Part 11 Commercial costs and Depreciation basics

Question 1

. The Marshall Valuation Service categorizes commercial construction indicators into five classes

Answer 1

(A, B, C, D, and S).

Question 2

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.

Answer 2

Class A construction

Question 3

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.

Answer 3

Class C construction

Question 4

a typical single-family wood-frame structure would be a

Answer 4

Class D building

Question 5

a corrugated metal storage building or a do-it-yourself car wash structure

Answer 5

Class S

Question 6

. A high rise office building would be a Class

Answer 6

Class A steel-frame structure,

Question 7

mid-rise office building constructed of reinforced concrete is

Answer 7

Class B construction type.

Question 8

A concrete tilt-wall industrial building would be a

Answer 8

class C structure.

Question 9

There are four quality ratings within the Marshall Valuation Service into which the appraiser must place the subject property:

Answer 9

1. Low Cost
2. Average
3. Good
4. Excellent

Question 10

These buildings are generally constructed to minimum code requirements often with little regard for architectural appearance or amenities.

Answer 10

Low Cost

Question 11

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.

Answer 11

Average

Question 12

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.

Answer 12

Good

Question 13

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.

Answer 13

Excellent

Question 14

Depreciation is the fifth step of the cost approach

Answer 14

5

Question 15

These are the three elements of accrued depreciation. What we mean by saying accrued depreciation is that depreciation accumulates from these three sources.

Answer 15

Physical deterioration
Functional obsolescence
External obsolescence

Question 16

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.

Answer 16

Physical deterioration

Question 17

is the impairment of functional capacity according to market tastes and standards

Answer 17

Functional obsolescence

Question 18

The older a building becomes, the more likely it is to have functional obsolescence.

Answer 18

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.

Question 19

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.

Answer 19

External obsolescence

Question 20

Since the source of external obsolescence is due to circumstances beyond control from outside the property, it is generally thought of as

Answer 20

incurable

Question 21

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.

Answer 21

Depreciation

Question 22

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.

Answer 22

Economic life

Question 23

This is the estimated period over which existing improvements are expected to
contribute economically to a property

Answer 23

Remaining economic life

Question 24

The number of years that have elapsed since construction of an improvement
was completed; also called historical or chronological age. (Bold added for
emphasis.

Answer 24

Actual age

Question 25

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

Answer 25

Effective age

Question 26

the physical life of the house is generally

Answer 26

always greater than its economic life

Question 27

one of the more difficult tasks appraisers have in analyzing depreciation involves estimating the effective age of a structure

Answer 27

This really comes down to the appraiser’s experience in the market and is ultimately a judgment call.

Question 28

There are three methods used to analyze improvements and the market’s reaction to their perceived condition.

Answer 28

Market extraction method

Age-life method

Breakdown method

Question 29

basically taking the cost new and subtracting the current depreciated cost of the building

Answer 29

Market extraction method

Question 30

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.

Answer 30

Age-life method

Question 31

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.

Answer 31

Breakdown method

Question 32

Remember, curability of a problem relates to

Answer 32

whether or not the problem is economically feasible to cure, not whether or not it is physically possible to cure.

Question 33

A warehouse building rated for 80 mph winds that is located in a hurricane
zone with the potential for 120 mph winds

Answer 33

Functional obsolescence

Question 34

A 40-year-old oak fl oor

Answer 34

Physical deterioration

Question 35

A 40-year-old kitchen

Answer 35

Functional obsolescence

Question 36

A broken screen door

Answer 36

Physical deterioration

Question 37

A house with a 24-hour truck-stop next door

Answer 37

External obsolescence

Question 38

house with six bedrooms and one bath

Answer 38

Functional obsolescence

Question 39

A restaurant in a town where a major employer has just closed

Answer 39

External obsolescence

Question 40

When is an item of depreciation curable?

Answer 40

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.

Question 41

The older a building becomes, the greater is the likelihood of it having

Answer 41

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.

Question 42

Which statement best describes the term “depreciation”?

Answer 42

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

Question 43

Which of the following describes the number of years that have elapsed since the construction of the improvements was completed?

Answer 43

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.

Question 44

Which of the following describes the age of a property that is based on the amount of observed deterioration and obsolescence it has sustained?

Answer 44

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.

Question 45

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?

Answer 45

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.

Question 46

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?

Answer 46

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.

Question 47

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?

Answer 47

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.

Question 48

The period of time over which the improvements will contribute to property value is described by which of the following terms?

Answer 48

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.

Question 49

Which of the following is the age of a property that is based on the amount of observed deterioration and obsolescence it has sustained?

Answer 49

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.

Question 50

The number of years that have elapsed since the construction of the improvements was completed is described by which of the following terms?

Answer 50

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

Question 51

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?

Answer 51

external obsolescence
Forces external to a property can include loss of employment, increase in interest rates, or an imbalance in supply and demand.

Question 52

Which statement best describes the term “depreciation”?

Answer 52

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.

Question 53

An incurable functional problem is best defined as

Answer 53

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.

Question 54

When is an item of depreciation curable?

Answer 54

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

Question 55

Which of the following types of depreciation would a three-story office building without an elevator suffer

Answer 55

functional obsolescence

A three-story office building lacking an elevator is an example of functional obsolescence (in most markets).

Question 56

What type of construction would a tilt-wall warehouse be according to Marshall Valuation Service?

Answer 56

Class C masonry or reinforced concrete frame

Question 57

An appraiser observing infestation and action of the elements would classify them as

Answer 57

physical deterioration.

Physical deterioration is the wearing out of the improvements hastened by insect infestation and action of the elements.

Question 58

Which of the following statements describes the loss in value due to changes in market tastes and standards?

Answer 58

functional obsolescence
Functional obsolescence is loss in value caused by the impairment of functional capacity according to market tastes and standards.