Some principles governing the valuation of land having been laid down, consideration may be given to the valuation of the buildings on the land. These principles may be stated as follows:

(a) It should first be determined whether the building is the proper or adequate improvement, that is, whether it is the improvement which yields the greatest amount of economic or ground rent. Such a building will be the one which, as an income producer, is most suited to the neighborhood.

(b) If a building is the adequate improvement for the plot it is worth its cost to produce minus a reasonable allowance for depreciation.

(c) The cost of a building can be computed to a fair degree of accuracy by means of factors determined by experience. These factors are applied to the number of square feet of floor surface in the building, or to the number of cubic feet contained within its walls, the result being estimated cost.

(d) Buildings cease to be adequate improvement when the land (i.e. the location) is suited for a building of a higher type. The condition is usually progressive and is indicated by increasing land values.

(e) It is usual to value first the land and then the land and building together. The difference will be the amount of value the building adds to the land. In the case of new buildings and those which are the proper improvement the amount of value the building adds to the land equals the amount it cost to construct. In the case of old or obsolete buildings, or those not proper improvements for the site, it will be an amount much less than cost.

(f) Consideration should be given to fluctuations in the cost of labor and materials entering into building construction. Buildings produced in periods of low costs, if they remain the proper improvement, increase in value with increasing costs, and conversely if they are produced when costs are high these values drop with falling labor and material costs. It may be considered that reproduction costs are the ones to be considered rather than original costs, although prices resulting from sudden and extreme changes are not safe guides. As an illustration of an example of a building ceasing to be the proper improvement, it may be assumed that a given piece of property when new was valued:

Let us assume that five years later lots had become worth $10,000 due to the fact that the locality had become suitable for a higher type of improvement. The property under consideration, as a whole, would not have increased in value, however, as it produces the same rental as formerly. The valuation can now be stated to be:

The building at this point adds $15,000 only to the value of the land. Let us further consider that at a later period the total value would be divided:

The plot has by this time become so valuable that the building adds to it only a nominal amount. It has practically reached the time when it should be torn down to make way for a suitable improvement. When that time arrives, the value of the old building, even though it may be physically in good condition, can be said to have merged in the value of the land.