Entrepreneur's profit for residential buildings. Estimation of business profit

Entrepreneur's profit (PP)– entrepreneurial income, which represents a reward to the investor for the risk associated with the implementation of a construction project. When implementing a construction project, from its very beginning until the transfer of rights, or its rental or other use, a large number of risks arise. various types. Risk factors include:

• Economic and political factors;
• Social and regional factors;
• Entrepreneurial factor;
• Factor of construction conditions.

The greater the total level of all risks arising during the implementation of the project, the more the investor should receive as compensation and profit. The entrepreneur’s profit in this case is formed, like the discount rate, by the cumulative construction method; the formula for calculating the PP is presented below:

PP=Σ(R) +R risk-free,

• PP – profit of the entrepreneur (investor) of the construction project;
• Σ(R)- the total level of risks arising during the implementation of the construction project;
• R risk-free – rate of return cleared of risk (risk-free rate).

Risk factors and the total risk value are presented in the table:

Table. Risk calculation.

The most common and adequate choice of risk-free rate of return is the annual yield to maturity of government securities. They are highly liquid, and the level of investment risk for them approaches zero. However, the presence of a number of government securities forces the appraiser to choose among these securities, since government securities have different maturities, as well as different current yields to maturity.

When choosing a risk-free rate of return, the following arguments were taken into account:

• other things being equal, the more long term the maturity of a security, the lower the volatility of its yield;
• to ensure a constant value of the discount rate throughout the entire forecast horizon, it is preferable to choose the security whose maturity period coincides with or is longer than the forecast horizon;
• the security must be denominated in rubles.

The most suitable state security is a bond federal loan 27th episode, i.e. OFZ with debt amortization with a maturity from 2004 to 2009 inclusive.

Table 16. Calculation of the risk-free rate of return.

Thus, the value of the risk-free rate of return, as a basic element for calculating the discount rate by cumulative construction, is taken equal to 6.12%.

Website data http://www.micex.ru

In this case, the value of the entrepreneur's profit is equal to.....

Analytical article of the official ROO club www.appraiser.ru

The entrepreneur's profit reflects the costs of managing and organizing construction, general supervision and the associated risk.

The profit of an entrepreneur is determined by the analytical method proposed by employees of the St. Petersburg Technical University (SpBGTU) - Ph.D., Associate Professor D.D. Kuznetsov and Doctor of Technical Sciences, Professor E.S. Ozerov.

The calculation of an entrepreneur's profit is based on the assumption that investing in new construction makes sense only if the profit from the construction of a new project is no less than the profit from an alternative project that has the same level of risk and the same duration as new construction .

The amount of profit of an entrepreneur is determined by the formula:

Where N is the standard construction period in years;

C 0 - the share of the advance payment in the total amount of payments, taken on the assumption that the investor initially advances 20% of the total cost of the object;

y a - annual rate of return on invested capital (corresponds to the estimated capitalization ratio for similar objects, taking into account typical risks and the period of return of capital)

n* – project implementation period;

k is the coefficient of alternative investments when the object is sold within n* years, determined by the formula:

, (50)

The calculation of the entrepreneur's profit is summarized in table 14

Table 14

3.3.3. Calculation of the cost of constructing a similar facility

Due to the lack of data on the cost of constructing an exact copy of the property being valued at current prices on the actual date of valuation, it is advisable to apply replacement cost.

In appraisal practice, the index calculation method is mainly used to calculate the replacement cost of a property. It consists of determining the full replacement cost by multiplying the base cost indicated in the estimate documentation for the object being valued by the index for converting the cost to the current price level.

The cost of creating a property similar to the one being assessed is determined using the following formula:

C = (B 2001 J 2001-2014) (51)

Where B 2001 is the total cost of construction in 2001 prices of the above building, according to aggregated construction cost indicators;

J 2001-2014 – 5.43 excluding VAT - index of the transition of the price level from the 2001 TER to the 2014 price level by type of construction in the Russian Federation, according to;

3.3.4. Calculation of building wear and tear

In the theory of the cost approach to assessing the value of real estate, accumulated depreciation is interpreted as the total loss of an object’s market value assessment, due to physical wear and tear, as well as functional and external obsolescence. This thesis project uses a method for estimating accumulated wear and tear by its components (breakdown method).

Depreciation is the loss of value due to deterioration in the physical condition of an object and/or its obsolescence. Accumulated depreciation is defined as the difference between the current cost of restoration (replacement) and the real market value of the object on the valuation date.

Calculation of physical wear and tear

Calculation of physical wear and tear was carried out using the state examination method according to. According to this method, the physical wear and tear of each structural element of the building was determined. Total physical wear and tear is determined by the formula:

, (52)

Where F f - physical wear and tear of the building, %;

F i - physical wear and tear of the i-th structural element of the building, %;

L i - coefficient corresponding to the share of replacement cost

the i -th structural element in the total replacement cost of the building;

n - quantity structural elements in the building.

Replacement cost is taken as 100% in calculations.

Table 15

Description of structural elements of the building and determination of wear

The wear value is rounded to the nearest whole number. Thus, physical wear and tear is 13%.

The calculation of physical wear and tear is summarized in Table 16.

Table 16

Calculation of physical depreciation in 2014 prices

Based on the results, we can conclude that the functional wear and tear of the building amounted to 17,898 thousand rubles. This is due to the service life of the building, since it was built in 2007 and its wear and tear in 2014, according to calculations, is 13%.

Recently, publications have appeared proposing to abandon taking into account the entrepreneur’s profit in the cost-based approach to real estate valuation. The paper suggests that the (“erroneous”) proposal about the need to take into account this profit and about the scheme for calculating its value is based on the axiom of valuation theory, which follows from the (“not realized in practice”) assumption about the possibility of equilibrium between supply and demand on the market real estate. Additional arguments in favor of justifying this axiom are presented in; below, the problem of the need to take into account the profit of an entrepreneur is discussed - regardless of the recognition of the validity of the mentioned axiom.

At the very beginning of the discussion, let us pay attention to the classic definition of the concept of a developer, which came to us from abroad, who, being the author of the project idea, ensures:

• acquisition of the right to develop a land plot (ownership rights or the right to enter into a lease agreement),
• organization of design, financing (using own and borrowed funds) and creation (with the involvement of contractors) of improvements (buildings, structures, communications, plantings) on this site,
• registration of rights to these improvements (in addition to the previously registered land ownership or land lease rights),
• organizing the sale of the created property.

It is not difficult to imagine a situation in which a developer asks an appraiser to determine the market value of a property that has just been completed and intended for sale. Any practicing appraiser in this case will take into account that a development project must provide not only a return on capital (costs incurred during the implementation of the project), but also a return on capital, called the entrepreneur’s profit (otherwise there would be no point in the developer getting involved in a risky project, it would be more profitable put money on deposit or purchase risk-free financial instruments).

At the same time, the amount of profit of the entrepreneur should not depend on the actual set of project participants: instead of one developer, the project can be started and implemented by an investor (customer), project manager, contractor, materials supplier, consultants and brokers - all with the participation of a credit institution. At the same time, the remuneration of the company managing the project, payments contractor, as well as payments to material suppliers, consultants and brokers, payment of the main body of the loan will be provided by funds from the amounts intended for the return of capital, while the entrepreneur’s profit must include interest on the loan and income on all equity capital invested in project.

If the customer asks the appraiser to determine the market value of an object that, after creation, has already been used by its owner to generate income, then the practicing appraiser will additionally take into account the loss of value associated with wear and tear and obsolescence: these losses are deducted from the sum of the costs of implementing the project and the profit found by capitalizing the costs for the period (before the valuation date) theoretically necessary to create the valuation object as new (see, pp. 305-306).

From the above it follows that entrepreneur's profit in the cost approach to real estate valuation, the return on all capital invested in a development project is called. The amount of invested capital is determined by the sum of all costs associated with the implementation of the project (including marketing preparation of the object for sale), and the income on this capital (the entrepreneur’s mentioned profit) is determined by subtracting the above-mentioned amount of all costs incurred by the developer from the future value of these costs obtained by the procedure of their increase (capitalization) using market-based general norm return on capital invested in the creation of the object.

We point out that the mentioned future cost value represents the market value of the object just completed construction. Based on this value, the offer price of the object for sale or for inclusion of the object in authorized capital any company, as well as the offer price at the market rent (offer at the rent rate) - when leasing the property being assessed as financial asset in real form.

Note that the denial of the need to take into account the entrepreneur’s profit in the cost approach is often justified by reference to the principle of substitution, which is considered the fundamental principle of the cost approach in the editorial: “a reasonable buyer will not pay for a property more than the amount of money that is necessary to purchase a similar plot and construct a building with an equivalent usefulness without undue delay, taking into account fair financial compensation for the time spent on construction.” Opponents of accounting for the entrepreneur’s profit believe that this formulation allows us to consider the cost approach to valuation as an approach that reflects the interests of the user who creates the object for himself (“why would he then know and take into account the entrepreneur’s profit?”).

To begin with, let us draw attention to the unacceptability of using the calculation market value as the cost of building a facility for your own use, because in accordance with the definition of the concept of market value, this latter is value in exchange - in a hypothetical transaction simulated by an appraiser. At the same time, we note that the formulation of the principle mentions financial compensation for the time spent on construction, and this compensation should be calculated taking into account the value of money over time: during construction, the creator of the object “freezes” his and borrowed funds- instead of receiving income from the use of a finished object, which he could buy from a developer. That is, in this case, capitalization of all costs of the construction project must be carried out, which will also lead to the formation of an amount of income on capital (profit of the entrepreneur), determined by the method of increasing (capitalization) costs according to the rate of return on capital.

It should be borne in mind that when constructing an object “for oneself”, the specified rate of return on capital must include premiums for all risks of the investor, with the exception of the risk of low liquidity of the transaction for the sale of the object (the latter exception must be taken into account when assessing real estate as part of operating enterprise cost approach methods). However, if the creation of a real estate object is intended to subsequently lease it out as a financial asset, then the owner of the created object and the appraiser will determine the market rental rate and the cost of reversion based on the market value of the finished object, found using cost approach methods, taking into account all risks, including risk low liquidity, so in this most general case, the entrepreneur’s profit will be calculated similarly.

Let us pay attention to the specifics of the problem of assessing (using the cost approach) a real estate property that has just been completed during a crisis: in this case, along with the costs of acquiring land and creating improvements, as well as the profit of the entrepreneur, external obsolescence associated with a drop in demand for real estate. Loss of value due to such obsolescence is taken into account by reducing prices and rental rates for objects of the same type as the property being assessed during the project implementation. On the contrary, when assessing a new property at the stage of market growth after the end of the crisis, it may be necessary to take into account external renewal (an increase in the value of a completed property due to negative external obsolescence), caused by the excess of demand over supply due to the inertia of the resumption of development projects frozen during the period crisis.

Thus, it is obvious that the statement that there is no need to take into account the entrepreneur’s profit when calculating the market value of an object in the cost approach is contrary to common sense and cannot be recommended for use in valuation practice.

Literature

1. Korostelev S.P. , 2009.
2. Ozerov E.S. Economic analysis and real estate valuation. SPb.: Publishing house. "ISS". 2007.
3. Ozerov E.S. , 2009.

Who takes on private matters without first
general decisions, that will inevitably be at every step
unconsciously "stumble" upon these common
questions... and doom your policy to vacillation
and unscrupulousness.
LENIN (Ulyanov) Vladimir Ilyich

Despite the existing achievements in the development of theory and practice Russian assessment real estate, which were noted at the event held in November 2008. 1st International Congress, it should be noted that there are serious lags in this area from global trends and from the needs of practice. Unfortunately, we have not yet adopted a fundamental valuation standard - the assessment of the value of real estate. Without this standard, a large number of problems arise for practicing real estate appraisers, especially at the stage of conducting expert reports.

Of all the existing problems in the theory and practice of assessing the value of real estate (real estate), in this article we will dwell on the most pressing IMHO issue - determining the entrepreneur's profit (PP) when conducting an assessment using the cost approach. Conducting practical examinations of real estate valuation reports shows that this issue causes the greatest difficulties. In turn, almost all leading scientists and specialists in the field of real estate valuation have expressed their opinions in terms of theoretical justification for the procedures for calculating PP, but a unified position has not yet been developed for its inclusion in the valuation standard. Currently, the discussion about PP continues in the electronic media (appraiser..), and many new articles have also appeared with proposals for methods for calculating PP.

I will express my opinion about PP, which will probably differ from most of those expressed previously. I have already addressed this topic in my articles /1,2/, which showed the need to revise the dominant trends in assessing PP today, but no specific proposals were made for practical use.

So to move on to practical recommendations, it is necessary to understand why today almost all regulatory documents on real estate valuation (methodological recommendations of the Federal Property Management Agency, state corporations, the draft standard FSO-6, etc.), as well as training manuals, include requirements for mandatory taking into account PP in the cost approach, while in the MCO, American, German, and English methods of real estate valuation there is no such requirement. Either we are really “ahead of the rest” here, or perhaps we misunderstand something and are completely confused. To do this, it is necessary to make a short historical excursion and find out where these requirements came from.

In my opinion, these requirements came to us from the banks of the Neva, where the strongest school of real estate valuation to date was formed, headed by three respected professors S.V. Gribovsky, E.S. Ozerov. and Tarasevich E.I. In their numerous works, which I am sure are known to practicing appraisers, they gave their definitions of PP:

• Tarasevich E.I.: “ Entrepreneur's profit is a figure set by the market that reflects the amount that entrepreneur expects to receive a bonus for use of your capital invested in a construction project. Entrepreneur's profit is mainly a function of risk and depends on the specific market situation” /3/.
• Ozerov E.S. Entrepreneur's profit- “total profit developer and lender"/4, p.261/
• Gribovsky S.V. "Entrepreneur's profit - the difference between the sale price of an asset and the costs of its creation or acquisition and modernization. Reflects a market-based premium for organizing and implementing a profitable project" /5/
  « Entrepreneur's profit in the cost approach should be defined as the part of the market value of the building that represents remuneration entrepreneur (investor) for the risk of use equity(investment) to create a real estate property. In general entrepreneur's profit should be defined as interest on the capital used by the entrepreneur to make a profit" /6/

As can be seen from the above quotes, even within one school there is no unity in the definition of the new concept “entrepreneur’s profit” introduced into circulation, which naturally leads to different methods for assessing PP. The main thing is that from these definitions it is not clear what kind of entrepreneur we are talking about - a developer, investor, lender, entrepreneur representing capital, or someone else.

In this regard, attention should be paid to the statement of the most prominent representative of the St. Petersburg school, Professor S.V. Gribovsky. " Note that there may be many people interested in making a profit in the project. This is not only an investor or developer, but also a general contractor, just a contractor, suppliers of equipment and building materials, etc. And all of them are entrepreneurs with their own requirements for profit on their capital (material or intellectual). In other words, if you want to correctly calculate the profits of an entrepreneur, figure out how many entrepreneurs are involved in the process of creating a profitable asset, and what capital each of them has x" /6/.

A more careful study of the works of the St. Petersburg school of assessment allowed me to form my own opinion about the origin of the concept of “entrepreneurial profit.”

It seems to me that the PP has become necessary for the application of the simplified models developed there for assessing the value of development rights land plots on the basis proposed by Professor Ozerov E.S. the so-called “axiom of valuation theory” /4/.

The basis of these models (techniques) was the assumption of equality of real estate values ​​obtained within the cost and income approaches. This is a rather crude assumption based on the ideal market model, which is not realized in Russian market real estate. However, the researcher has every right to make such assumptions, especially since it leads to the solution, to a first approximation, of practically important assessment problems.

So, in order to correctly solve this problem within the framework of the assumptions made, it is necessary to take into account all the time costs that the future developer of the project will incur on the assessed land plot and his profit, which will stimulate him to implement the project. That is, the inclusion, in this case, of the entrepreneur’s profit, meaning the developer, in the project costs is absolutely justified and does not raise objections. Objections can only arise regarding the methods for determining the developer’s profit, since this is a special specific type of entrepreneurship.

A developer, as already indicated in his article /1/ and in more detail in the book now published /7/, is, as a rule, a professional who manages the development process and does not invest cash to the project. If such investments exist, they are insignificant. He invests his labor, knowledge, skills, and established connections in the project, that is, an intangible asset. His profit depends on the risk he takes. It’s one thing if he organizes the construction process with guaranteed payment of expenses from the customer, but completely different risks when the development is carried out using investments attracted by the developer. A simplified schematic mechanism for making a profit for a developer during implementation housing project shown in Fig. 1.

Fig. 1 Simplified scheme for generating a developer’s profit

However, in simplified “St. Petersburg” models, it is not this profit that is sought, but the profit of the development project, which is added to the compounded costs of implementing the project. At the same time, the authors managed to develop their own approaches to determining this profit based on the model of capitalized or opportunity costs (for example, all famous model Ozerova E.S.)

Such models certainly have a right to exist; moreover, they sometimes make it possible to solve problems that, at first glance, cannot be solved. For example, by selecting parameters to determine the value market rate rent, cost of land lease rights, etc. in conditions of limited market information. However, it is necessary to take into account that their accuracy is due to not very realistic initial assumptions about the equality of real estate values ​​according to two or more approaches.

However, this article is not about these models (techniques), but about the fact that the PP assessment methods used in these models (techniques) began to be used, and without fail, when valuing real estate in cost-effective approach. With this, taking into account modern trends development of evaluation theory, we need to understand it in more detail.

If we turn to the primary sources on which modern Russian theory and practice of real estate valuation is based, and this is, of course, Friedman D., Ordway N /8/ and Harrison G /9/, we will see that they do not have requirements for taking into account PP in the cost approach . Only Harrison G. has a very careful phrase “ Many appraisers believe that some amounts should be added to direct and indirect costs to reflect business profit "(p.128). However, here, judging by the calculation examples, we are apparently talking about the contractors’ profit, which is taken into account in the estimate.

Of course, we can say that the Americans are not a decree for us, and a lot of time has passed. But then let’s turn to the MCO: “ Whenever possible , business income is taken into account, i.e. the developer’s income or losses are added to the construction costs” (MR1 “Valuation of real estate” MCO 2005). There is nothing more on PP in the MCO. That is, there is also no strict requirement for mandatory accounting of PP in the cost approach, but on the contrary, the appraiser must prove the possibility of accounting for PP in the cost approach.

What about us? The draft FSO-6 “Assessment of the value of real estate” says the following:

“The market value of the valuation object, determined by the cost approach, corresponds to the total value of the rights to land plot and ownership of improvements. Market value is usually calculated in the following sequence:

• assessment of the market value of rights to a land plot;
• estimating the costs required to reproduce or replace improvements;
• grade entrepreneur's profit ;
• assessment of wear and tear and obsolescence;
• calculation of the market value of the object as the sum of the value of rights to the land plot and the cost of improvements as reduced by the amount of wear and tear and obsolescence of the amount of costs necessary for the reproduction or replacement of improvements, and entrepreneur's profit ».

Even earlier, officials from the Federal Property Management Agency introduced mandatory accounting for PP when applying the cost approach. IN terms of reference FAUFI on conducting an assessment of the market value of federally owned real estate objects involved in economic turnover on investment terms says the following: “When assessing an object should be calculated profit of the entrepreneur (developer) ), defined as the required income on nested in investment project capital taking into account the risks and timing of its implementation.”

We will see the same thing in modern textbooks and teaching aids on real estate valuation. That is, the obligation to take into account PP when valuing real estate objects in the cost approach has become practically a standard in our country, unlike other types of property. Why did this happen and how is this fact reflected in assessment practice.

It seems to me that this happened due to the fact that often when deciding practical problems assessments, we pay too little attention to the economic content of the problem, bringing to the fore or legal basis or technical aspects.

About what happens in the first case, that is, when legal issues dominate economic essence problem to be solved, I wrote in my last article /9/. The point here is that with this formulation of the question, the problem has no solution, which is what we see in the situation of assessing confiscated property for the purposes of the Sochi Olympics. By the way, the Olimpstroy Group of Companies finally realized this and decided to allocate funds for the development methodological recommendations according to assessment. Moreover, this work, according to my information, was transferred to NP SRO ARMO, whose specialists have been actively participating in this work from the very beginning. Let's hope that they will be able to solve this difficult problem and make their contribution to the development of the theory of assessment on modern stage. We will also look forward to the results of this work, namely, methodological recommendations for determining the amount of losses caused by the seizure of real estate and easement fees.

In our case, it seems to me, there was no proper study economic content cost approach in real estate valuation, and a direct transition was made to technical aspects calculation of PP.

1. It is necessary to exclude from all regulatory documents (methodological recommendations of the Federal Property Management Agency, Russian Railways, DIGM and other structures), especially from the draft standard FSO-6 “Assessment of the value of real estate”, the requirement that it is mandatory to determine the entrepreneur’s profit in the cost approach.
2. Instead, in these regulatory documents it is necessary to introduce a provision that the inclusion of the entrepreneur’s profit in the costs must be justified.
3. When assessing real estate using the cost-based approach, instead of the entrepreneur’s profit, it is necessary to include the costs of managing the investment and construction project. These costs must be justified based on market data (estimates, surveys, calculations).
4. The costs of raising capital can also be taken into account as part of the costs, but this position must also be justified.

List of sources used

1. Korostelev S.P.
2. Korostelev S.P.
3. Tarasevich E.I. Real estate valuation. St. Petersburg: St. Petersburg State Technical University, 1997
4. Ozerov E.S. Economic analysis and real estate valuation. St. Petersburg: Publishing house "ISS", 2007
5. Gribovsky S.V. Valuation of profitable real estate. - St. Petersburg: Peter, 2001
6. Gribovsky S.V. Real estate valuation. Tutorial. - M.: Maroseyka, 2009 - 432 p.
7. Korostelev S.P. Theory and practice of valuation for the purposes of development and real estate management. -M.: Maroseyka, 2009 - 416 p.
8. Friedman D., Ordway N. Analysis and assessment of income-generating real estate. Per. from English, - M.: “Delo LTD”, 1995. - 480 p.
9. Harrison G. Real estate appraisal. Study guide. Per. from English - M.: RIO Mosobluprpolitigraphizdata, 1994. - 231 p.
10. Korostelev S.P.
11. Korostelev S.P.
12. Mikerin G.I., Kozlova O.I. Corporation value: valuation and management (about the discussion on basic concepts) http://www.appraiser.ru/default.aspx?SectionID=188&Id=2525&search=%CC%E8%EA%E5%F0%E8%ED
13. Artemenkov A.I., Mikhailets V.V. Neoclassical and post-neoclassical perspectives in the theory of valuation. http://ssrn.com/author=806294

“Axiom - (Greek axíoma - honored, accepted position, from axióo - I consider worthy), a position of some given theory, which, during the deductive construction of this theory is not proven in it, A accepted as the original, which underlies the proofs of other proposals of this theory. Usually, as A. they choose such propositions of the theory under consideration that are obviously true or can be considered true within the framework of this theory.” TSB

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