Chapter 12--Cost-Depreciation Analysis: Estimation of Accrued Depreciation

Physical deterioration

*†† Curable

*†† Painting

*†† Broken windows

*†† Incurable

*†† short-lived

*†† long-lived

Calculation of Short-lived Deterioration.

*†† Identify significant property items which are expected to have remaining lives less than the remaining life of the structure.

*†† For each of these items, their replacement cost, their effective age, and the expected useful life of a new item.

Short-lived Deterioration Example

*†† Item††††††† Useful†††† Effective Cost Depreciation
††††††††††† Life††††††† Age †††††† New†††††††††††††† Charge

*†† Roof††††††† 30 years 10 years $3000 10/30*3000
††††††††††††††††††††††††††††††††††††††††††††††††††††††††††† = $1,000

*†† Furnace20 years 5 years†† $2000 5/20*2000
††††††††††††††††††††††††††††††††††††††††††††††††††††††††††† = $500

*†† Range†††† 15 years 10 years $900††††† 10/15*900
††††††††††††††††††††††††††††††††††††††††††††††††††††††††††† = $600

Long-lived Physical Deterioration

*†† First estimate the propertyís effective age and its expected useful life when new.

*†† From the reproduction cost new of the property, deduct the total cost new of the short-lived items.

*†† Long-lived Physical Deterioration =
(effective age/useful life) * (Cost new - short-lived itemís cost new)

Long-lived Physical Deterioration Example

*†† Your market research has indicated the reproduction cost of a property is $95,900. Short-lived itemís cost new are $3,000 for a roof, $2,000 for a furnace, and $900 for a range. The property is estimated to have an effective age of 10 years. Similar construction suggests a useful life of 60 years.

*†† (10/60) * (95,900 - 3,000 - 2,000 - 900) = $15,000

Functional obsolescence

*†† Curable

*†† 5 bedroom/1 bath

*†† Jalousie windows

*†† Cost to remodel - cost to install in new construction.

*†† Incurable

*†† Inefficient floor plan

*†† Rent loss times GRM

*†† Superadequacies

*†† Gold plumbing fixtures in an inexpensive home

*†† Cost of item - increase in value with item

Functional Obsolescence Examples:

*†† Curable Functional: It will cost $4,000 to add an additional bath in the subject four bedroom, one bath property. The same bath in new construction would cost $3,000.

*†† Depreciation = $4,000 - $3,000 = $1,000

*†† Incurable Functional: An awkward floor plan costs the subject property $50 per month in rent. The market GRM is 110.

*†† Depreciation = $50 * 110 = $5,500

External obsolescence

*†† Locational obsolescence

*†† Market obsolescence

*†† Rent loss times GRM

*†† Sales-comparison analysis

Final Cost-Depreciation
Value Estimate

*†† Reproduction Cost New

*†† Less Accrued Depreciation

*†† Plus Site Value

Cost Depreciation Example

*†† Given a 2,000 s.f. 5 year old home with 5 bedrooms and one bath. Lots cost $30,000 and new construction costs $40 / s.f. and an extra bathroom would cost $12,000 to add. Homes are expected to last for 50 years

*†† Land Cost = $30,000

*†† Building Cost = $40 * 2,000 = $80,000

*†† Less Physical Depreciation = 5/50*$80,000= $8,000

*†† Less Functional Obsolescence = $12,000

*†† Cost Depreciation Value = $90,000