1. Depreciation Estimates

2. Depreciation
The difference between the cost new of the improvements and their value as of the effective date of appraisal
Curable or incurable?
Methods of estimating depreciation
Market extraction method
Economic age-life method
Breakdown method
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3. Age and Life Relationships
Actual age and effective age
Actual age is a fact
Effective age is a numerical estimate
Total economic life and useful life
Economic life is the period of time over which improvements contribute to property value
Useful life is the period of time over which a structure may reasonably be expected to perform the function for which it was designed
Remaining economic life and remaining useful life
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4. Market Extraction Method Procedure
1. Find comparables with the same losses as the subject
2. Make adjustments to the sale prices for
Property rights conveyed
Seller financing concessions
Conditions of sale
3. Subtract the value of the land (VL)
4. Estimate the reproduction or replacement cost
5. Subtract the value of the building(s) from the cost of improvements to show the depreciation
6. Convert amount to a percentage
7. Develop annual depreciation rate if there is a difference between subject’s and comparables’ ages
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5. Depreciation of Newer Improvements (Estimated Using Sales Comparison)
Chapter 29

6. Depreciation of Older Improvements
Chapter 29

7. Depreciation of an Office Building
Chapter 29

8. Economic Age-Life Method
Effective age divided by economic life = percentage depreciation
For example, a 10-year-old roof with a 20-year life is 50% depreciated (10/20).
Applicability and limitations
Variations
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9. Methods of Calculating Depreciation in the Breakdown Method
Estimation of the cost to cure the problem
Application of the estimated age-life ratio
Application of the functional obsolescence procedure
Analysis of market data, usually using paired sales and income capitalization
Capitalization of the income loss
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10. Types of Depreciation Physical deterioration
Curable physical deterioration--Deferred maintenance
Incurable physical deterioration--Short-lived items
Incurable physical deterioration--Long-lived items
Estimating all forms of physical deterioration using the age-life procedure
Functional obsolescence
Problem-solving for functional obsolescence
Using the functional obsolescence procedure
External obsolescence
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11. The Functional Obsolescence Procedure
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12. Curable Functional Obsolescence Caused by a Deficiency Requiring an Addition
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13. Incurable Functional Obsolescence Caused by a Deficiency
Chapter 29