Part 11 Commercial costs and Depreciation basics Flashcards
. The Marshall Valuation Service categorizes commercial construction indicators into five classes
(A, B, C, D, and S).
characterized by structural (skeletal) steel columns and beams that have been fireproofed with masonry, concrete, plaster or other noncombustible material. Floors will be concrete or concrete on the steel deck and fireproofed. Roofs will be formed concrete, pre-cast slabs, concrete or gypsum on the steel deck, and fireproofed. Walls are non-load bearing (this means they have a structural steel skeleton) curtain walls, with masonry, concrete, metal and glass panels, stone, steel studs and masonry, tile or noncombustible material.
Class A construction
characterized by masonry or concrete load-bearing walls with or without pilasters including tilt-up construction. The curtain walls are masonry, concrete with full or partial open steel, wood, or concrete frame.The floor is wood or concrete plank on wood or steel floor joists. It can also be concrete slab on grade. The roof is wood or steel joists with wood or steel deck or concrete plank. The walls are brick, concrete block, or tile masonry, tilt-up, form concrete, non-bearing curtain walls.
Class C construction
a typical single-family wood-frame structure would be a
Class D building
a corrugated metal storage building or a do-it-yourself car wash structure
Class S
. A high rise office building would be a Class
Class A steel-frame structure,
mid-rise office building constructed of reinforced concrete is
Class B construction type.
A concrete tilt-wall industrial building would be a
class C structure.
There are four quality ratings within the Marshall Valuation Service into which the appraiser must place the subject property:
- Low Cost
- Average
- Good
- Excellent
These buildings are generally constructed to minimum code requirements often with little regard for architectural appearance or amenities.
Low Cost
These buildings constitute the largest group of buildings constructed, approximately fifty percent of all buildings. Buildings are generally designed for maximum economic potential. They comply with standard code construction and have simple ornamentation and finishes.
Average
These buildings are designed for good appearance, comfort, and convenience, as well as an element of prestige. Ornamentation treatment is usually of higher quality and interiors are designed for upper-class rentals.
Good
These are sometimes referred to as prestige buildings. On an economic basis, part of the cost must be written off to the pride of ownership and some of the income intangibly derived from advertising. Excellent dwellings are generally built for the established professional or those with higher incomes and will have some degree of expensive finishes and fixtures.
Excellent
Depreciation is the fifth step of the cost approach
5
These are the three elements of accrued depreciation. What we mean by saying accrued depreciation is that depreciation accumulates from these three sources.
Physical deterioration
Functional obsolescence
External obsolescence
includes both the slow destruction (i.e., wear and tear) and fast destruction (i.e., neighbor’s baseball through a window) of the structural components that goes on every day, from the moment a building is completed.
Physical deterioration
is the impairment of functional capacity according to market tastes and standards
Functional obsolescence
The older a building becomes, the more likely it is to have functional obsolescence.
However, it is possible to have a 50-year-old building with no functional obsolescence, while a new building may have functional obsolescence while still in the blueprint stage due to poor design.
is the loss in value that comes from outside the boundaries of the property. It is a loss in value from physical or economic causes external to the property.
External obsolescence
Since the source of external obsolescence is due to circumstances beyond control from outside the property, it is generally thought of as
incurable
In appraisal, a loss in property value from any cause; the difference between the cost of an improvement on the effective date of the appraisal and the market value of the improvements on the same date.
Depreciation
This is the period over which improvements to real property contribute to property value.
It is usually shorter than physical life (which means how long the building is expected to stand and provide shelter).
The period can be extended by means of renovations or remodeling of the improvements.
Economic life
This is the estimated period over which existing improvements are expected to
contribute economically to a property
Remaining economic life
The number of years that have elapsed since construction of an improvement
was completed; also called historical or chronological age. (Bold added for
emphasis.
Actual age
The age of property that is based on the amount of observed deterioration
and obsolescence it has sustained, which may be different from its
chronological age.
b. This may be greater or less than actual age, depending on the
maintenance, quality, or design of a structure.
c. Renovation or rehabilitation may decrease the effective age
Effective age
the physical life of the house is generally
always greater than its economic life
one of the more difficult tasks appraisers have in analyzing depreciation involves estimating the effective age of a structure
This really comes down to the appraiser’s experience in the market and is ultimately a judgment call.
There are three methods used to analyze improvements and the market’s reaction to their perceived condition.
Market extraction method
Age-life method
Breakdown method
basically taking the cost new and subtracting the current depreciated cost of the building
Market extraction method
This is the method most commonly used by appraisers. It is a formula that covers all components of depreciation (physical, functional, and external) and groups them together in a lump-sum amount that is derived through the use of a ratio applied to the current cost of the structure.
Age-life method
This is a very complicated method that involves breaking down each individual component of the structure. The diminution in the value of a property is estimated by analyzing and measuring each cause of depreciation (physical, functional, and external) separately. Appraisers rarely use this method.
Breakdown method
Remember, curability of a problem relates to
whether or not the problem is economically feasible to cure, not whether or not it is physically possible to cure.
A warehouse building rated for 80 mph winds that is located in a hurricane
zone with the potential for 120 mph winds
Functional obsolescence
A 40-year-old oak fl oor
Physical deterioration
A 40-year-old kitchen
Functional obsolescence
A broken screen door
Physical deterioration
A house with a 24-hour truck-stop next door
External obsolescence
house with six bedrooms and one bath
Functional obsolescence
A restaurant in a town where a major employer has just closed
External obsolescence
When is an item of depreciation curable?
when the cost to cure is less than the expected increase in value
An item of depreciation is curable if the cost to cure the item is less than the expected increase in value.
The older a building becomes, the greater is the likelihood of it having
all of these answers.
Physical deterioration, functional obsolescence, and external obsolescence can arise over the passage of time and changes in market conditions. A building can suffer from all three forms of depreciation.
Which statement best describes the term “depreciation”?
the difference between the reproduction or replacement cost and the market value of the improvements as of the effective date of the appraisal
Depreciation is the total loss in value from cost new as of the effective date of value
Which of the following describes the number of years that have elapsed since the construction of the improvements was completed?
chronological age actual age historical age all of these answers The actual age of improvements is also known as historical age and chronological age. It can be significantly different from effective age depending on renovation, remodeling, and level of maintenance.
Which of the following describes the age of a property that is based on the amount of observed deterioration and obsolescence it has sustained?
effective age
Assume that an improvement has an actual age of 50 years, but has been renovated, remodeled, rehabbed, or has had a high level of maintenance over the years. If it can compete in the market with much newer properties that have actual ages of 15 to 20 years, then the 50-year-old improvement has an effective age of 15 to 20 years.
Suppose you are appraising a high-rise apartment building with fireproofed structural steel frames, concrete floors and roof, and metal and glass paneled walls. What class of construction is this building?
Class A
The primary feature of Class A buildings is the fireproofed, protected structural steel frame and metal deck flooring and roof with a concrete topping. The fireproofing may be masonry, poured concrete, plaster, sprayed fiber, or any other type of material that will give a high fire-resistance rating.
You have a 20,000 square feet retail store with a concrete slab floor, stucco on masonry block exterior walls, and metal trusses as a roof structure partially supported by open steel framing members. What class of construction is this building?
The primary features of Class C buildings are masonry or reinforced concrete exterior walls, and wood or steel roof and floor structures that have not been made fire-resistant, except for concrete slab on grade. Class C buildings can be totally wall-bearing with no frame, fully framed with nonbearing curtain walls enclosing the space, or have partially bearing walls and interior framing members only.
A building has been designed for maximum economic potential and to comply with standard construction codes, but extras in ornamentation and finishes are not evident. What quality rank should be chosen for this building?
average
Average quality buildings constitute the largest group of buildings constructed, approximately 50% of all buildings. Buildings are generally designed for maximum economic potential. They comply with standard code construction and have simple ornamentation and finishes.
The period of time over which the improvements will contribute to property value is described by which of the following terms?
economic life
The economic life of improvements can be affected by physical, economic, social, and geographic forces, and can be extended by renovations and remodeling.
Which of the following is the age of a property that is based on the amount of observed deterioration and obsolescence it has sustained?
effective age
Assume that an improvement has an actual age of 50 years, but has been renovated, remodeled, rehabbed, or has had a high level of maintenance over the years. If it can compete in the market with much newer properties that have actual ages of 15 to 20 years, then the 50-year-old improvement has an effective age of 15 to 20 years.
The number of years that have elapsed since the construction of the improvements was completed is described by which of the following terms?
all of these answers The actual age of improvements is also known as historical age and chronological age. It can be significantly different from effective age depending on renovation, remodeling, and level of maintenance. chronological age historical age actual age
The major employer in a small city just went out of business. This resulted in a loss of jobs and a subsequent decline in real estate values. Which of the following terms best describes this loss?
external obsolescence
Forces external to a property can include loss of employment, increase in interest rates, or an imbalance in supply and demand.
Which statement best describes the term “depreciation”?
the difference between the reproduction or replacement cost and the market value of the improvements as of the effective date of the appraisal
Depreciation is the total loss in value from cost new as of the effective date of value.
An incurable functional problem is best defined as
an item that will not return as much in value as it costs to fix.
An incurable functional problem is best defined as an item that will not return as much value as it costs to fix.
When is an item of depreciation curable?
when the cost to cure is less than the expected increase in value
An item of depreciation is curable if the cost to cure the item is less than the expected increase in value
Which of the following types of depreciation would a three-story office building without an elevator suffer
functional obsolescence
A three-story office building lacking an elevator is an example of functional obsolescence (in most markets).
What type of construction would a tilt-wall warehouse be according to Marshall Valuation Service?
Class C masonry or reinforced concrete frame
An appraiser observing infestation and action of the elements would classify them as
physical deterioration.
Physical deterioration is the wearing out of the improvements hastened by insect infestation and action of the elements.
Which of the following statements describes the loss in value due to changes in market tastes and standards?
functional obsolescence
Functional obsolescence is loss in value caused by the impairment of functional capacity according to market tastes and standards.
