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Unit Shortfall Scenarios

Examples of shortfall scenarios written by Hemsley Paterson | Valuers & Property Advisors

A building insurance valuation is undertaken to asses the estimated cost of reinstatement for a particular development, taking into consideration factors such as the cost of rebuilding cost escalation over the lead in and construction period, demolition and removal of debris and professional fees.

Another important consideration is whether the development could be reconstructed to the same height, plot ration or density under the current Town Planning Scheme. This scenario is the most common in areas where zoning densities have changed of the year which can potentially result in a 'unit shortfall'. Essentially this meant the existing development exceeds what would normally be allowed on the parent site current planning restrictions.

An example of this may include a development of say, 10 single level villas on a site which could only accomodate 7 units, or a 5 storey building which could only be reconstructed to three levels as a result of planning amendments since the development was constructed. Another example may be a road reservation impacting the parent site which could potentially limit the effective land area and therefore lot yield.

In the instance of a unit shortfall, it is important consider what impact this would have on the strata owners if major damage, or a total loss were to occur. In the example of the single level villas above, there would potentially be 3 unit owners that could not have their property rebuilt which is why it is important to ensure your sum insured provides adequate cover to put you in as close to the same position as possible. In the vent of a unit shortfall, we can provide advice under the following scenarios:

Scenario 1: Assume part reconstruction, part compensation.

In this instance, a reinstatement cost estimate for the portion of the development which could be reconstructed on the parent site is provided, along with an opinion of the aggregate of individual market values for the remaining units.

Utilising the example of the 1- unit villa development above, as reinstatement cost estimate for 7 units on the parent site would be provided, along with market based advice regarding the market value of the 3 units which are not to be reinstated, plus acquisition costs ie. stamp duty.

The difficulty in this scenario is that the valuer would require specific instructions on which units would be reinstated and which owners would be compensated at market value.

Scenario 2: Assume compensation for all units.

Under this scenario, market based advice regarding the marker value of all the units within the development is provided, plus acquisition costs. From this aggregate of individual market values, the market value of the underlying land, less cost of demolition and removal of debris , along with selling and marketing expenses is deducted as this could be sold to offset the cumulative value of the individual units.

Essentially this scenario assumes that instead of rebuilding part of the development, all unit owners would be compensated for the value of their unit, allowing them to purchase of a unit of similar value and the parent site would be cleared and sold.

This scenario will also put all unit owners in a similar position sooner than other scenarios, as they would not have to wait for the development to be reconstructed.

Written by our partners - Hemsley Paterson | Valuers & Property Advisors

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