Estimating the cost of the inherent improvements made. Example report. Tenant Improvements to Real Estate: Reimbursement Procedure and Valuation. The volume of the cost of capital investments may include

Inseparable improvements to real estate can be both buildings or structures located on a land plot and, at the same time, cannot be separated from it without harm to themselves, and a certain kind of material costs that are made to change the interior appearance of the premises. ... Such costs are realized, as a rule, within the framework of the repair or reconstruction of the real estate object and among the inhabitants can also be referred to in a simplified manner as “repair”.

It is natural that when assessing inseparable improvements, there are certain nuances in the essence of the subject 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 assessment cannot be alienated in 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.

Second, when determining the market value of capital repair costs, 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. More precisely, it is only a specific buyer and seller. And the transaction for the sale and purchase, in essence, will consist in the fact that the lessor will compensate the amount of costs incurred for reconstruction and repair.

These circumstances, thus, form the peculiarity of the application of approaches and methods to 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 within which the market value of improvements can be determined is costly.

In this case, the essence of the calculations by the cost-based approach will be that capital costs should be considered as an investment project (taking into account the payback period, the current cost of past investments, the accumulated wear 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 time, a decrease in their value has already occurred due to the time value of money, as well as the physical wear and tear of structural elements. In this regard, it cannot be assumed that the lessee can count on reimbursement of the full amount of funds spent.

Thus, when drawing up a report, the final figure can characterize investments as expedient if the increase property value positive, and if it is negative or equal to zero, then investments in improvements can be safely considered excessive or ineffective, and, therefore, the tenant will not be able to count on compensation.

Due to the lack of an unambiguous wording in the legislation, which is considered an inseparable improvement, according to the established practice, they include such changes in an object that improve its technical and functional capabilities and are inseparable from the object itself. Typically, such improvements are renovation, redevelopment of the property, reconstruction, restoration, and more.

What is an estimate of the cost of inseparable improvements?

Evaluating 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 directly to themselves, as well as to the property.

As practice shows, such an assessment is required:

• When renting a property

Case study: An organization has rented an office building for several years. Over the years, some premises have been redeveloped in order to increase their functionality, and communications have been replaced. Upon termination of the lease, the tenant organization has the right to demand from the owner of the building reimbursement of the costs of improving these premises. To substantiate the amount, our company evaluates the cost of inseparable improvements.

• When calculating the size of shared ownership

Example from practice: During the marriage period, the spouses made expensive repairs in the apartment using common funds. In the event of divorce, if the apartment belongs to one of the parties, the other has the right to demand compensation, taking into account the costs of this repair. In order to make a fair decision in court, our company evaluates these improvements.

The following factors affect the cost of inseparable improvements:

• Economic and technical relevance of the improvements
• Completeness of submitted documents
• Level of need for improvement
• Potential life of the improvements made

How are inseparable improvements evaluated?

Determining the cost of improvements is an extremely difficult job that can only be done 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 precisely as inseparable improvements, and not repairs necessary to maintain the object in its previous state, which is of particular importance in court and other disputes.

When determining the market value of improvements, it is important to realize that such an object of valuation cannot be alienated in the market on its own. This means that the value of improvements cannot be considered without considering the value of the property to which they relate.

When assessing the value of inseparable improvements, our valuers apply costly 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 total value of the market value of the improvements.

Important:

The amount of compensation payable to the tenant as compensation is calculated based on 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, a decrease in their cost has already occurred due to the physical wear and tear 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 drawn up in accordance with the requirements of the legislation and 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:

• Assessment task
• Customer Information
• Information about the appraiser: Diploma, SRO membership certificate, Extract from the SRO register, Appraiser's compulsory liability insurance policy
• Description of Applied Valuation Standards
• Description and characteristics of the object of assessment
• Description of the assessment process and approach used
• Site documents: title and technical documentation
• Information about analogue objects
• Company documents: OGRN, INN / KPP, Insurance policy

Repair cost estimate as inseparable property improvements first of all, it implies the identification of the cost of capital costs at the facility (apartment, non-residential premises, building) i.e. are inseparable from the object itself without causing damage. These costs can represent buildings or structures located on a land plot, which 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 using 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 the agreement of the participants in the shared property, shall become the property of the participant who made them.

MAIN TYPES OF ASSESSMENT OF INDIVIDUAL IMPROVEMENTS:

Features of the assessment of inseparable real estate improvements

Because the the subject of evaluation is works, services and materials paid by an interested party, then such an object of appraisal cannot be independently alienated in the market since it is considered as a share in the initial value of the property.

The income approach method is based on the determination of 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 required for repairs, reconstruction, this approach is not applied, since it is not provided for the receipt of any income.

When using the comparative approach, the cost of an item is determined based on a comparative analysis of the sale of similar items. The selling price is amended to reflect significant differences between the analogue item and the item under consideration. The comparative approach was not used, since the repair, reconstruction at each specific object is strictly individual, there are no analogues in their quantitative and qualitative characteristics on the market.

The only possible and most accurate is costly approach estimates of these costs. This method is based on determining the cost of reconstructing an exact copy or equivalent replacement of an object as new at current prices and determining the loss of value due to physical wear and tear of structural materials, functional and economic obsolescence of the object of assessment.

When carrying out 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 of funds after the time has elapsed since the repair work. For example, the lessor purchases 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 wear and tear of finishing materials. For these reasons, the full cost of all costs incurred cannot be expected.

ESTIMATION OF THE COST OF REPAIRS

According to Article 5 of the Federal Law of July 29, 1998, No. 135-FZ "On appraisal activities in the Russian Federation", to evaluate inseparable improvements, it is possible to make an independent appraisal with the involvement of an appraiser and prepare an appraisal report where:

• Inseparable improvements in repair or renovation are reflected;
• The cost of capital expenditures (work, services, materials) has been determined;
• Their quantitative and qualitative values \u200b\u200b(name and volume) have been calculated.

By me as independent appraiser and professional estimator with more than 10 years of experience, services are provided to assess the cost of inseparable improvements to buildings and premises for various purposes.

The documents required for the legal protection of the report are posted on (higher education in construction, surveyor's certificate, relevant diplomas and certificates, appraiser's liability insurance, certificate of inclusion of appraisers in SRO).

Documents required to estimate the cost of repairing inseparable improvements:

• A copy of the title deed (certificate of registration of ownership or purchase and sale agreement, lease agreement or other documents confirming your ownership);

When their stock :

• Permission for overhaul, reconstruction;
• Copies of BTI documents (explication, floor plan)
• Design and estimate documentation for reorganization, reconstruction, overhaul;
• Information on the presence of object encumbrances: collateral, promissory notes, the presence of tenants, special taxtaxes and other restrictions on use.

Inseparable improvements to the leased property are benefits that contribute to the improvement, modernization, increase in the service life or increase in the value of the leased item and, at the same time, they cannot be separated without damaging the property or changing its original appearance and properties.

What is recognized as an inseparable improvement

The current legislation distinguishes two fundamentally different categories of property improvements mediated within the framework of the lease. Among those:

• Separable improvements are improvements that can be separated from the leased item without causing damage or altering the original nature of the object. They are recognized as the property of the tenant, who has the right to pick them up if the landlord does not offer compensation for leaving them in the same place.
• Inseparable improvements are those that cannot be separated without causing damage to the property of the landlord or to the object itself being improved.

Features of Inseparable Improvement:

1. Can be made only with the consent of the owner;
2. Produced at the expense of the lessee;
3. Increase the value of the leased item;
4. Improve functionality, technical characteristics of 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 the current repair of the premises, which does not imply the production of improvements that contribute to an increase in the price of the property. This rule assumes that no major improvements can be made during maintenance.

The lessee of the property who has made improvements against the will of the owner may receive a demand for their elimination and restoration of the original appearance of the object.

Inseparable improvements include:

• Reconstruction, redevelopment;
• Completion, extension (completion of previously started construction or construction of an additional building);
• Modernization (replacement of old electrical wires or pipelines with a new one);
• Technical equipment (installation of an alarm system, etc.);
• Garden arrangement (planting fruit trees);
• Painting (for example, in relation to a car);

Features of accounting and compensation for inseparable improvements

According to the provisions of the Civil Code, the costs of making 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 disposed to voluntary compensation, then the tenant has no right to demand compensation.

Compensation for the cost of inseparable improvements to the rented property most often occurs in the following form:

• By proportionately reducing 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:

1. Whether the costs of construction and repair work will be reimbursed or compensation is provided only within the cost of materials;
2. The period during which the compensation will be made (for the duration 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 circle of depreciable assets ... Accounting for inseparable improvements in rented property allowed by both the lessee and the lessor.

The owner agreeing to the improvements should remember the following (when taxing):

• According to the Tax Code of the Russian Federation, depreciable property is subject to accounting if its useful life exceeds 1 year, its value is at least 20,000 and it is paid for by the owner of the premises;
• After making improvements, the value of the object increases;
• After reimbursement of expenses, the lessor has the right to charge depreciation by increasing its amount;
• 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 case, the following points are important:

• There is consent from the owner to carry out major changes;
• Expenses are reflected when calculating income tax (if there was compensation);
• Depreciation can be charged for the recorded object (if compensation has not yet been made);
• Depreciation can be charged from the first day of the month following the month when inseparable improvements were put into operation (you must have a document confirming the completion of the work - an act of acceptance and transfer);
• Depreciation allows you to write off the expenses incurred during a capital investment only for the period during which the lease relationship is in effect and within the framework of the monthly depreciation amount;
• If during the period of the contractual relationship on the lease, depreciation did not cover the previously incurred expenses, then they remain unaccounted for (become losses) and are not taken into account in taxation.
• Prolongation of the contract allows you to retain the possibility of depreciation.

It is important to take into account that the depreciation amounts are calculated according to the useful life and according to the rules for the classification of fixed assets (previously the rule on calculation based on depreciation groups was applied).

If the lessee, 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 made the appropriate compensation prior to the commissioning of capital investments, then they cannot be accounted for in the amount of the lessee's fixed assets and are not subject to tax.

Accounting for capital improvements in the accounting report can be reflected if the following conditions are met:

1. Facility improvements are used in product manufacturing, management activities, or for other needs that require payment;
2. The object will be used for a long time (at least 1 year);
3. The subsequent resale of the object is not included in the scope of the objectives of the organization;
4. In the long term, the facility will be able to generate income for the company.

How to provide for inseparable improvements in the contract

Implementation of inseparable improvements is a legal fact that requires proper registration. The parties may provide for such upgrades in the form of a separate agreement, or as an annex to the main agreement describing the subject of the lease.

An agreement for reimbursement of the cost of improvements recognized as inseparable must contain:

• List of objects serving as improvements;
• Their preliminary cost (cost of materials and construction and repair services);
• Time of implementation of work on the implementation of capital improvements (an important aspect in accounting);
• The procedure for paying for capital investments (who will pay for it, in what time frame);
• Specific indication of the consistency of actions, both on the part of the lessor and the tenant;
• Responsibility for non-performance of obligations or delay in performance.

The practice of rental legal relations shows that the parties have the right to provide for a universal condition regarding the production of capital investments, which indicates that the lessor initially agrees to any types of capital transformations and the lessee does not need to agree on this point every time. However, in the event of a dispute, such a legal structure may not be reliable.

In the event that such a modernization was made with the consent of the copyright holder of the leased property, but was not documented, after which he issues a refusal to reimburse, the tenant should resort to legal challenge. The evidence base can be:

• Testimony of witnesses present during the conversation;
• Audio and video recording;
• Signatures on receipts for materials or actual reimbursement of expenses.

Determining the cost of inseparable improvements

Improvements for which the tenant claims compensation must meet the following requirements:

1. Made with the consent of the lessor and (or) the asset holder;
2. Their separation will result in damage to the structure of the leased item;
3. They are in the nature of capital investments.

Before compensating for expenses, the owner usually analyzes the volume of work performed, on the basis of which he makes a conclusion about the costs of improvement.

The volume of the cost of capital investments may include:

• Improvement construction costs;
• Their production, manufacturing;
• Bringing to a quality condition in which they will be recognized as suitable for use.

The cost of capital investment is determined using a cost approach, which is applied in the form of calculating the cost of creating improvements.

Features of identifying value:

• The final result of the calculations is not affected by the specifics of the investment (cost overruns or material savings, etc.);
• Determined by the cost of the estimated construction work that was carried out on the date of assessment according to the corresponding sheets of the scope of work;
• The cost of capital improvements is of a contractual nature and directly depends on the timing and volume of their implementation.

Conclusion

Any actions related to the implementation of inseparable improvements must be coordinated with the rightholder of the leased item, since his will directly affects the possibility of obtaining compensation for the costs incurred. The landlord always remains the owner of these improvements. Compensation for capital expenditures can be made through a commensurate reduction in the rental payment or through a cash payment from the owner.