2.5.45 The employment of assets including land and buildings should be costed using opportunity cost values. The valuation of property should be based on the higher of the most valuable feasible alternative use, or the best value that could be obtained for its current use.
2.5.46 Determining the right values requires expert advice. Advice should be sought from suitably qualified and experienced valuation surveyors, for instance, members of the Royal Institution of Chartered Surveyors or the Institute of Revenues, Rating and Valuation. Where the planning context is unclear advice should also be sought from surveyors experienced in planning matters.
2.5.47 In many cases, an up-to-date market value should provide a satisfactory measure of opportunity cost. However, valuations based on market prices reflect private rather than social costs and benefits, hence they will not always reflect opportunity costs. For example, they may not take full account of the actual or potential amenity value or environmental impact of a particular land use; or where the current use of land is subsidised, market prices may need adjustment to reflect the impact of the subsidy; or where the market value of a site is enhanced by planning permission the property should be valued to reflect the actual planning approval.
2.5.48 Assessing the value of buildings in their most profitable use is fairly straightforward where the building can be readily adapted to different users' requirements, such as standard office accommodation. However many public sector buildings, such as prisons and hospitals, may not be readily adaptable to other purposes. In the absence of an alternative use for the buildings, the higher of the value of the site for redevelopment and a valuation in current use of the site plus buildings, should be used. The latter can be estimated in terms of depreciated replacement cost (DRC).
2.5.49 DRC value may represent what the land and buildings are worth to the occupier, but a DRC approach is normally only used where no market exist for a property for its existing use. It would not be unusual for the alternative use value, which represents market value, to be much less than DRC value. The DRC value should not be used to represent the expected proceeds of any sale/disposal. It is unlikely that the market would pay as much as the DRC value.
2.5.50 Land and buildings should generally be costed in terms of either capital values or annual rents. It is normally appropriate to use capital values in appraising freehold property, properties with development value and longer leasehold interests. In other cases it is usually appropriate to use annual rentals. Actual rent paid on leasehold property (the passing rent) will often differ from the market rent. It is the market rent that should be used in appraisal but only from that point in the lease where the rent is subject to review. Common errors in appraisal are either to omit the rental or capital value of land and buildings already owned, or to double count the cost by including both the capital cost and rental value.
2.5.51 Capital values of land, buildings and other assets should be attributed as costs at the beginning of any period in which they are employed by an option. Property should be costed whether or not any financial transaction is anticipated. For instance, it should be costed whether or not it is already owned or needs to be purchased. In new build cases, the cost of construction should be included. Costs of refurbishment should be included in the years in which they are expected to occur.
2.5.52 Where assets have a residual life, their residual values should be included as benefits in the year in which they are released by an option, or the last year of the appraisal period, whichever is sooner. Any enhancement of the value of a building during its life, for instance, due to refurbishment should be taken into account in estimating its residual value. Residual values should be attributed whether or not the property is to be sold or retained.
2.5.53 Double counting of the cost difference between options should be avoided. It is generally sufficient to cost in the alternative option(s) the sites actually employed in those options. For example,
• suppose there is an option to use a site already in ownership worth £5,000 ("Option 1") and an alternative option to acquire and use another site worth £8,000 ("Option 2").
• The difference in cost between these options is adequately reflected by including a cost of £5,000 in Option 1 and a cost of £8,000 in Option 2.
• It would be incorrect to add a benefit of £5,000 to Option 2 to reflect the sale or release of the owned site.
• That would give the misleading impression that Option 2 is less costly than Option 1 by £2,000; whereas it is more costly by £3,000.
2.5.54 Deciding the correct treatment of opportunity costs can be less straightforward than in the above example. For instance,
• suppose there is another alternative ("Option 3") that involves employing the £5000 site for the first two years and then moving the function to a new £8000 site.
• In this case, £5000 should be included as an opportunity cost at the start of the appraisal period;
• a residual value for the same site should be included as a benefit in Year 2;
• an opportunity cost of £8000 should also be included in Year 2; and a residual value for new site should be included at the end of the appraisal period.
2.5.55 In some cases it may be helpful to separate the value of the land from the buildings. This is because buildings usually depreciate in real terms over their lifetime but site values may appreciate or depreciate. For instance, site depreciation may be attributable to, for example, contamination, mineral workings, or poor ground conditions.
2.5.56 Appraisals should include any land price appreciation as a consequence of the project or programme. This may occur with appraisals of urban regeneration projects, or of flood protection. In such cases great care is needed, as the appreciation itself is likely to be most uncertain. Expert advice is required.
2.5.57 Costs to the public sector as a whole must be taken into account in the appraisal calculation. This will be important in the case of jointly occupied buildings where there might be difficulties in finding a replacement tenant if one occupier were to quit, so imposing additional costs on the major occupier.
2.5.58 Allowance should be made for an appropriate level of ongoing maintenance costs. If maintenance is not carried out to an appropriate standard this will be reflected in the increased costs of refurbishment, or reduced sale price of a freehold property, while in the case of leasehold property dilapidations payments will be incurred at the termination of the lease.
2.5.59 Costs of providing temporary accommodation and other costs of decanting staff should be included in appraisals.
2.5.60 When a building requires refurbishment, the relative merits of refurbishment, and alternative options such as redevelopment, relocation and disposal should be appraised.
2.5.61 Where possible, appraisals should include both freehold and leasehold options to test both for value for money.
2.5.62 The time period for appraisal should relate to the life of the services being provided and be sufficiently distant to cover all the important cost and benefit differences between options. The appropriate period may be shorter than the physical life of the buildings or longer than the period for which they are leased. A time period of about 25 years is typically used, with suitable allowance for refurbishment costs and residual values. However, there is flexibility to tailor the time period to suit the circumstances of the case in hand.