Depreciation

There are three general types of depreciation; physical deterioration, function obsolescence and external obsolescence.  Most people are familiar with physical deterioration, which is the "wear and tear" from use and from the elements.  This concept is different from the depreciation describe by accountants which has to do with a recapturing a capital outlay over time which is also called a "write-off."  

Where a less than an optimal building structure, building material or design (layout) negatively affect the utility, function and / or value of an improvement, a functional obsolescence is identified.  This kind of obsolescence can be readily seen in older buildings that waste space or make rooms accessible only through other rooms.  

There are curable and incurable element of physical deterioration and functional obsolescence that are considered by an appariser during the appraisal process.  Incurabe physical deterioration can be short-lived or long-lived in nature.  Curable functional obsolescence can be a deficiency or a superadequacy.  Appraisers generally do not delve into the details of the  cost approach in their reports since it is often not given the greatest weight when a strong sales approach or income approach are available.  

When the utility or marketability of a property is negatively affected due to an external influence, or from outside of a property, an external obsolescence is identified.  An example of an external influence would be the general deterioration of a neighborhood into which a newer building had been constructed.  The downward trend of the neighborhood negatively affects the value of the newer construction.  External influences can be economic or locational, and consideration can be given to whether or not the influences are curable.    

Appraisers choose from a number of methods for estimating accrued depreciation.  The economic age-life method is often used and the use of published depreciation tables is also favored.  One of the problems with the cost approach is the relaively disparity that can result from using different depreciation methods.

When all three of the depreciation types are considered the total depreciation of an improvement is considered.  Appraisers generally consider the replacement cost of a building plus the value of the vacant land combined in the cost approach.  Depreciation is subtracted from the replacement cost of an improvement as new.    

Contact us with your questions or concerns regarding depreciation or regarding your specific appraisal assignment in Nevada at 1-702-568-6699.  We can also be e-mailed at grigdon@cox.net. 

Commercial Real Estate Appraisals in the Las Vegas & Henderson, Nevada Area.