Duff & Phelps - Texas PRIMA · US Construction Cost Trends Duff & Phelps - Insurance Valuation...

Costs are Up, Costs are Down, and COPE Data is Key, Managing Property Valuation and

Data Issues in Today’s Economy

Nigel P Wilson, ASA, CEng, MIMMM, Director, Insurance Services

Craig Derrick, Director, Insurance Services

November 9th, 2016

Texas PRIMA

Outline of Contents

• Property valuation – Why? >> 3

• Initial diagnostic review of property values >> 6

• Property valuation resources >> 10

• Trending fixed asset records >> 21

• Valuation of Historic Properties >> 22

• Valuation solutions and engaging a valuation consultant >> 28

– COPE data and catastrophe risk modeling >> 31

– Desktop versus site inspection of buildings >> 35

Duff & Phelps - Insurance Valuation Services 2 November 9, 2016

Property Valuation, Why?

Questions that you need to ask yourself

• Are you confident that your statement of values

accurately reports all of your insurable property?

• Have you kept pace with the change in assets within

your facilities?

• Do you know where your properties’ reported insurable

values come from?

• How well was your statement of values received when

last marketed, did you receive push back from

underwriters?


Benefits of an Insurance Appraisal

• Determine the adequacy of insurance coverage

– Complete property listing

– Accuracy of values

– No surprises at the time of loss

• Improved risk management

– Consistent approach to quantification of risk

• Improved marketability to underwriters

• Optimizes CAT modeling performance

• Basis for equitable allocation of premiums

• Basis for preparation of a “proof-of-loss”

• Partnership – Insured/Insurer


Typical missing buildings

• New buildings

• Significant additions / renovations

• Park buildings

• Waste water lift stations (new developments)

• Buildings acquired by foreclosure

• Portable classrooms

• It is not atypical to add 15 - 20% to the total building count of a municipal

risk pool


Initial Diagnostic Review of Property Values

What’s the source of your current property listing and values?

• Appraisal

• Trended historical costs

• Standardized property values worksheets

• New construction costs

• Staff estimates

• Assistance from your Broker / Underwriter (Marshall & Swift “brown book”)

• Don’t know!


Initial Diagnostic Review of Property Values

Analyze property values by:

• Occupancy:

– Municipal Office Building, Town Hall, Fire Station, Water Treatment, Wastewater Treatment, High School, Community College, Library, Senior Housing, etc.

• Use gross area (square foot) as a basis of comparison:

– Exterior wall to exterior wall; include basements, parking, common areas, etc.

– Develop $/Sq. Ft for buildings and contents

• Use process capacity as a basis of comparison where

appropriate:

– $/Units/day; $/MW; GPD; etc.


Cost/SqFt Comparison

Replacement costs should be similar, if not, why not?

• Buildings

– Historic vs Modern construction

– Architecturally significant vs plain-Jane

– High quality materials vs low cost/quality

– Large vs Small building

– Replacement vs Reconstruction cost basis

• Contents

– Mixed occupancy

– Occupancy density

– Change in occupancy

– Manufacturing / Warehouse / Office ratios

– Incorrectly classified


Case Study – SoV Analysis Defense contractor, 150+ US locations, $2.0 billion TIV (property only), 6,000,000 SqFt

Request to review SoV and prioritize top 10 locations for appraisal

One of top 10:

• Mid Western city

• 610,000 SqFt

• Built 1950s

• Office/Manufacturing/Warehouse occupancy

• Buildings - $21,000,000

• Personal Property – $22,200,000

Why was this selected for top 10?

• One of the largest locations, area 10% of total

• Only 2% of TIV

• Buildings - $21,000,000 ($34.43/SqFt)

• Personal Property – $22,200,000 ($36.07/SqFt)

Appraisal results

• Area – 636,822 SqFt

• Buildings - $81,000,000 ($127/SqFt)

• Personal Property – $48,000,000 ($75/SqFt)


Construction Costs - Benchmarking Resources

• Construction Cost Information (US)

– Marshall & Swift

• http://www.marshallswift.com/

– R.S. Means

• http://www.rsmeans.com/

– Design Cost Data

• http://www.dcd.com/


http://www.marshallswift.com/

http://www.rsmeans.com/





Current Cost Trends - Construction

• 1986-2003 (1% to 3% per year)

• Significant construction inflation in 2004 (10.5%)

• Slowing but not back to normal in 2005 and 2006 (5.5% to 8.0%)

• A definite slowing in 2007 (2.8% to 4.7%)

• Commodities cause increases in 2008 (6.7 to 7.2%)

• Prices fall back with economy in 2009 (-7.0 to -0.3%)

• Inflation stabilizes in 2010 (-1.4% to +4.9%)

• Continued stabilization in 2011 (2.5% to 4.5%) & 2012 (1.5% to 2.8%)

• Slight upturn in 2013 (2.2% to 3.7%)

• Steady in 2014 (0.5% to 2.9%)

• Most recent 12 months sees a decline in the rate of inflation

» FM Global +1.3% (July 2015 - July 2016)

» RS Means +0.5% (July 2015 – July 2016)

» Marshall & Swift +0.0% average, range -0.3 to +0.5% (July 2015 - July 2016)

• 25% - 30% inflation in seven years


Sources cited: FM Global, Industrial Cost Trends, United States Industrial Building Average RS Means, 30 City Average Construction Cost Index Marshall & Swift, Quarterly Cost Index

US Construction Cost Trends


Sources cited: RS Means, Quarterly Construction Cost Trends, 30-City Average Marshall & Swift, Marshall Valuation Service, US Average FM Global, Industrial Cost Trends, United States Industrial Building Average

100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

180.0

US Average Construction Cost Indices, January 2000 to July 2016

RS Means, 30-City Average

FM Global, US Average

Marshall & Swift, US Average

Construction Cost Indices – Houston


Sources cited: RS Means, Quarterly Construction Cost Trends, Houston Marshall & Swift, Marshall Valuation Service, Houston FM Global, Industrial Cost Trends, Industrial Building, South West

100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

180.0

Houston Area Construction Cost Indices, 2000 - July 2016

RS Means, Houston

FM Global, South West

Marshall & Swift, Houston

New Construction Outpacing Reconstruction, School

Construction Costs


$100.00

$120.00

$140.00

$160.00

$180.00

$200.00

$220.00

$240.00

$260.00

$280.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

School Construction, Median Cost per Square Foot

Elementary

Middle

High

229%

185%

218%

Source cited: School Planning & Management, Annual Construction Cost Reports, 2000-2016, costs are for the entire project, including fees, furnishings and construction

Current Cost Trends - Construction

What’s driving the increase in construction costs • Elaborate design

• Green building features

– Increased initial construction costs to save operational costs

• 21st century learning environments

– Technology

• Security requirements

• Environmental issues

• Local zoning requirements

Cost mitigation measures • Architectural prototypes

• Long term contracts with contractors and architects


Cost Trend Resources, Construction

• United States Construction:

– Marshall & Swift

• http://www.marshallswift.com/

– R.S. Means

• http://www.rsmeans.com/

– FM Global

• http://www.fmglobal.com/fmglobalregistration/

– Engineering News Record

• http://enr.construction.com/Default.asp





http://www.fmglobal.com/fmglobalregistration/


http://www.gardiner.com/economics.asp

http://www.gardiner.com/economics.asp

Equipment Cost Trends

Machinery and Equipment Inflationary Increases, 2013 - 2016

Currency fluctuations are creating new replacement cost realities for imported machinery and equipment.


Sources cited: Marshall Valuation Service, Marshall & Swift Quarterly Cost Index, Industrial Equipment Average of All FM Global, Industrial Cost Trends, Industrial Equipment Composite US Department of Labor, Bureau of Labor Statistics, Producer Price Index, Capital Equipment, Table WPUSOP3200

2013 2014 2015 Most Recent 12 Months

Marshall & Swift, Industrial Average 0.9% 2.0% -1.0% -0.8% (July 2016)

FM Global, Industrial Equipment Composite

1.7% 1.6% 0.8% 0.4% (July 2016)

BLS, PPI Capital Equipment 1.2% 1.2% 0.8% 0.2% (July 2016)



Sources cited: M&S: Marshall Valuation Service, Marshall & Swift Quarterly Cost Index, Industrial Equipment Average of All FM: FM Global, Industrial Cost Trends, Industrial Equipment Composite PPI: US Department of Labor, Bureau of Labor Statistics, Producer Price Index, Finished Goods Seasonally Adjusted, Table WPSSOP3200

100.0

110.0

120.0

130.0

140.0

150.0

Equipment Cost Indices - Increases 2000 to July 2016

BLS - PPI

FM Global - Equipment Average

M&S - Equipment Average

M&S - Office Equipment

M&S - School Equipment



Sources cited: M&S: Marshall Valuation Service - Marshall & Swift Quarterly Cost Index, Chemical & Petroleum Equipment Indices Oil & Gas Journal, Nelson/Farrar total refinery index Chemical Engineering Magazine, Chemical equipment total index

100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

Chemical Process and Oil & Gas Equipment Cost Indices, July 2016

Marshall & Swift, Chemical

Marshall & Swift, Petroleum

Nelson/Farrar, Total Refinery

Chemical Engineering, Total Index

Cost Trend Resources, Equipment / Personal Property

United States Equipment:

• Marshall & Swift

• FM Global

• US Dept. of Labor, Bureau of Labor Statistics

– http://www.bls.gov/ppi/

• Handy Whitman – Index of Public Utility Construction Costs


http://www.bls.gov/ppi/

Trending Fixed Asset Records

• Identify insurable property

- No land or site development costs

• Site improvements?

• Trends are not an absolute

• Fixed assets diverge from reality eventually

• Don’t trend:

- Used costs

- Allocated costs

- Internal transfer costs

• Renovations/Rebuilds

• Expensed items

• Non-US sourced assets

• Transferred assets

• Allocate assets to individual buildings

• Property of others

• Offsite assets

• Don’t trend longer than 7 – 10 years


Valuation of Historic Properties


Valuation of Historic Properties


Valuation of Historic Properties – Valuation Challenges

• Accurate Dimensions

– No plans, irregular construction

• Construction details:

– Elaborate/Ornate design

– Unusual/higher quality materials

– Higher quality of craftsmanship

– Special features


Valuation of Historic Properties – Valuation Challenges

• On-Site Procedures:

– Extensive photography

– Measure and draw floor plans

– Identify and quantify construction materials

– Identify and quantify unique features –

Towers, Spires, Organs, Clocks, Carillons, Chandeliers, Stained Glass, etc.

• Office Pricing Procedures:

– Segregated cost analysis

– Cost adjustment for material quality/design

– Research costs with industry sources

– Compare conclusions with similar properties


Renovations of historic properties and tracking insurable values

• Insurable value = Original cost x Cost index

– Built in 1890 for $250,000

– Index/multiplier from 1890 = 55.0

– Insurable Value = $250,000 x 55 = $13,750,000

– Is this reasonable?

• Renovation costs

– 1920 - $300,000 ($9,000,000) (additional wing and updated entrance)

– 1950 - $750,000 ($9,750,000) (finished basement area and updated interior finishes)

– 1980 - $2,500,000 ($7,500,000) (updated building services/HVAC)

– 2008 - $6,000,000 ($6,600,000) (updated ADA compliance, lighting, wiring, HVAC, system controls and exterior finishes repaired)

– Total current cost of renovations = $32,850,000

• Are renovations adding cost or just curing physical depreciation?


Renovations of historic properties and tracking insurable values

Recent example

• Public library, built in 1873

– 1917; removal of tower to make way for stack additions

– 1933; renovation changing architectural exterior design

– 1968; new wing

– 1986; system upgrades

– 2005; upgrades to building systems, elevators, wireless internet, security, and code upgrades

• 2015 insured value of $20,800,000 = $850/SqFt

• 2015 Historic appraised value $10,900,000 = $440/SqFt

• Typical high quality new libraries in local area being built for $275 to $300/SqFt


Valuation Solutions - Data Required for a Valuation Services

Quote

Size and Scope of Valuation Services

Current SoV

Property details

– Size (total square feet/square meters)

– Occupancy/product

– Number of buildings on site

– Sketch/plot plan

– Loss prevention report

Asset description requirements for client/underwriter/broker

– Modeled contents, single value for all assets within each building

– Asset level detail, inventory


Valuation Solutions

Appraisal Programs

Identification of high-priority sites based on:

– Value

– Risk profile

– Degree of confidence in existing values

– Key location driving policy limits

Perform diagnostic analysis of recent statement of insurable values and related data

Sample sites by occupancy / product

Sample sites by region

Appraise specific number of sites per year

Build database for site comparison

Update prior appraised sites by trending (limit five to seven years)


Insurance Appraisal Services - Buildings

Component-Based Appraisal Methodology

Buildings - site inspection

– Review of available as-built plans

– Measuring of dimensions

– Determination of primary construction components

– Review of building services, interior and exterior finishes, etc.

– Photographing of each building

– Development of replacement cost using local construction cost resources

– Reporting of values (and COPE data if required) by building

– Evaluation of land improvements (if required) - parking lots, signage, outdoor lighting, etc.

We do not recommend trending building costs:

– High probability of capitalized renovations results in excessive replacement cost

– Unable to break out original costs by individual building


Valuation Solutions - Buildings

COPE Data

Underwriters are interested in receiving more than just a valuation; they also want COPE data.

– Construction (e.g., frame, brick, masonry, masonry veneer, etc.)

– Occupancy (how the building is being used)

– Protection (e.g., quality of the responding fire department, adequacy of water pressure and water supply in the community, the presence or absence of smoke alarms, etc.)

– Exposure (risks of loss posed by neighboring property or the surrounding area, taking into consideration what is located near the property, such as an office building, a subdivision or a fireworks factory)

Duff & Phelps reports primary COPE data as a standard deliverable in addition to insurable values.


Insurance Appraisal Services - Buildings

Standard COPE Data Occupancy

Address

Class of construction

Year of construction

Square feet of space

Number of stories

Average story height

Wall construction

Roof construction

Heating system

Cooling system

Fire alarm

Sprinklers

Entry alarm

GPS coordinates

Optional COPE Data

Plot plans

Flood zone certification

Secondary Windstorm COPE Data

Construction quality

Roof covering

Roof age/condition

Roof geometry

Roof anchor

Roof equipment bracing

Basement

Appurtenant structures

Cladding type

Roof sheeting attachment

Frame/foundation attachment

Ground-level equipment

Opening protection

Flashing and coping quality

Content grade


Secondary COPE data, the impact

Florida College System Risk Management Consortium

(FCSRMC)

Risk sharing pool with 175 campuses, 2,380 buildings, TIV $6.7 billion

Issue – mitigate property insurance pricing increases and capacity reductions arising out of introduction of RMS v.11 in 2012

2012 Renewal: premium increase of $1.6M, wind capacity $90 million, a reduction of $60 million

Carriers blamed loss in capacity on the substantial increase in the FCSRMC model results under RMS 11 versus RMS 10.

Actions: data collection project and personal visit to Lloyds to solicit more property wind capacity

Duff & Phelps (formerly American Appraisal) visited all 2,380 buildings to collect primary and secondary COPE, FRSRMC already had good values, cost $160,000

GA PRIMA Chapter, October 14th, 2015 33

Secondary COPE data, the impact

Florida College System Risk Management Consortium (FCSRMC)

2013 renewal results:

– Modeling results reduced 250 year PML by 44%, and AAL by 47%

– Wind capacity increased by 39% to $125 million with a 9% increase in total property program cost

2014 renewal results:

– Property wind limit increased from $125 to $150 million

– 7% property premium decrease

– Since 2012 overall premium remained flat with 10% exposure increase and $60 million wind limit increase

GA PRIMA Chapter, October 14th, 2015 34

Valuation Solutions - Buildings

Site Inspection versus Desktop – the difference

Accuracy of Square Footage

Accurate determination of construction materials

Quality of construction

Appropriate “Model” usage

Additional building features

Collection of primary & secondary COPE data

Site specific factors

Shape / perimeter required for accuracy


Valuation Solutions – Contents / Personal Property

Appraisal Programs

Contents/personal property valued by modeling approach

– Recommended when personal property is of much less significant value than real property

– Based on appraisal company’s prior full surveys of similar occupancies

– $/SF used and adjusted when necessary by appraisal staff

– Typical for public-sector occupancies



Appraisal Programmes:

Fixed asset trending with brief site inspection

– Requires accurate fixed asset list with true original costs

• Manufacturer, model, serial number, original cost, year of acquisition and locations within the property

– Application of appropriate cost trends prior to site inspection

– Onsite limited verification of existence of significant assets

– Limited addition/deletion of assets based on findings

– Limited re-costing to validate cost trends

– Contents costs reported by building if identified in fixed asset record, otherwise by overall site

– Typical for light manufacturing occupancies



Appraisal Programs

Detailed asset listing by comprehensive site inspection

– Inspected and inventoried

• Asset number, description, model number, serial number and manufacturer

– Predetermined equipment listing cut-off, suggested is $100,000

– Logical production lines and single assets with replacement cost $100,000 listed

– Asset below this cost grouped with like kind assets

– Assets repriced using a variety of sources

– Values reported by floor by building

– Typical for HPR occupancies


Report Formats

Final report formats

The following are typically available

– PDF reports

– Web-accessible reports

• Stores original PDF reports

• Select and view individual buildings and associated contents

• Sort on five different levels using 16 key data elements

• Download sorts to Excel and PDF

• Allow restricted access to employees/brokers/underwriters


Qualifying Valuation Consultants

Factors to consider when engaging an appraisal consultant

Qualifications and experience - a match to your properties

Professional accreditation

– ASA, Appraisal Institute, ASFMRA, etc.

Experienced Full-Time Consultants

Uniform Standards of Professional Appraisal Practice (USPAP) Compliant Reports

Internal Quality Review / Controls

Size of staff

Optional services

– Fair market value of real estate

– Fixed asset inventory and reconciliation services


Summary Points

Benefits

Improved risk management and marketability of insurance portfolio

Diagnostic Review

– Are your present values reasonable?

Cost Trends

– Construction cost trend uncertainty receding

– Trends are average indicators of change, they are not absolute

Valuation Solutions and Engaging a Valuation Consultant

– Be an informed purchaser, customize your scope

– Increased demand for COPE data


Michael Domin

Managing Director

Michael is a managing director of business development for the Fixed Asset Management and Insurance

Solutions group (FAMIS). He has more than 16 years of experience in the professional appraisal industry, and

currently works to develop client solutions for public, private and nonprofit entities.

As a consultant, Michael completed infrastructure valuations for various public entities including counties, cities,

independent park districts, municipalities, universities, colleges, risk pools and school districts. He specialized in

the appraisal of building construction and water and wastewater utilities. In addition, he valued traditional and

modern churches, parishes, convents, and rectories. He continues to provide quality assurance for church

appraisals. Michael has valued fixed assets and buildings for purposes of insurance, accounting, and property

records. He has also completed infrastructure studies and performed valuations for compliance with GASB 34.

Michael joined Duff & Phelps through the acquisition of American Appraisal in 2015. He joined American

Appraisal in 2000 and worked in various valuation consulting and management positions until 2008, when he

joined the business development

Michael earned his Bachelor of Business Administration at Carthage College.

Duff & Phelps - Insurance Valuation Services 42

Duff & Phelps, LLC

Managing Director

Chicago. Lisle

+1 630-541-4651

[email protected]

November 9, 2016

Craig Derrick

Craig is responsible for the management, performance, quality, fee generation, and profitability of the Dallas

fixed asset management and insurance practice operations, providing the proper guidance, direction, and

communication to those within the group. He collaborates closely with Duff & Phelps’ business development

personnel to establish new opportunities. In addition, Craig is responsible for each engagement’s management,

execution, and quality; compliance with applicable laws and standards; and the establishment of a client focus,

which results in excellent client service.

Craig has over 11 years of managerial experience in the industry and 15 years of project management

experience. His expertise includes knowledge with property insurance and the evolving needs of that

marketplace. His valuation experiences are with real and personal property, including fixed assets and their

reconciliation procedures, as well as the appraisal of land improvements, buildings, and

infrastructure. Primarily, Craig serves public sector clients, involving both state and local government,

healthcare groups, public schools/colleges, and water/wastewater utility treatment. He has advanced

knowledge of various appraisal practices and client portfolio management, specializing in complex engagements

and high-value risk in the property insurance marketplace.

Craig holds a B.A. in Communications with specialization in Public Relations from the University of Texas at

Arlington. He is also a candidate member of the American Society of Appraisers.


Duff & Phelps, LLC

Director

Addison

+1 469 547 4246

[email protected]

November 9, 2016

Nigel Wilson, ASA, CEng, MIMMM

Nigel Wilson is a director of insurance services at Duff & Phelps and is part of the firm's Fixed Asset

Management and Insurance Solutions (FAMIS) practice. Nigel has deep expertise in developing the cost

approach for insurance purposes in all industrial, commercial, and institutional occupancies, as well as cost

trend development and maintenance.

Nigel has provided his insurance valuation expertise to a broad spectrum of noteworthy clients including Kraft

Foods, Las Vegas Sands, CSL Behring, Cooper Tire, Johnson Controls, DRS Technologies, Omni Hotels, Nike,

Vishay Intertechnology, Harvard University, Massachusetts Bay Transportation Authority Exelon, Massachusetts

Institute of Technology and many more.

Nigel joined Duff & Phelps through the acquisition of American Appraisal in 2015 where he held various

positions within the Industrial Valuation and FAMIS practices. Prior to American Appraisal, Nigel was with FM

Global where he served as a manager of appraisal standards for over 20 years.

Nigel is a thought leader, frequent speaker and author on various topics related to insurance valuation. He is

the editor and contributing author to the firm’s Insurance Valuation Services Today e-newsletter and has been a

qualified instructor of the American Society of Appraisers’ machinery and equipment valuation courses for the

past 25 years. Nigel is an active member, former Chapter President and Committee Chair of the American

Society of Appraisers. He is professional member of the Institute of Materials, Minerals and Mining and a

chartered engineer. Nigel is also an active member and past committee chair in the University Risk

Management and Insurance Association.

Nigel earned his B.S degree in Metallurgy from the University of Aston in Birmingham, England.


Duff & Phelps, LLC

Director

225 Franklin Street, Floor 21

Boston, MA 02110

T +1 617 378 9485

M +1 414 791 4751

[email protected]

November 9, 2016

For more information about our global

locations and services, please visit:

www.duffandphelps.com

About Duff & Phelps

Duff & Phelps is the premier global valuation and corporate finance advisor with expertise in complex valuation, dispute and legal management

consulting, M&A, restructuring, and compliance and regulatory consulting. The firm’s more than 2,000 employees serve a diverse range of

clients from offices around the world. For more information, visit www.duffandphelps.com.

M&A advisory and capital raising services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill

Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory and capital raising services in the United Kingdom and Germany are

provided by Duff & Phelps Securities Ltd., which is authorized and regulated by the Financial Conduct Authority.

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