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Depreciation: Raising
Your Understanding of
Losses in Value
Norrine Brydon, Chief Research &
Data Officer
Edward Martinez, Training Manager
Depreciation Complexity
Determining depreciation is not a simple sit in the office type of
exercise, it require complete and careful examination of all the
components which affect the depreciation equation.
Based on research, Marshall & Swift created guidelines to aid in the
valuation and to standardize results. But other than straight line
depreciated formula, the final value comes down to the expertise
and thoroughness of the person performing the valuation.
Agenda
Back to the Basics - Understanding Depreciation
o Overview of Common Definitions Terms and
Concepts
How Depreciation affects Assessed Value
Overview of Standard Methodologies
Review of M&S Methodologies
o New Life-Cycle Tables
Methodology
Instructions and Example
o Existing Extended-Life Theory
New Instructions and Example
Summary and Q/A
Session
Objectives
1. Greater Consistency in Appraisals
2. Understanding of New Life Cycle
Tables
3. Understanding of Existing
Extended Life Theory
Back to Basics:
Understanding Depreciation
Depreciation : Loss in value
3 Categories:
1.Physical Deterioration
2.Functional Obsolescence
3.External Obsolescence
2 Components:
All depreciation has an economic component and:
1.May be curable
or
2.Incurable
Copyright 2013 Marshall & Swift/Boeckh LLC
Causes of Depreciation:
Physical Deterioration
Loss in value related to Wear and Tear (combination of use,
effects of aging process, physical decay, structural defects, and
action of the elements)
Key considerations to pay attention to:
o Condition of Exterior Walls (evidence of smoke, mildew stains, and
general decay)
o Condition of Interior (walls, millwork, doors, wall coverings, evidence of
smoke, mildew stains, and general decay)
o Mechanical Equipment Condition
o Roof Condition
o Floors/Floor Covering
Causes of Depreciation:
Functional Obsolesce
Loss in value due to something inside property
boundary
1. Improved too much: Over-improvement
2. Improved too little: Under-improvement
What were they thinking?
Causes of Depreciation:
External Obsolesce
Loss in value due to something OUTSIDE property
boundary
1. Location (affect small area, generally incurable)
2. Market (affect large area, may be temporary)
Physical
Is Loss Curable or
Incurable?
Curable: Physical deterioration or obsolescence of an asset that
is repairable or replaceable at reasonable cost
Effective Age
The Effective Age of a residence is its age in years
as compared with other residences performing like
functions.
Key Importance:
Requires Judgment:
3. Effective Age: Subtract the remaining useful life from the Typical
Life to obtain the Effective Age.
Questions on Basics of
Depreciation
deterioration.
2. Functional or technical obsolescence is loss in value due
to lack of utility or desirability of part or all of the property,
inherent to the improvement or equipment. Thus a new
structure or piece of equipment may suffer obsolescence
when built.
3. External, locational or economic obsolescence is loss in
value due to causes outside the property and independent
of it, and is not directly included in Marshall & Swift tables.
Copyright 2013 Marshall & Swift/Boeckh LLC
worn finish.
Interior Construction
doors.
Weather Extremes
passive or active.
Multiple Methods:
Mid-life Theory: This takes into account that most buildings depreciate little
during the first few years. When it becomes evident that the buildings are no
longer new, even though they are adequately maintained, the maintenance
expenses rise, rentals tend to decrease and the building depreciates faster.
Extended Life Concept: Starts with the hypothesis that buildings age in
much the same manner as people and that the older they get, the greater is their
total life expectancy. This concept recognizes that a building is in the prime of life
before mid-life and that the road is downhill after that, but that correction of
deficiencies may lower the effective age and lengthen the remaining life.
User Feedback:
o Life Cycle Chart - Complicated
o Extended Life Theory Instructions not clear enough
Framing Type
o
o
o
o
o
o
Wood Frame
Masonry
Steel Frame
Pre Engineered Metal
Protected Steel Frame
Reinforced concrete
Copyright 2013 Marshall & Swift/Boeckh LLC
New
Life
Cycle
Tables:
New Life Cycle Tables
Methodology
Methodology
Develop Example Models
Examples of some of the models created
o Different occupancies
o Gross floor area estimated
o Number of stories
o Each model has 6 framing types associated
New Life
Cycle Tables
Lets review a stepby-step example to
use the New Life
Cycle Table.
Just
Steps!
Easy
Remaining
Example: Useful Life
Effective
AgeHome has a Typical life
Average Wood Frame
Site Built
expectancy of 55 year. The Remaining Life estimated to
be 45 years
(Life Expectancy 55 Years) (Remaining Life 45 Years) =
Effective age of 10 Years
Copyright 2013 Marshall & Swift/Boeckh LLC
User Feedback:
o Life Cycle Chart - Complicated
o Extended Life Theory Instructions not clear enough
(Residential or Commercial)
Note: this
will assist
you in
determining
correct
table
Questions on Instructions
for Extended Life Theory
Session Summary
M&S provide tools to aid in valuation and standardize the
process. Your takeaways should be:
Greater Consistency in Assessments
Understanding New Life Cycle Tables
Understanding of Existing Extended Life Theory
Key Component: Individual judgment and knowledge of
property.
Note: Section 97 Updated: 4Q2012 and Section E Updated: 1Q2013