Ch6. Building Appraisal — Property Types, Useful Life, and Depreciation

Principles of Building Appraisal

Improvements: Structures permanently attached to the land. In the Cost Approach they are valued separately from land, then combined.

Building valuation principles:
① Valued separately from land (standard practice)
② Valued together with land as a unit (Income or Sales Comparison Approach)
③ Always analyzed relative to Highest and Best Use

Primary approach for buildings: Cost Approach (Depreciated Cost)
Supporting approaches: Sales Comparison (where paired sales exist)
                        Income Approach (for income-producing buildings)

Replacement Cost New by Building Type

Residential Buildings

Single-Family Homes:
- Construction types: wood frame, masonry, concrete block
- Economic life: wood frame ~45–55 yrs; masonry/concrete ~60–70 yrs
- Cost estimated on a $/SF of gross living area basis

Multifamily / Condominiums:
- Reinforced concrete or steel frame: 60–70 year economic life
- Mechanical systems (elevators, HVAC, plumbing) may depreciate faster
- Common-area allocations must be included

Commercial Buildings

Office:
- Steel frame or reinforced concrete: 50–65 year economic life
- High mechanical content (elevators, HVAC, fire suppression, data)
- Functional obsolescence watch: ceiling heights, column spacing, HVAC capacity

Retail / Shopping:
- Reinforced concrete or steel frame
- Flexibility and demising-wall configurability affect functional adequacy
- Parking ratios are often the key functional test

Warehouse / Industrial:
- Pre-engineered steel: 30–40 years (lighter construction)
- Clear height, dock doors, column spacing, and floor load are critical
- Cold storage adds significant cost and specialized depreciation analysis

Special-Purpose Buildings

Manufacturing / Industrial Plants:
- Heavy steel or reinforced concrete: 40–60 years
- Process equipment valued separately as personal property
- Fixed equipment integrated into structure may be real property

Hotels / Hospitality:
- Very high mechanical and FF&E content
- Effective economic life often shorter than structural life
- Separate depreciation schedules for FF&E vs. structure

Healthcare / Medical:
- Specialized mechanical and plumbing systems
- Code-driven requirements (HVAC, isolation rooms)
- Functional obsolescence accelerates with technology changes

Depreciation in Depth

Types of Economic Life

Physical Life:          How long the structure remains standing
Economic Life:          How long the improvement contributes positively to property value
Effective Age:          The age the market assigns based on condition and utility
                        (may be less than or greater than actual/chronological age)
Remaining Economic Life: Economic Life − Effective Age

Appraisal practice: Use Economic Life and Effective Age, not chronological age

Typical Economic Lives by Construction Type

Wood Frame:                  45–55 years
Masonry / Concrete Block:    40–50 years
Reinforced Concrete (RC):    60–70 years
Structural Steel:            50–65 years
Pre-Engineered Metal:        30–40 years

Depreciation Analysis in Practice

Physical Deterioration:
- Straight-line: Effective Age / Total Economic Life
- Can be reduced if the property has been exceptionally well maintained
- Common indicators: exterior cracks, roof condition, plumbing age

Functional Obsolescence:
Curable (economically worth correcting):
  Cost to cure < value added → Depreciation = Cost to cure
  Example: Add a second bathroom when market now expects it

Incurable — deficiency (not worth correcting):
  Example: Ceiling height of 18' in a market where 28'+ is standard for modern logistics
  Measure: capitalized rent loss or market-extracted paired sales

Incurable — super-adequacy:
  Over-improvement relative to market norms
  Example: elaborate finishes in a commodity industrial building
  Measure: excess cost (cost of the super-adequate feature − value it contributes)

External (Economic) Obsolescence:
- Always incurable (cause is outside property owner's control)
- May be allocated between land and building by ratio or income analysis

Worked Example — Depreciated Cost

Subject: Reinforced concrete office building
Replacement Cost New:  $1,500,000
Total Economic Life:   60 years
Effective Age:         12 years
Curable Functional Obsolescence (HVAC system upgrade needed): $35,000
Incurable Functional Obsolescence (low floor-to-ceiling height): $45,000

Physical Depreciation (straight-line):
  Rate = 12 / 60 = 20%
  Amount = $1,500,000 × 20% = $300,000

Functional Obsolescence:
  Curable:   $35,000
  Incurable: $45,000

Total Depreciation = $300,000 + $35,000 + $45,000 = $380,000

Depreciated Cost of Improvements = $1,500,000 − $380,000 = $1,120,000
Add: Land Value (from Sales Comparison)
= Total Property Value Indication (Cost Approach)

Field Inspection Checklist

Verify at inspection:
① Construction type, number of stories, gross building area
② Date of original construction (anchors effective age)
③ Additions / renovations (apply separate depreciation if warranted)
④ Condition of envelope: roof, siding/facade, windows
⑤ Mechanical systems: HVAC, plumbing, electrical, elevators
⑥ Interior: floor plan functionality, finishes, deferred maintenance
⑦ Compliance: ADA accessibility, current building code

Renovation / Addition treatment:
- Assign a separate effective age to major additions
- Or reset effective age of the whole structure if the renovation was comprehensive

Effective Age vs. Chronological Age ★★★★★ : Appraisers use Effective Age (market-perceived age based on condition), which may differ substantially from the actual building age. A well-maintained 30-year-old building may have an effective age of 15 years. Memory trigger: Effective Age = condition-based age, not birth certificate

Curable vs. Incurable Functional Obsolescence ★★★★★ : Curable = cost to cure is less than the value gain → measure as cost to cure. Incurable = not economically worth correcting → measure as capitalized income loss or market reaction. Memory trigger: Curable = fix it and measure cost; Incurable = market measures the loss

RC Economic Life: ~60–70 Years ★★★★☆ : Reinforced concrete structures carry the longest typical economic life among standard building types. Wood frame: ~45–55 yrs; pre-engineered steel: ~30–40 yrs. Memory trigger: RC = 60–70 · Wood = 45–55 · Steel = 30–40

Practice Quiz

Q. An elevator in an office building is outdated. Replacement costs $60,000 and would add$ 80,000 in value. What type of depreciation, and how much?

Curable Functional Obsolescence — because the cost to cure ( $60,000) is less than the value added ($ 80,000). Depreciation amount = cost to cure = $60,000.

Q. Replacement cost new = $750,000; total economic life = 40 years; effective age = 8 years; incurable functional obsolescence =$ 25,000. What is depreciated cost?

Physical depreciation rate = 8/40 = 20%. Physical depreciation = $750,000 × 20% =$ 150,000. Total depreciation = $150,000 +$ 25,000 = $175,000. Depreciated Cost =$ 750,000 − $175,000 =$ 575,000.