Reproduction cost is defined as: the cost, including material, labour, and overhead, that would be incurred in constructing an improvement having exactly the same characteristics as the original improvement. Ifediora (1993) defines reproduction as the cost of creating a replica building (considering a building here) or improvement on the basis of current prices, using the same or closely similar materials. Boyce (1984) defined it as the cost of construction at current prices of an exact duplicate or replica using the same materials, construction standards, design, layout and quality of workmanship, embodying all deficiencies, and obsolescence of the subject building. According to Ifediora, (1993), reproduction involves the total reproduction of a thing in its current state.
Reproduction cost, although representing the basic concept is sometimes, difficult to estimate. because the same building materials or methods are not available. Reproduction cost for an older building with 12-foot ceilings, working fireplaces in every room (as opposed to modern central heating systems), and elaborate trim would be computed on the basis of creating an identical structure today. The reproduction costs of these types of physical characteristics in older structures often tend to create an element of depreciation (value loss) identified as functional obsolescence. This is illustrated using the principle of substitution, which states that in a competitive market, a buyer will typically not pay more for a particular property than the amount to acquire a similar property with comparable utility (a satisfactory substitution). Thus, reproduction cost may often require adjustments for construction techniques, building materials and various forms of depreciation to be indicative of current market value.
As indicated by Bloom, Weimer and Fisher (1982), most appraisers tend to use the terms “reproduction” and “replacement” synonymously, taking both terms to mean the present cost of a property of equivalent utility. The reason for the difficulty could be attributed to the fact that identical materials may not be available or construction method may have changed. Reproduction envisages ‘faithful copy’ while replacement accepts ‘equivalent substitute’. However, how true can the carbon copy be? This, among others, was left aside in order not to bring conflicts in the different concepts of costs. This also has necessitated the shift from reproduction to replacement. This shift is in recognition of the fact that in rapidly changing building techniques, architectural styles and materials thus making it almost impossible to reproduce buildings which were built with materials and methods which are no longer available or desirable. Moreover the investor is only concerned with an acceptable substitute and is not interested in exact replica.
This concept however could lead from one problem to another if not carefully addressed because the shift from ‘reproduction cost’ to ‘replacement cost’ does not totally solve the problem. The question of what is an acceptable substitute and who determines it arises. Ifediora (1993) was able to advance three choices which might fit the definition of suitable substitute, these are:
- A new, but otherwise substantially identical replica
- An equally depreciated substitute
- The most advantageous, new and modern substitute
Also when a building’s substitute is reproduced, the investor would not ordinarily undertake the project unless he believed that the return the new property is expected to earn would more than justify the costs incurred. Hence, it is quite appropriate in the case of a new structure (assuming highest best use of the site) to compute on the return on the investment required to improve the land and to impute the remainder on the anticipated income to the land.
Reference
Bloom, G.F. (1982). Real estate.USA: John Wiley & Sons.
Boyce, B. N. (1984). Real estate appraisal terminologies.USA: Ballinger Publishing Co.
Ifediora, G. S. A. (1993). Appraisal framework. Enugu, Nigeria: Iwuba Ifediora & Associates.
