Functional Utility and Building Analysis

Chapter Title: Functional Utility and Building Analysis

Introduction

This chapter delves into the critical aspects of functional utility and building analysis within the context of real estate appraisal. Understanding these concepts is paramount for accurate property valuation and assessment of its market appeal. Functional utility refers to the ability of a building to perform the function for which it is intended, while building analysis encompasses a comprehensive examination of its design, construction, systems, and overall condition. This chapter will explore these elements in detail, highlighting their impact on property value and marketability.

1. Defining Functional Utility

Functional utility is the measure of a building’s ability to satisfy its intended purpose according to current market standards and expectations. It addresses whether a property is well-suited and efficient for its specific use. A property may suffer from functional obsolescence if it lacks features or design elements that are considered standard or desirable in the market, even if it is in good physical condition.

1. Market Acceptability:

   • A building can be well-designed but functionally obsolete if there is no market demand for its intended use.
   • The utility must be acceptable to the market for the property to be functionally efficient.

2. Design and Layout:

   • Efficient layouts, adequate space allocation, and appropriate adjacencies of functional areas contribute to functional utility.
   • Poorly designed spaces or awkward layouts can hinder usability and diminish value.

3. Modern Standards:

   • Functional utility is dynamic and evolves with changing market preferences, building codes, and technological advancements.
   • Older buildings may need updates to meet current standards.

4. Example:

   • A racquetball club perfectly designed for its use, but the resale market for that use is negligible if the business cannot turn a profit.

2. Analyzing Architectural Style and Functional Utility

Architectural style influences a building’s aesthetic appeal and market perception, which can impact functional utility. A building’s style must align with market preferences to maximize its value and usability.

1. Formal vs. Vernacular Architecture:

   • Formal architecture: Follows historical patterns, easily identifiable by those with formal training.
   • Vernacular architecture: Local in style, emphasizes function over form.

2. Style and Market Acceptability:

   • Architectural styles considered acceptable today may not be in the future.
   • A building design can be functional but not acceptable in the market because of changing architectural fashions.

3. Architectural Design Considerations:

   • Architects balance aesthetics with efficient space use, low maintenance, and construction costs.
   • The best designs are a combination of the efforts of the architect, builder, broker, and owner.

3. Building Systems Analysis

A thorough analysis of a building’s systems (electrical, mechanical, plumbing, structural) is essential to assess its functionality and identify potential deficiencies.

1. Electrical Systems

   • Capacity and Load:
     • Older buildings often lack sufficient electrical capacity to support modern equipment and tenant needs.
     • An older building may have a 300-ampere service, but the uses require an 800-ampere service.
     • Tenants may use systems that draw 20 amperes for a single circuit, overloading a 15-amp system.
     • Installing additional power lines can be complicated.
   • Smart Grids and Demand Response:
     • Smart grids and demand response (DR) systems automatically determine a building’s power needs or reduce power use if needed.

2. HVAC Systems:

   • Efficiency and Capacity:
     • Evaluate the efficiency, capacity, and condition of heating, ventilation, and air conditioning (HVAC) systems.
     • Ensure HVAC systems can maintain comfortable temperatures and adequate ventilation for occupants.
   • Air Quality:
     • Assess indoor air quality by measuring pollutants such as volatile organic compounds (VOCs), carbon dioxide (CO2), and particulate matter.

3. Plumbing Systems

   • Water Supply and Drainage:
     • Assess the condition and capacity of water supply and drainage systems.
     • Check for leaks, corrosion, and inadequate water pressure.
   • Fixture Efficiency:
     • Evaluate the efficiency of plumbing fixtures (toilets, faucets, showers) in terms of water consumption.

4. Structural Systems

   • Material Properties:
     • Analyze the properties of building materials (concrete, steel, wood) to determine their strength, durability, and resistance to environmental factors.
     • Consider factors such as compressive strength (σc) for concrete and tensile strength (σt) for steel.

   • Load-Bearing Capacity:

     • Assess the load-bearing capacity of structural elements (beams, columns, walls) to ensure they can support the building’s weight and occupancy loads.

   • Formula Example:

     • Stress = Force / Area: σ = F / A
       • Where: σ = Stress (N/m² or psi), F = Force (N or lbs), A = Area (m² or in²)

4. Design and Functional Utility by Property Type

Functional utility requirements vary significantly based on property type (residential, commercial, industrial, agricultural, special-purpose, mixed-use).

1. Residential Properties:

   • Evolving Standards:
     • Functional utility in residential properties is a moving target.
     • Designers are always trying to move standards in one direction or another.
   • Market Preferences:
     • Abundant closet space, dishwashers, garbage disposals, larger kitchens and baths, and master bedrooms with spa tubs are popular in new housing.
     • Multiple bathrooms are also popular, even in smaller apartments and condominium units.
     • A house without air-conditioning in the southern part of the United States would have been marketable 40 years ago, but not now.
     • A new house with a one-car garage may have been marketable 30 years ago, but it is probably not marketable now.
   • Researching Market Preferences:
     • Interview local brokers, builders, buyers, and salespeople involved with model homes.

2. Commercial Properties:

   • Benchmarking:
     • Functional utility for commercial properties is best measured against new construction designs.
     • If you want to know what the market wants, you generally need only look at what is currently being built.
   • Shopping Centers:
     • Issues like parking adequacy and design, common area design, support by anchor stores, access points, and common area draw.
     • Visibility, access, and attractiveness are significant considerations.
     • Retail centers anchored by big-box stores with a larger number of smaller anchors and lifestyle centers aimed at attracting high-income customers.
   • Office Buildings:
     • Office efficiency issues such as elevators, security, parking, and the amount of bathrooms and windows.
     • HVAC issues because of the increasing heat load created by computers and other electronic equipment.
     • Flexibility has generally become an important factor in an office building’s desirability.

3. Industrial Properties:

   • Specialized Requirements:
     • Manufacturing plants have significant issues with building designs because different operations require different building configurations.
     • Electrical capacity, refrigerator or freezer space, or natural gas service may be the most important factor.
     • Warehousing, storage, and distribution facilities are focused on the movement of finished goods in and out of the facility. Easy access to tractor-trailers or railroad cars is much more important than the interior process.
     • Ceiling heights may be a big issue for buyers of this type of property because of storage needs.
   • Flexibility and Adaptability:
     • Newer one-story, square-shaped buildings with high ceilings are the most flexible, efficient, cost-effective, and therefore most desirable type of industrial building.
     • Buildings and plants with specialized designs and uses have fewer potential users, while buildings used for light manufacturing and processing are more desirable in the wider market.

4. Agricultural Properties:

   • Specialized Design Features:
     • Special wiring and plumbing may be required for milking processes, and special troughs or plumbing may be required for confined feeding operations.
     • The number of agricultural buildings per acre of land and the contribution of farm buildings to total farm value have also decreased.
   • Market Trends:
     • Moving away from larger numbers of small, family-owned farms and moving toward smaller numbers of larger, business-owned farms with increasingly specialized operations and equipment needs.

5. Special-Purpose Buildings:

   • Limited Markets:
     • Facilities like car dealerships, funeral homes, schools, churches, breweries, and bowling alleys have specialized designs and limited markets.
   • Adaptive Use:
     • The adaptive-use movement works to preserve nonfunctional, special-purpose buildings that are architecturally significant and possibly find new uses for them.

6. Mixed-Use Buildings:

   • Compatibility:
     • Mixed-use buildings have a combination of two or more uses on one site or in one building, such as apartments above a retail store or a branch bank inside an office building.
   • Extensive Planning:
     • Mixed-use properties require extensive planning in order to successfully combine compatible uses.
     • Multiple stories connected by escalators and elevators, multiple entranceways, central courtyards or galleries, and interconnecting pedestrian thoroughfares that provide access to parking facilities.

5. Quality and Condition Survey

Assessing the quality and condition of a building is crucial for determining its overall functional utility and value. Appraisers use the term quality to describe the cost, durability, and efficiency of an element of construction or the entire property. The term condition is used to describe the amount of wear and tear a property has endured.

1. Quality Assessment:

   • Comparative Analysis:
     • Quality is almost always applied in comparisons of properties that compete with the subject property.
     • A building is not compared to all buildings in a community, only to buildings it competes for buyers with.
     • A manufactured home that competes with other manufactured homes would have “average” construction quality within that market segment.
   • Market Context:
     • If a mansion with top-quality features and appointments competes in a market with other homes of similar quality, it is considered to be of “average” quality within its market segment.

2. Condition Assessment:

   • Relative Term:
     • Condition is also a relative term.
     • A good-quality home to be in fair or poor condition or a fair-quality home to be in good condition.
   • Maintenance Levels:
     • A 75-year-old building that has had typical maintenance for its market segment but still needs a little work is considered to be in “average” condition because it is the same as most homes it competes with.
     • A home that has had impeccable maintenance levels and meets the standards of its high-end market is also considered to be in “average” condition.
   • Fannie Mae and Freddie Mac:
     • The UAD standard no longer compares the subject property with competing properties, which results in many properties being labeled average. The new system compares the subject improvement to all residential properties with a detailed description of the ratings Q1 to Q5 and C1 to C5.

3. Items in Need of Immediate Repair:

   • Items in need of immediate repair are often factored into sale prices.
   • In the minds of buyers these problems are not examples of deferred maintenance but have to be addressed immediately to make the property marketable.

6. Green Building Assessment

The integration of sustainable and energy-efficient features is increasingly important for functional utility. Green buildings often exhibit enhanced performance, reduced operating costs, and improved indoor environmental quality, leading to higher market value.

1. Energy Efficiency

   • Energy Consumption Metrics:
     • Assess energy consumption using metrics such as Energy Use Intensity (EUI), measured in kBtu/ft²/year or kWh/m²/year.
     • Calculate EUI using the formula: EUI = (Total Energy Consumption / Building Area)
   • Building Envelope Performance:
     • Evaluate the thermal resistance (R-value) and heat transfer coefficient (U-value) of building envelope components (walls, roofs, windows).
     • Lower U-values and higher R-values indicate better insulation and reduced heat loss/gain.

2. Water Efficiency

   • Water Consumption Metrics:
     • Assess water consumption using metrics such as gallons per capita per day (GPCD) or liters per capita per day (LPCD).
     • Evaluate the efficiency of water fixtures and irrigation systems.

3. Indoor Environmental Quality (IEQ)

   • Ventilation Rates:
     • Assess ventilation rates in cubic feet per minute (CFM) per person or air changes per hour (ACH).
     • Ensure adequate ventilation to remove indoor pollutants and maintain healthy air quality.
   • Daylighting and Lighting Quality:
     • Evaluate daylighting levels and lighting quality using metrics such as illuminance (lux or foot-candles) and color rendering index (CRI).

7. Green Building Documentation

In valuation analyses for green properties, appraisers may want to include special documentation of the quality of green construction from sources such as:

• Third-party ratings and certifications (from LEED, Green STAR, the EPA, etc.)
• Commissioning reports
• Indoor air quality assessments
• Site evaluations of ecosystem health, functionality, and services
• Lease agreements and other documentation of income adjustments
• Incentives, including tax abatements, that may offset additional “green” costs
• Modeled operating data (for proposed buildings)
• Post-occupancy evaluations (for properties that are at least one year old)
• Technical specifications of the benefits of particular systems and their cost estimates (for existing or proposed buildings)

Conclusion

Functional utility and building analysis are integral components of real estate appraisal. By thoroughly examining a property’s design, systems, condition, and sustainability features, appraisers can accurately assess its ability to meet market demands and determine its true value. Understanding the concepts and principles outlined in this chapter is essential for making informed appraisal decisions and providing reliable valuation services.