
  • General explanatory note to the construction project.
  • Accounting statement on the book value of the building (if the building owner is a legal entity).
  • Act of conservation of an object that has not been completed by construction (if the object is mothballed).
  • Information about the presence of encumbrances in the object of construction in progress, including encumbrances with collateral or debt obligations, and other restrictions on the use of the object.
  • Industry affiliation of the object.
  • Start date of construction and end date of construction.
  • Information about the structural system of the building (structure).
  • Permitted annual power consumption (water, electricity, gas supply, etc.).
  • Built-up area.
  • The degree of completion of construction in general and for individual structural elements separately.