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

Physical deterioration

u   Curable

u  Painting

u  Broken windows

u   Incurable

u  short-lived

u  long-lived

Calculation of Short-lived Deterioration.

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

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

Short-lived Deterioration Example

u   Item UsefulEffective††††††††† Cost††† Depreciation
†††††††††††††††††† †† Life†† †††† Age††† †††††††† New†††††††††††††† Charge

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

u   Furnace†††††† 20 years†††††††††† ††† 5 years†††††††† $2000†††† 5/20*2000
†††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††† =†† $500

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

Long-lived Physical Deterioration

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

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

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

Long-lived Physical Deterioration Example

u   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 hood.The property is estimated to have an effective age of 10 years.Similar construction suggests a useful life of 60 years.

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

Functional obsolescence

u   Curable

u  Apartment complex lacking fire alarms

u  Resturant kitchen lacking three sinks

u  Cost to remodel - cost to install in new construction.

u   Incurable

u  Inefficient floor plan

u  Rent loss times GRM

u   Superadequacies

u  Gold plumbing fixtures in an inexpensive home

u  Cost of item - increase in value with item

Functional Obsolescence Examples:

u   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.

u   Depreciation = $4,000 - $3,000 = $1,000

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

u   Depreciation = $50 * 110 = $5,500

External obsolescence

u   Locational obsolescence

u   Market obsolescence

u   Rent loss times GRM

u   Sales-comparison analysis

Final Cost-Depreciation
Value Estimate

u Reproduction Cost New

u Less Accrued Depreciation

u Plus Site Value