Replacement/Reproduction Cost 


  Estimating the replacement cost new of the improvements, requires that a distinction be made between replacement cost and reproduction cost.  

Replacement cost
is defined as: the cost and overhead that would be incurred in constructing an improvement having the same utility as the original, without necessarily reproducing exactly the same characteristics of the property, but using today's materials, labor, and building techniques. In other words, replacement cost represents the cost to create an equally desirable substitute property  

Reproduction cost is defined as: the cost, including material, labor, and overhead, that would be incurred in constructing an improvement having exactly the same characteristics as the original improvement. Reproduction cost is sometimes difficult to measure 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 cost of these types of physical characteristics in older structures, often tends 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. The Replacement cost rather than Reproduction cost is used as the basis for the cost approach in most appraisal situations where cost is considered an appropriate measurement of value.

Replacement Cost New is generally applicable to most classes of property and leads to a greater degree of uniformity and equity in assessed values.  The Alabama Appraisal Manual is a cost manual estimating replacement cost new.  Periodically, each county is required to conduct an index study to determine an appropriate factor to adjust historical costs to present day costs.