Depreciation

1
Chapter 16

• Depreciation
• Replacement Cost-Depreciation Value
• Appraiser Interprets Market Perception of
  Depreciation Effects
• Physical Deterioration
• Wear and Tear Elements Use
• Maintenance Affects Rate of Deterioration
• Curable or Incurable

2

• Functional Obsolescence
• Flaw in Structure, Design, Materials
• Diminishes Function, Utility Value
• Curable or Incurable
• External Obsolescence
• Negative Influences Outside of Property
• Not Controlled by Owner/User But Not Necessarily
  Permanent
• Appraisal Deprec. ? Book Depreciation
• Book Depreciation is Accounting Term and Does not
  Consider Market Value

3

• Economic Life Time Period in Which Improvements
  Contribute to Value
• Physical Considerations Rate at Which Components
  Wear Out
• Functional Considerations Rate at Which
  Technology/Designs/Styles Change
• External Considerations Neighborhood Life Cycle,
  Market Conditions, Proximity to Nuisance, etc.

4

• Useful Life
• Time Period in Which Improvements Can Perform
  Their Intended Function
• Generally Longer Than Economic Life
• Components
• Long-Lived Useful Life gtEconomic Life
• Foundation, Framing, Pipes, Etc.
• Short-Lived Useful Life lt Economic Life
• Roof, HVAC, Finishes, Etc.

5

• Actual Vs. Effective Age
• Actual Age Chronological Age
• Effective Age Determined by Condition and Utility
• Remaining Economic Life
• Remain Eco. Life Eco. Life - Effective Age
• Depreciation Estimation Method
• Market Extraction Method
• Age-Life Method
• Breakdown Method

6

• Market Extraction Method
• Study Sales of Comparable Properties
• Deprec. Improve. Sales Price - Site Value
• Deprec. Replace Cost - Deprec. Improve
• Pct. Deprec. Deprec. / Replace Cost
• If Necessary, Adjust Pct. Deprec. to Subject
• By Annualizing
• Compare Across Comparables and Apply to
  Subject
• Subject Deprec. Annual Pct. Deprec.
  Effective Age Replace Cost

7

• Age-Life Method
• Simplest Not As Accurate
• Assumes Straight-Line Depreciation
• Ratio Effective Age / Economic Life
• Deprec. Ratio Replace Cost
• Breakdown Method
• Most Detailed
• Estimate Physical Deterioration, Functional
  Obsol. External Obsol. Separately

8

• Applying the Breakdown Method
• Curable Phys. Deterioration
• Deferred Maintenance
• Curable if Economically Feasible
• May Cost More to Repair Than When New
• Incurable Phys. Deterioration
• Estimate Each Component Age-Life Separately
• Apply Ratio to Cost to Replace (Short-Lived) or
  the Balance of the Improvements (Long-Lived)

9

• Functional Obsolescence
• Deficiency Substandard or Missing Component
• Superadequacy Exeeds Market Standards
• Costs Not Economically Recovered
• Curable if Economically Feasible
• Formula Cost of Existing Item
• - Previous Deprec.
• Cost to Cure (Or Loss of Value)
• - Cost to Install if New
• Functional Obsolescence

10

• External Obsolescence
• Paired Data Analysis Compare Sales of Similar
• Properties Near and Far Away From Subject
  Allocate Between Land and
• Improvements
• Capitalization of Rent Loss Analyze Rent
  Differences Near And Far Away From
• Subject Capitalize the Income to
• Derive Value of Land and
• Improvements