Posted on Wednesday, December 11th, 2013 in by Matt Garmony
Maintaining a current assessment of the Insurance Replacement Value of Strata Titled complexes is important, particularly with the building construction costs escalations in recent years. In addition to building replacement costs, consideration needs to be given to changes in Town Planning Schemes and Zoning, particularly if the current zoning does not support or prohibits the replacement of the whole of the existing strata development. This is more essential within older suburbs where councils have made changes to their local Town Planning Schemes since buildings where originally constructed. Strata Complexes and their owners may be under insured and in risk of substantial loss should their property suffer severe damage or require replacement, particularly if the council will not permit the same number of units to be rebuilt.
The Licensed Valuers at Garmony Property Consultants have several methods of assessing the strata company’s appropriate insurance replacement cost that takes the above issues into consideration. The most appropriate method is dependent upon the individual circumstances of the complex and our valuers preliminary investigations can generally identify any concerns and recommend to Strata Manager & the Body Corporate the appropriate assessments required for the complex and allow them to properly instruct the valuer for the appropriate Insurance Valuation.
The most common assessments are briefly outlined in the three scenarios as follows:
SCENARIO ONE – Building Insurance Replacement Cost Valuation assuming the whole complex can be rebuilt.
The Licensed Valuers at Garmony Property Consultants can provide a Building Insurance Replacement Cost Valuation for the entire complex including all the individual units and common property improvements and will take into account the replacement cost of improvements, demolition and removal of debris, architects & professional fees, building cost escalations for a 12 month period and loss of rent and statutory outgoings. This will not take into consideration any shortfalls in relation to the number of permitted units, plot ratio and height limitations the current zoning prescribes.
It is important to note that by instructing the valuer to assess the Building Insurance Replacement Costs, you are assuming that the current building (number of units & building height) on site can be rebuilt in its current or broadly comparable form and that council will permit this at any time within the current premium year. This is considered extremely risky, if the local council does not currently allow the buildings to be replaced to the current height or number of units or if there is any uncertainty by the council in their current policies or zoning.
We are also of the opinion, properties that are greater than 3 stories high or have a lift and/or fire service, should be assessed by a suitably qualified quantity surveyor.
SCENARIO TWO – Building Insurance Replacement Cost Valuation on part of the complex and aggregate values assuming only part of the complex can be rebuilt.
We can also provide a Building Insurance Replacement Cost Valuation for the portion of the current units that are permitted by council to be rebuilt based on current policies or zoning, and provide a broad indication of Aggregate Market Value & Associated costs for the remaining units not permitted to be rebuilt for compensation purposes.
The Valuer will need to investigate what the local council will permit to be rebuilt under the current Town Planning Scheme Zoning and the council’s policies to determine if this partial rebuilding is practical. If there is any uncertainty from the council or if the council suggests the circumstance will be assessed upon application, then we recommend the worst case scenario is adopted. A portion of the remaining units that best reflects the level of accommodation within the complex will need to be inspected in order to complete the compensation component.
Example 1:
A 3 level complex is built in the 1960’s and council advises that if the building is destroyed, only a 2 level complex can be rebuilt due to a building height restriction. The total number of units can be rebuilt on the land however the upper level with river views would be lost. Therefore the body corporate can instruct the valuer to provide an insurance replacement cost for the units up to the level 2 with remaining units being compensated (insured) at fair market value plus acquisition costs for acquiring a similar value property.
Example 2:
A 10 unit villa complex is built in the 1980’s and the council advises that if the building is destroyed, only 5 units can be rebuilt due to a change in the zoning creating a unit shortfall. The body corporate can instruct the valuer to provide an insurance replacement cost for 5 of the units with remaining units being compensated (insured) at fair market value plus acquisition costs for acquiring a similar value property.
This scenario can only be implemented if the valuer is instructed which units will remain and which units will not be rebuilt. This should be formally reflected in the Strata Company By-laws. There appears to be no detail within the Strata Title Act that dictates which units are entitled to be rebuilt and which units will be compensated for. With the height restriction example it may be easier to distinguish, however where there is a unit shortfall and only a portion of the total units can be rebuilt, it is recommended to formally note in the Strata Company By-Laws which units are to be rebuilt and which units receive compensation before the building is destroyed.
Insuring some of the units by market value plus the acquisition costs for acquiring a similar value property will likely increase the sum insured as the cost to construct new units will be less than their aggregate market value.
We are also of the opinion, properties that are greater than 3 stories or have a lift and/or fire service, should have the insurance replacement cost assessed by a quantity surveyor which should be read in conjunction with the market value assessment by our licenced valuers for the compensation portion of the assessment.
SCENARIO THREE – Aggregate Market Values of all units assuming only part of the complex can be rebuilt.
We can provide an assessment of the Aggregate Market Value for all units for compensation purposes assuming only part of the units can be rebuilt. The Licensed Valuer determines the Aggregate of the Market Values plus Acquisition Costs for acquiring a similar value property and then deducts the Market Value of the underlying vacant land, which will be on sold after the cost of demolishing the building and removing the debris has been deducted. This will help to reduce the sum insured.
This scenario will provide market compensation for all unit owners, which will then allow them to purchase a similar unit to the same value as their current property. The owner has the potential to receive compensation and purchase another unit well before a newly rebuilt replacement could be constructed.
We note, when this scenario is adopted it is important that the strata unit entitlement is up to date as any compensation for units should be apportioned based on the Strata Plans unit entitlement.
A detailed cross section of unit types (if all units are unable to be inspected) within the complex needs to be inspected by the valuer that best reflects all levels of accommodation within the complex in order to complete the compensation component.
The cost to provide an insurance replacement report by way of scenarios two and three is far greater than scenario one’s standard insurance report as it takes into consideration the greater work involved in analysing various Market Values.
If you have any further queries, please do not hesitate to contact us.