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Depreciation Estimates

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Presentation on theme: "Depreciation Estimates"— Presentation transcript:

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 Chapter 29

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 Chapter 29

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 Chapter 29

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 Chapter 29

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 Chapter 29

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 Chapter 29

11 The Functional Obsolescence Procedure
Chapter 29

12 Curable Functional Obsolescence Caused by a Deficiency Requiring an Addition
Chapter 29

13 Incurable Functional Obsolescence Caused by a Deficiency
Chapter 29


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