Evaluation Models to Aid Choice of
Investiments Regarding Building Stocks
in Mediterranean Urban Landscape
MARIANGELA MUSOLINO
Dipartimento Patrimonio Architettura Urbanistica (PAU), Università degli Studi Mediterranea di Reggio Calabria, Italia. E- mail: mariangela.musolino@unirc.it, demassimo@gmail.com
Evaluation Models to Aid Choice of Investiments Regarding Building Stocks in Mediterranean Urban Landscape.
Sustainable urban policies are increasingly oriented towards: (1) revitalization of existing cities; (2) management of historical and architectural heritage; (3) energy better management strategies. In an urban context, sustainability is a process describing the potential that, in the medium or long term, the city has, compared to the improvement at environmental, social and economic levels. This paper is part of an integrated strategy for the sustainable retrofit of existing cities. In particular its object is on economic feasibility models to evaluate housing rehabilitation compared to replacement. A further innovative goal in future research will be the valuation of achievement of "Energy Urban District and Green Buildings" and the assessment of the unexpected economic impact on real estate market price.
Keywords: sustainable urban regeneration; costs valuation, maintenance costs; urban resilience; valuation Type: Article - Submitted: 23/10/2018 Accepted: 18/03/2019
MARIANGELA MUSOLINO, DOMENICO ENRICO MASSIMO
Evaluation of regio-nal and urban dynamics have not been institutiona-lized sufficiently. In Italy, urban planning has been a pure regulation of accepted sprawl spontaneous trend. The planning goal has been one - dimensional, i. e. the distribu-tion of land rent among landlords and contractors. Evaluation procedures have been rough empirical practices, confined in the first step of the planning process. Evaluations have been just bureaucratic checks about legal permissibility of spread-out trends. During
60ies and 70ies some methodological in-novations arose proposing planning as a dynamic process of urban management. In the last years, urban plans remained unchanged whereas urban investments changed, shifting from urban sprawl to new strategies including urban rehabilitation and to compact and mixed-use districts.
1. Economic general criteria of
evaluation models
1.1. The comparative Cost Approach The rehabilitation \ retrofitting versus
redevelopment \ new construction question can be solved on the basis of least-cost. This criterion is particularly appealing because it
reduces to a minimum the cost. Housing is improved at the lowest possible cost. However, sole reliance on least-cost of the renewal is insufficient since attention must also be directed to the longevity of the housing improvement that is achieved.
1.2. The Profitability Criterion
Considered solely as a private investment decision, the feasibility of residential rehabili-tation, both absolutely and in comparison with redevelopment, would depend upon its market profitability. The investment would be made only if the expected returns were competitively sufficient to justify the invest-ment cost. The choice between rehabilitation versus redevelop-ment depends upon which one promises the greater market profit. Insofar as private costs and gains coincide with those of society, the profitability criterion would result in an optimum utilization of the resources. This is the major and time-honoured way in which this question is solved in a free market economy. In fact, determining rehabili-tation and redevelopment solely costs cannot solve the whole problem. By and large, in some cases neither course of action is profitable. Sometimes private profitability criteria are not taken for granted. They are still important to feasibility analyses even if subsidies are required. In much of the literature on rehabili-tation, its usefulness and generality have been overlooked due to a lack of appreciation of profitable opportunities. This argument has sometimes led to the conclusion that unless rehabilitation is profitable, it cannot be used and that redevelopment is then the only remained action. This conclusion is quite incorrect . Rehabilitation and redevelopment are equally well-suited for subsidization, and the absence of private profitability is not a reason to reject of either. Regardless of profitability, either may be “feasible” as a mean of implementing policies aimed at improving housing conditions through subsidization of an increased volume of residential construction. In our analysis, the best and therefore most “feasible” method is simply one with the greatest output per unit of input.
2. Economic feasibility
evalua-tion models
Steps of the procedures to evaluate the choice between rehabilitation versus reconstruction are the following: general framework of intervention; its objective; models for effect (benefits, costs) assessment. Before implemen-ting the model, it has to be verified the most profitable new use and the possibilities for shifting to no-residential use and to higher settlement density. Tax variation issues are taken in to account only Rothenberg’s model, even if they concern in alternative decision between rehabilitation versus redevelopment. The most important models, reported in sectoral literature, are described below, starting from Schaaf ’s models.
2.1. A. H. Schaaf’s model (1960)
In first (1960) provisional Schaaf ’s economic feasibility model the term C/(1 +i) is used to measure the present value of the amount that will have to be available to replace the structure when rehabilitation’s effects have played out. Ignoring M, , the formulation contained in (1) implies that the owner would be indifferent between rehabilitation and replacement if:
( )
1 úû, ù ê ë é + + = n i C R CThis is not true, however. If he replaces now, he will have a structure n years old in n years, whereas if he rehabilitates and invests the amount:
( )
ni
C
+
1
he will have an amount equal to the cost of a new structure in n years.
Thus the proper comparison is between C and
(
)
(
1
)
,
1
ú
û
ù
ê
ë
é
+
-+
ni
nr
C
R
where r denotes the annual depreciation rate of the new structure (using straight-line depreciation). We may correctly say (still
ignoring M) that the owner is indifferent between rehabilitation and redevelopment if:
(
)
(
1)
, 1 ú û ù ê ë é + -+ = n i nr C R Cbecause in either case he will have an income-producing structure for n years and an asset worth the depreciated value of a new structure at the end of n years. If:
(
)
(
1)
, 1 ú û ù ê ë é + -+ > n i nr C R Che will rehabilitate and viceversa if:
(
)
(
1)
. 1 ú û ù ê ë é + -+ < n i nr C R CThe C term represents a limitation in the model. Summing up, the equation (1) ignores the term (1 – nr) and the possibility to contemplate different levels of rehabilitation . It is necessary to include a variety of possible values for C (the standard of the new dwelling), and for R (the expenditure level on rehabilitation). The level of R selected would also determine both
M (the annual difference in maintenance
expense) and n (the future life of the rehabili-tated dwelling). Besides, ignores in order to reflect the different standards of amenity and convenience between new and rehabilitate dwellings. Schaaf ’s formulation is:
( )
(
)
( )
( )
úúû ù ê ê ë é - + + + -+ + -+ > - -i i D i nr C i i M R C n n n 1 1 1 1 1 1where, for the new terms and amendments: D represents the differences in annual rental
values of the new and the rehabilitated dwellings;
r is the annual rate of depreciation of the new structure.
Schaaf proposed a new term D (annual differences in rental income) in order to reflect the different standards of amenity and convenience between new and rehabilitated dwellings.
A.H. Schaaf ’s model has been developed in two steps: 1960 and 1969. Equation (3), belongs to the first step, and the choice among alternatives is based upon least cost related to just only one quality level. Definition of such level is the benchmark to make judgement about costs.
Tab.1
Characteristics of Renewal Levels
RENEWAL LEVELS RENEWAL COST $ STR UCTURELIFE Years EXPECTED AVERAGE ANNUAL FUTURE MAINTENANCE COSTS. $ EXPECTED AVERAGE ANNUAL MARKET RENTAL VALUE. $ 1. Co de compliance 8 ,0 00 10 2,000 3,600 2. Structural repair 28,00 0 40 1,400 3,600 3. Modernization 40,00 0 40 1,000 6,720 4. Presti ge 80,00 0 40 1,000 8,640 5. New 10 0,000 50 80 0 9,600
Source: our elaboration on A. H. Schaaf, 1969: 402
2.2. Exemplifying A. H. Schaaf’s model(1969)
The second definitive A. H. Schaaf ’s economic feasibility analysis model originated from observations to some terms of Needleman’s model as well as from some Rothenberg’s ideas . A. H. Schaaf’s second model created in 1969 is applied to determine the optimum renewal standard between five predetermined alter-natives. We assume an apartment house containing four two-bedroom units with numerous code deficiencies. Following purchase by the local Housing Authority, investigations of the structure and the local rental market are made. Four levels of rehabilitation are studied with cost estimates and rental values as shown in Tab. 1. An assumed interest rate of six percent is employed in the calculations. The optimum level of rehabilitation is the one that maximizes Y when:
( )
(
)
( )
( )
. 1 1 1 1 1 1 ú ú û ù ê ê ë é - + + + -+ + -+ -= - -i i D i nr C i i M R C Y n n nAs shown by the feasibility calculations relating to each renewal standard, the model indicates that both modernization and prestige rehabili-tation are feasible (preferable to new con-struction) and that modernization is econo-mically the most efficient standard. Similarly, the least efficient course of action would be to meet code standards and repair the structure but not to attempt any modernization of the units. It is not possible to represent all the al-ternative investment situations in one genera-lized formulation. The model in (3) remains the basic framework for comparing immediate new construction with various situations involving rehabilitation. However, three types of changes or additions must be made in the basic model in order to adapt it for the use in all possible circumstances. Single numerical example should demonstrate the method of incorporating these changes in the basic model formulated in (5). In this example we investi-gate the feasibility of rehabilitating the structure to the code compliance standard three times over and then rehabilitating to the moderni-zation standard.
The feasibility analysis of this situation requires solving the following:
( ) ( ) (( ) ) ( ) ( ) ( ) ( ) ( ) ( )1 ] 1 1 1 1 1 1 1 1 1 1 3 ( 1 1 [ 1 3 1 ) 3 ( 3 1 3 1 ) 3 ( 3 1 3 1 1 3 1 1 3 1 1 3 3 1 2 1 1 1 1 n n nc n n nc n n n n n i i i D i i i M i i D i i M i n nc r R i R i R R C Y + + -+ + + -+ + -+ + + -+ + -+ + + + + -= -with:
R1 cost of code compliance;
R3 cost of modernization;
r3 0,25%;
nc life of new structure;
n1 life of structure rehabilitated to the code compliance standard;
M1 difference in maintenance costs between a new structure and rehabilitated one to the code compliance standard;
D1 difference in rent levels between a new structure and rehabilitated one to the code compliance standard;
M3 difference in maintenance costs between a new structure and rehabilitated one to the modernization standard;
D3 difference in rent levels between a new structure and rehabilitated one to the modernization standard.
If rehabilitation is decided as a general approach, the formulation here developed could then be used in the detailed study of each individual structure. In this way both feasibility and optimum standard of rehabilitation would be determined for all the structures in the area. In some cases, of course, clearance might be indicated.
2.3. Il modello di L. Needleman (1965) Lionel Needleman (1965) conceived the first economic feasibility analysis model to support choice of investments concerning building stocks in housing. At the first stage in the economics of rehabilitation and redevelopment, Needleman restricted his approach to including only comparative time-stream costs, not considering comparative revenues and benefits. Later on L. Needleman expanded comparative cost approach including future maintenance costs and economic life cycle of the renewed structure. Not only redevelopment and rehabilitation costs differ but, after renewal, also the economic life cycle of the structure and the level of maintenance costs may differ, depending upon whether rehabilitation or redevelopment has been used as the mean of renewal. In Needleman’s original criterion, rehabilitation is preferred if:
( )
( )
úúû ù ê ê ë é + + + -+ > -n n i C i i M R C 1 1 1 with:C cost of constructing a new house; R cost of rehabilitation of the old house; M annual savings in maintenance costs with a
new structure than a rehabilitated one;
i interest rate, or rate of discount;
n life of the present structure following
rehabilitation.
R is directly related to n and indirectly related
Formulation (1) recognizes relevant cost-comparison variables, in addition to pure replacement and rehabilitation cost. It also illustrates the point were the feasibility of rehabilitation is greater if compared to replacement. Higher the interest rates are, then rehabilitation work increases the structure’s life and postpones the time when replacement must be done. Rehabilitation’s feasibility is directly related to i and n and indirectly related to M. However, the construction formulated in (1) ignores a number of complicating factors that should be considered in an appraisal of rehabilitation’s feasibility. Needleman considered rehabilitation as a useful option to redevelopment, allowing a temporary stay of execution from the bulldozer blades and redevelopment. It contributed to the most urgent need to improve the accommodate families who are worst housed at present (Needleman 1965: 196).
2.4. E. M. Sigsworth-R.K. Wilkinson’s models (1967)
Sigsworth and Wilkinson (1967) disputed about some aspects of Needleman’s formulation. First of all they agreed that the basis of model rehabilitation depended upon: influence of the rate of interest; future life length of the rehabilitated building; difference in running costs compared with redeveloped buildings. They suggested that Needleman had ignored the capital value of the building before improvement. In their alternative formulation place as a cost against rehabilitation. In addition, they argued that rising building costs should be incorporated into appraisal. Rehabilitate if:
( )
( )
( )
úúû ù ê ê ë é + + + + -+ + > -n n i z i C i i M B R C 1 1 1with new terms:
B is the capital value of the house before
improvement;
z is the annual rate of increase in replacement
costs.
The subsequent exchanges in the literature (Needleman 1988, and Sigsworth and
Wilkinson 1967) revealed the contentions and issues. For Needleman, “once the decision has been taken to improve the house, the unimproved house will have ceased to exist” (1968: 88). On this basis he excluded the capital value of the house before improvement. On the contrary Sigsworth and Wilkinson had argued that where rehabilitation extends the life of a dwelling it represents two elements: one is the cost of rehabilitation; and the other “the existing investment of capital which that house represents” (1967: 112). Further aspects of the contentions and issues can be ascertained from Pugh’s earlier writings (1976) and from Merrett (1979). Merrett indicated that redevelopment involves the destruction of an asset, and can be regarded as a cost of redevelopment rather than a cost against rehabilitation. Authors in the Usa proceeded on the basis of this understanding. Merrett additionally indicated that the Sigsworth-Wilkinson’s formulation leads to early rather than later demolition. Or, put in other words, in using the Needleman and the Sigsworth/ Wilkinson formulations in empirical computer applications, the Needleman’s formulation has a bias towards rehabilitation and the Sigsworth-Wilkinson’s formulation has its bias towards redevelopment. In the United States, urban renewal economists such as Mao (1966) and Rothenberg (1967) had developed formula-tions which charged the value of a demolished property as a cost of redevelopment.
2.5. J. Rothenberg’s model (1967) In Rothenberg’s model, urban renewal plan has its key element in its objectives focused to improvement of city quality and services quantity, and they can be summarized as follows:
1. elimination of blight and slums;
2. mitigation of poverty, increasing opportunity for employment and social cohesion;
3. provision of decent, safe, sanitary housing in a suitable environment;
4. revival of downtown areas in central city; 5. development of services and infrastructures; 6. attraction of middle-income families; 7. attraction of “clean” industry activities;
G
Sommario
Le decisioni politiche riguardanti la riqualificazione edilizia sono spesso assunte senza stime e valutazioni sistematiche dell’alternativa tra recupero versus rico-struzione del patrimonio. Il paper proposto esplicita come analisi e valutazione possono fornire un suppor-to concresuppor-to alle scelte di rigenerazione sostenibile del-le aree urbane degradate e pertanto investiga un set
8. enhance town hall public finance..
Blighted building a not-optimal use. Renewal produces benefits. Function of renewal evaluation models is to verify if future benefits will be higher that future project costs. Rothenberg’s model structures is the following:
GPC gross project cost; AC cost acquired land;
L0 market value of acquired land;
L1 market value of improved land;
I0 market value of improvements;
R other resource expenditure; GPC = AC + R;
AC = L0 + I0;
TC = I0 + R;
the total costs TC are determined as follows:
TC = (AC - L0) + R = GPC - L0; the total benefits TB are determined as follows:
TB = (L1 - L0) + spillovers + less social costs.
Optimal project will be the one which maximizes the differential from benefits to costs. This model has been useful to evaluate the federal renewal programs in USA.
2.6. C. Pugh’s model (1974)
The inherent versatility of the Schaaf formulation, in the period 1974-90, has been used to appraise rehabilitation \ refurbishment and their redevelopment \ replacement alternatives in housing and in commercial offices. Current work includes the extension of applications to refurbishment in shopping centres. The research is published elsewhere in its elaborated detail (Pugh 1976; 1991). What follows is a summarised version of the main principles, procedures, results, and interpretations. The Schaaf criterion has been used in 1974 to assess the comparative economics of housing rehabilitation and redevelopment in an urban renewal project in the Adelaide suburb of Hack-Ney in Austra-lia. Equation (4) is the optimum level of rehabilitation is the one that maximizes Y when: ( ) ( ) ( ) ( ) úúû ù ê ê ë é - + + + -+ + -+ -+ = - -i i D i i M i nr C R C C Y n n n 1 1 1 1 1 1 2 2 1
where, the new terms are:
C1 value of the existing dwelling; C2 the cost of the new dwelling;
The value selected for r was 1,5%, reflecting the usual estimates in the literature.
Variations were used for C2, i and D.
3. Conclusions
Research reviews the State of the Art of the most important economic feasibility models concening the alternative between urban rehabilitation versus urban redevelopment. Comparative analysis unlighted that: Needle-man’s model is prone toward rehabilitation; Sigsworth-Wilkinson’s model is prone toward clearing up (“bulldozer blade”) and redevelop-ment, Schaaf ’s and Pugh’s models are almost neutral. Needleman, Sigsworth and Wilkinson, Schaaf and Pugh models focused on private cost and revenues. Rothenberg models includes some public costs and benefits such as environmental pollution, traffic congestion, other negative externalities. It is very important to admit these variables in the theoretical framework, even if it is a hard task to assess them. In this way, valuation will be reliable and estimate will produce sound magnitude of costs and revenues deriving from alternative projects for urban renewal. A further innovative goal of future researches is the valuation of alter-native plans designed to achieve “Energy Urban District and Green Buildings” and the assessment of the unexpec-ted economic impact on local real estate market and on house market prices (Del Giudice et al., 2018; De Paola et al., 2018; Malerba et al., 2018; Mas-simo, 2009, 2010, 2014, 2015; Massimo et al., 2016, 2017, 2018; Musolino, 2014; Musolino et al. 2013; Spampinato et al., 2018).
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