1. 11 The Cost Approach—Part II: Depreciation
Depreciation is a loss in value from any cause
Accrued depreciation is total depreciation
due to all causes from time of construction
to the effective date of the appraisal

2. Categories of Depreciation
Physical deterioration
Caused by wear-and-tear and action of the elements, and usually the most obvious form of depreciation
Curable when repairs result in equal or greater increase in overall property value
Incurable when repairs are not economical

3. Categories of Depreciation
Functional obsolescence
Caused by presence of currently undesirable layout, design, or other features, or absence of currently desirable features
Curable if alteration is economical
Incurable if alteration is not practical

4. Categories of Depreciation
External obsolescence is also called
environmental obsolescence,
economic obsolescence, or
locational obsolescence
It is any loss of value from causes outside the property and is always considered incurable.
Examples: Change in land use or natural conditions
Change in business environment, such as
loss of jobs due to layoffs or closures

5. The Americans with Disabilities Act
Title III requires new or remodeled places of public accommodation to have no architectural or communication barriers to prevent accessibility by persons having a disability
Places of public accommodation include stores, banks, theaters, offices, restaurants, hotels, museums, amusement parks, and other places to which the public is invited
Enforced by U.S. Dept. of Justice justice.gov

6. Methods of Computing Depreciation
Age-Life Method Also called straight-line method or economic age-life method Based on assumption that depreciation occurs at an even rate throughout the projected life of a structure Normally based on effective age of structure rather than actual age in years

7. Methods of Computing Depreciation (cont.)
Formula for age-life method
Total Economic Life
Effective Age
Accrued Depreciation ÷ =

8. Methods of Computing Depreciation (cont.)
Observed condition method Also known as breakdown method Appraiser estimates loss in value from curable and incurable items: Physical deterioration—curable Physical deterioration—incurable Functional obsolescence—curable Functional obsolescence—incurable External obsolescence—incurable only

9. Methods of Computing Depreciation (cont.)
Capitalized value method Also called rent loss method Appraiser determines loss of income due to depreciation by comparing the income produced by similar properties, and then applying capitalization rate to the loss of income to determine effect on property value

10. Methods of Computing Depreciation (cont.)
Market extraction method
Also called
market comparison method and
sales comparison method
Appraiser analyzes comparable sales from which value of depreciated feature can be isolated

11. Market Extraction Method
Land value of comp is subtracted from comp’s sales price to find depreciated value of improvements
Depreciated value is subtracted from reproduction cost of improvements to find dollar amount of depreciation
Dollar amount of depreciation is divided by age of improvements to find depreciation rate
If rate is consistent for comps, appraiser applies that percent of depreciation to reproduction cost of improvements to find dollar amount of depreciation for subject property

12. Itemizing Accrued Depreciation Part 1
Compute amount of depreciation for items below, then compute loss due to depreciation from home if estimated reproduction cost is $247,000
Item
Reproduction
Cost
Percent
Depreciation
Amount of
Bath fixtures
$1,800
75%
Carpeting
4,200
50%
Furnace
2,800
25%
Roof
5,500
90%

13. Itemizing Accrued Depreciation Part 2
Depreciated value of home is $237,900 ($247,000 - $9,100 accrued depreciation)
Item
Reproduction
Cost
Percent
Depreciation
Amount of
Bath fixtures
$1,800
75%
$1,350
Carpeting
4,200
50%
2,100
Furnace
2,800
25%
700
Roof
5,500
90%
4,950

14. Usefulness of Cost Approach
Reproduction cost tends to set upper limit of a building’s value There can be a significant difference between reproduction cost and market value Estimating current construction cost of an older structure may be difficult Cost approach most useful when valuing buildings for which other approaches are impractical