Depreciation Estimates

1
Depreciation Estimates

• Dr. Jim Burton
• Marketing Real Estate
• Richards College of Business

2
Overview

• Definitions
• Choices at the End of Economic Life
• Forms of depreciation
• Three depreciation methods

3
Definitions

• Economic life
• Effective age
• Remaining economic life
• Useful life
• Actual age
• Remaining useful life

4
Choices at the End of Economic Life

• Renovation
• Rehabilitation
• Remodeling
• Demolition replacement with new structure

5
Forms of depreciation

• Physical deterioration deferred maintenance,
  short-lived components, long-lived components.
• Functional obsolescence curable incurable.
• Economic or locational obsolescence not curable.

6
Three depreciation methods

• Market extraction
• Age-life
• Breakdown method

7
Market extraction

• Find comparable sales
• Make appropriate adjustments
• Subtract land from price
• Estimate building cost
• Subtract depreciated cost (price less land) from
  cost new
• Convert to , p. 390

8
Age-life

• (Effective age/total economic life) total cost
  depreciation
• Estimate total economic life effective age of
  subject
• Divide eff. age by econ. life
• Multiply times total cost depreciation, p.
  392.

9
Breakdown method

• Breakdown depreciation into components
• Cost to cure
• Age-life ratio
• Functional obsolescence procedure
• Paired sales
• Capitalization of income loss

10
Breakdown Procedures

• Estimate total depreciation
• Subtract total physical
• Subtract functional depreciation
• Any residual depreciation is from external
  obsolescence.

11
Alternative Breakdown

• Estimate physical depreciation
• Estimate functional obsolescence
• Estimate external obsolescence
• Estimate deferred maintenance
• Add all together