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Inseparable real estate improvements can be both buildings or structures located on land plot and, which, at the same time, cannot be separated from it without harm to themselves, as well as a certain kind of material costs that are made to change the internal appearance of the premises. Such costs are realized, as a rule, as part of the repair or reconstruction of a property and among the inhabitants can also be referred to simply as "repair".
It is natural that when assessing inseparable improvements, there are certain nuances in terms of the essence of the object of assessment, which imposes features on the process of determining the value real estate.
First, by defining market value improvements, it is important to realize that such an object of evaluation cannot be alienated on the market on its own. This means that the value of improvements cannot be considered without reference to the value of the property to which they relate.
Secondly, when defining market value capital costs for repairs, it is important to consider that, in contrast to the traditional understanding market value , for this object there is a limited circle of potential buyers and sellers. And to be more precise, it is only a specific buyer and seller. And the sale and purchase transaction, in essence, will consist in the fact that the lessor will compensate for the amount of the costs incurred for reconstruction and repair.
These circumstances, thus, form the peculiarity of the application of approaches and methods to the assessment. Namely, the income approach in its pure form, as well as the comparative approach, cannot be applied to such an object.
This means that the only approach in which the market value of improvements can be determined is the cost approach.
At the same time, the essence of calculations using the cost approach will be that capital costs should be considered as an investment project (taking into account its payback period, present value past investments, accumulated wear and tear of structural materials).
As a result of the calculations, the appraiser determines how effective, in a material sense, the costs incurred were. Moreover, the amount of compensation payable to the tenant as compensation is calculated taking into account the time value of money. This is because the landlord "buys" the improvements only after the end of the contract. But by this moment, their value has already managed to decrease due to the time value of money, as well as physical wear and tear structural elements. In this regard, it cannot be assumed that the tenant can expect to be reimbursed for the full amount of money spent.
Thus, when compiling a report, the final figure can characterize investments as appropriate if the amount of growth property value is positive, and if it is negative or equal to zero, then investments in improvements can be safely considered unnecessary or inefficient, and, therefore, the tenant will not be able to count on compensation.
Due to the lack of an unambiguous wording in the legislation, what is considered an inseparable improvement, according to established practice, they include such changes in the object that improve its technical and functionality and are inseparable from the object itself. Typically, such improvements are repairs, redevelopment of the property, reconstruction, restoration, and so on.
What is the valuation of inseparable improvements?
Valuation of inseparable improvements is the process of determining the cost of improvements to a property. It is important to understand that inseparable improvements cannot be separated from the property without harm to them directly, as well as to the property.
As practice shows, such an assessment is required:
- When renting a property
Case Study: An organization has been renting an office building for several years. Over the years, some premises have been re-planned in order to increase their functionality, and communications have also been replaced. Upon termination of the lease agreement, the tenant organization has the right to demand that the owner of the building reimburse the costs of improving these premises. To justify the amount, our company evaluates the cost of inseparable improvements.
- When calculating the size fractional ownership
Example from practice: During the period of marriage, the spouses made expensive repairs in the apartment using common funds. When a marriage is dissolved, if the apartment goes to one of the parties, the other has the right to demand compensation, taking into account the costs of this repair. In order for a fair decision to be made in court, our company evaluates these improvements.
The following factors affect the cost of inseparable improvements:
- Economic and technical relevance of the improvements made
- Completeness of submitted documents
- Degree of need for improvement
- Potential lifetime of the improvements made
How are inseparable improvements evaluated?
Determining the cost of improvements is an extremely difficult job, which can only be carried out by a specialist with sufficient qualifications and education. When assessing the cost of inseparable improvements, technical studies are carried out to determine the work carried out as inseparable improvements, and not repairs necessary to maintain the facility in its original state, which is of particular importance in litigation and other disputes.
When determining the market value of improvements, it is important to realize that such an object of evaluation cannot be alienated on the market on its own. This means that the value of improvements cannot be considered without taking into account the value of the property to which they relate.
When evaluating the cost of inseparable improvements, our appraisers use cost approach , which most fully and accurately allows you to take into account all costs and cumulative depreciation (physical depreciation, functional and economic obsolescence) and thereby obtain the final value of the market value of the improvements.
Important:
The amount of compensation payable to the tenant as a refund is calculated taking into account the elapsed time. This is due to the fact that the landlord, as it were, buys improvements only after the expiration of the contract. However, by this time, their cost has already been reduced due to the physical deterioration of these improvements. In this regard, it cannot be said that the tenant can count on reimbursement of the full amount of funds spent.
What does the client get?
Based on the results of the assessment carried out by our specialists, the client receives an assessment report, which is an official document confirming the market value of inseparable improvements, and is compiled in accordance with the requirements of the law and the Federal Valuation Standards (FSO). The report on the assessment of the cost of inseparable improvements has full legal force, sufficient for submission to the state, judicial and tax authorities of the Russian Federation.
The report includes:
- Assignment for evaluation
- Information about the Customer
- Information about the appraiser: Diploma, Certificate of membership in the SRO, Extract from the register of the SRO, Policy of compulsory liability insurance of the appraiser
- Description of applicable valuation standards
- Description and characteristics of the object of assessment
- Description of the assessment process and approach applied
- Documents for the object: title and technical documentation
- Information about analogue objects
- Company documents: OGRN, TIN/KPP, Insurance policy
Repair Cost Estimation as inseparable property improvements first of all, it implies the identification of the cost of capital expenditures at the facility (apartment, non-residential premises, building), i.e. are inseparable from the object itself without causing damage to it. These costs may represent buildings or structures located on a land plot that cannot be separated from it without causing physical damage to them and changing the appearance of the premises.
Clause 3 of Article 245 of the Civil Code of the Russian Federation:
A participant in shared ownership who has made inseparable improvements to this property at his own expense, in compliance with the established procedure for the use of common property, has the right to a corresponding increase in his share in the right to common property.
Separable improvements to the common property, unless otherwise provided by an agreement between the participants in shared ownership, shall become the property of the participant who made them.
MAIN TYPES OF ASSESSMENT OF INSERTABLE IMPROVEMENTS:
Features of the assessment of inseparable real estate improvements
Insofar as the subject of evaluation are works, services and materials paid by the interested person, then such an appraisal object cannot be independently alienated on the market, since it is considered as a share in the original value of the property.
The income approach method is based on determining the present value of the expected future income from the use of the object. As part of the subject of assessing the market value of works, services and materials necessary for repairs, reconstruction, this approach is not applied, since it does not provide for the receipt of any income.
When applying the method of comparative approach, the cost of an object is determined on the basis of a comparative analysis of the sale of similar objects. The sale price is adjusted to reflect significant differences between the comparable property and the property in question. Comparative approach was not used, since the repair, reconstruction at each specific facility is strictly individual, there are no analogues on the market in terms of their quantitative and qualitative characteristics.
The only possible and most accurate is cost approach estimates of these costs. This method is based on determining the cost of recreating an exact copy or equivalent replacement of an object as new in current prices and determining the loss of value due to the physical wear of structural materials, functional and economic obsolescence of the object of assessment.
When making calculations, the assessment of the cost of repairs shows the effectiveness of the costs incurred, the amount of compensation for inseparable improvements to the property, taking into account the cost Money after the expiration of time from the moment of repair work. For example, the landlord acquires improvements at the end of the lease agreement, when the cost of repair costs (work, services and materials) have lost their original value due to inflation and physical deterioration finishing materials. For these reasons, it is impossible to count on the full value of all costs incurred.
REPAIR COST EVALUATION
According to Article 5 federal law dated July 29, 1998 No. 135-FZ “On appraisal activities in Russian Federation» to assess inseparable improvements, it is possible to make independent evaluation involving an appraiser and preparing an appraisal report where:
- Inseparable improvements of repair or reconstruction are reflected;
- The cost of capital expenditures (works, services, materials) has been determined;
- Their quantitative and qualitative values (name and volume) are calculated.
me like independent appraiser And professional estimator with more than 10 years of experience, services are provided in assessing the cost of inseparable improvements to buildings and premises for various purposes.
The documents required for the legal defense of the report are available on (higher construction education, estimator's certificate, relevant diplomas and certificates, appraiser's liability insurance, certificate of inclusion in the SRO of appraisers).
Documents required to assess the cost of repairing inseparable improvements:
- A copy of the title document (certificate of registration of ownership or contract of sale, lease or other documents confirming your ownership);
At them availability :
- Permission to conduct overhaul, reconstruction;
- Copies of BTI documents (explication, floor plan)
- Design and estimate documentation for reorganization, reconstruction, overhaul;
- Information about the presence of encumbrances of the object: pledge, debentures, availability of tenants, special tax taxes and other restrictions on use.
Inseparable improvements to the leased property are benefits that contribute to the improvement, modernization, increase in the useful life or increase in the value of the leased property and, at the same time, they cannot be separated without damaging the property or changing its original appearance and properties.
What is recognized as inseparable improvements
The current legislation distinguishes two radically different categories of property improvements mediated under the lease. Among these:
- Separable improvements - improvements that can be separated from the object of lease without causing damage and changing the original essence of the object. They are recognized as the property of the tenant, who is entitled to take them if the landlord does not offer compensation for leaving them in their original place.
- Inseparable improvements - those that cannot be separated without causing damage to the property of the lessor or the object itself, which is an improvement.
Inseparable Improvement Features:
- Can be made only with the consent of the owner;
- Produced at the expense of the tenant;
- Increase the value of the leased item;
- Improve the functionality specifications property, consumer properties or service life;
It is important to understand that, in accordance with Art. 616 of the Civil Code of the Russian Federation, the tenant of the property is assigned the obligation to carry out current repairs of the premises, which does not imply the production of improvements that increase the price of the property. This rule assumes that major improvements cannot be made during maintenance.
A tenant of property who has made improvements against the will of the owner may receive a demand to remove them and restore the original appearance of the object.
Inseparable improvements include:
- Reconstruction, redevelopment;
- Completion, extension (completion of previously begun construction or construction of an additional structure);
- Modernization (replacement of old electrical wires or pipelines with a new one);
- Technical equipment (installation of an alarm system, etc.);
- Garden arrangement (planting fruitful trees);
- Painting (for example, in relation to a car);
Features of accounting and compensation of inseparable improvements
According to the provisions of the Civil Code, the costs of inseparable improvements can be compensated if they have been agreed with the owner of the property. If there was no such consent and the landlord is not set up for voluntary compensation, then the tenant is not entitled to demand compensation.
Compensation for the cost of inseparable improvements to the leased property, most often occurs in the following form:
- By commensurate reduction of the rent payment;
- By monetary compensation for the work performed.
In this case, the parties must agree in advance on the following nuances of compensation:
- Will the costs of construction and repair work be compensated or will compensation be provided only as part of the cost of materials;
- The period during which compensation will be made (during the term of the contract, after the actual implementation of improvements, after the expiration of the contract period).
Accounting for inseparable improvements
Inseparable improvements are included in the range of depreciable property . Accounting for non-separable leasehold improvements allowed by both the tenant and the landlord.
An owner who agrees to improvements must remember the following (when taxing):
- According to the Tax Code of the Russian Federation, depreciable property with a term of beneficial use exceeds 1 year, its cost is not less than 20,000 and it is paid by the owner of the premises;
- After making improvements, the cost of the object increases;
- After reimbursement of expenses, the lessor has the right to accrue depreciation by increasing its size;
- A factor indicating the extension of the service life as a result of capital investments is necessarily taken into account.
The lessee has the right to take into account inseparable improvements when recording expenses. In this regard, the following points are important:
- There is consent from the owner to implement capital changes;
- Expenses are reflected in the calculation of income tax (if there was compensation);
- Depreciation can be charged for the accounted object (if compensation has not yet been made);
- Depreciation can be accrued from the first day of the month following the month when the inseparable improvements were put into operation (you must have a document confirming the completion of work - an act of acceptance and transfer);
- Depreciation allows you to write off the expenses incurred during the capital investment only for the period during which the rental relationship is valid and within the monthly depreciation amount;
- If during the period of the contractual relations on the lease, the depreciation did not cover the previously incurred expenses, then they remain unaccounted for (transfer to the status of losses) and are not taken into account for taxation.
- Prolongation of the contract allows you to save the possibility of depreciation.
It is important to bear in mind that depreciation amounts are calculated according to the useful life and according to the rules for classifying fixed assets (previously, the rule was based on the calculation based on depreciation groups).
If the tenant, who has made inseparable improvements, has accepted them on his balance sheet of fixed assets, then he is obliged to pay property tax from him. However, if the owner of the property has made appropriate compensation before the commissioning of capital investments, then they cannot be taken into account in the amount of fixed assets of the tenant and are not subject to taxation.
Accounting for capital improvements in the accounting report can be reflected if the following conditions are met:
- Site improvements are used in the production of products, management activities, or for other needs that involve the receipt of payment;
- The object will be used for a long time (at least 1 year);
- The subsequent resale of the object is not included in the scope of the objectives of the organization;
- In the future, the object will be able to generate income for the company.
How to provide inseparable improvements in the contract
The implementation of inseparable improvements is a legal fact that requires proper registration. The parties may provide for such modernization in the form of a separate agreement, or as an annex to the main agreement describing the subject of the lease.
The contract for the reimbursement of the cost of improvements recognized as inseparable must contain:
- List of objects that act as improvements;
- Their preliminary cost (the cost of materials and construction and repair services);
- The timing of the work on the implementation of capital improvements (an important aspect in accounting);
- The procedure for paying for capital investments (by whom will they be paid, in what terms);
- A specific indication of the consistency of actions, both on the part of the landlord and the tenant;
- Liability for non-fulfillment of obligations or delay in performance.
The practice of lease relations shows that the parties have the right to provide for a universal condition regarding the production of capital investments, which indicates that the landlord initially agrees to any types of capital transformations and the tenant does not need to agree on this moment every time. However, in the event of a dispute, such a legal structure may not be reliable.
In the event that such modernization was carried out with the consent of the owner of the leased property, but was not documented, after which he issues a refusal to reimburse, the tenant should resort to judicial challenge. The evidence base can be:
- Testimony of witnesses present during the conversation;
- Audio, video recordings;
- Signatures on checks for the purchase of materials or actual reimbursement of expenses.
Determining the cost of inseparable improvements
Improvements for which the tenant claims compensation must meet the following requirements:
- Produced with the consent of the lessor and (or) the balance holder;
- Their separation will cause damage to the structure of the leased item;
- They are capital investments.
Before making reimbursement of expenses, the owner usually conducts an analysis of the amount of work performed, on the basis of which he draws a conclusion about the costs of improvement.
The cost of capital investments may include:
- Construction costs for the improvement;
- Their production, manufacture;
- Bringing them to a qualitative state in which they will be recognized as suitable for operation.
The cost of capital investments is determined by cost approach, which is used as a calculation of the cost of creating improvements.
Features of identifying the value:
- The final result of the calculations is not affected by the features of investments (overspending or savings in material, etc.);
- It is determined by the cost of construction works that were carried out on the date of assessment according to the relevant statements of the volume of work;
- The cost of work on the production of capital improvements is contractual in nature and directly depends on the timing and volume of their implementation.
Conclusion
Any actions related to the implementation of inseparable improvements must be agreed with the owner of the leased asset, since his will directly affects the possibility of obtaining compensation for the costs incurred. The owner of these improvements always remains the lessor. Compensation for capital investments can be made by a commensurate reduction in the rent payment or by a cash payment from the owner.
