Module 11
Which statement best describes the term "depreciation"?
-------Not (percentage loss in value based on the ratio of total economic life to effective age) ----- Not (a systematic method of reducing costs for physical deterioration)
An incurable functional problem is best defined as
----Not (an item that cannot be physically cured.)
When is an item of depreciation curable?
---Not (when the cost to cure is no greater than the replacement cost) ---Not (when the cost to cure is no greater than the replacement cost)
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?
--Not (Class A)
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
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.
Class A construction
Class A construction is 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.
What type of construction would a high-rise office tower be according to Marshall Valuation Service?
Class A fireproofed steel frame
According to Marshall Valuation Service, which construction class refers to reinforced concrete frame?
Class B
Class C construction
Class C construction is 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.
Low-Quality Class C Retail Store
Exterior Walls: Brick, block, good store type front with some trimInterior Finish: Some plaster, acoustic tile, some terrazzo or tile, vinyl compositionLighting, Plumbing, & Mechanical: Adequate lighting and outlets, adequate restrooms, TV circuits, elevatorsHeat: Package A.C.Sample Cost Per Square Foot: $103.45
Excellent
Exterior Walls: Brick, stucco on block, best tilt-up, good display frontInterior Finish: Plaster, acoustic plaster or tiles ceilings, carpet, vinyl tilesLighting, Plumbing, & Mechanical: Good lighting and outlets, adequate restroomsHeat: Package A.C.Sample Cost Per Square Foot: $67.16
Average Quality Class C Bank
Exterior Walls: Low-cost brick, block, tilt-up, low-cost frontInterior Finish: Painted walls, drywall or acoustic tile, asphalt tileLighting, Plumbing, & Mechanical: Minimum lighting employees' restrooms Heat: Forced airSample Cost Per Square Foot: $35.13
Good Quality Class C Retail Store
Exterior Walls: Marble or granite; bronze and solar glass, highly ornamentalInterior Finish: Plaster and paneling, vinyl wall finishes, carpeting, terrazzoLighting, Plumbing, & Mechanical: Best lighting & closed circuit TV, quality restrooms and plumbing, elevatorsHeat: Hot and chilled water (zoned)Sample Cost Per Square Foot: $195.53
Which of the following statements regarding functional obsolescence is the most correct?
Functional obsolescence can be caused by poor design or layout.
Depreciation.
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.
Effective 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. This may be greater or less than actual age depending on the maintenance, quality, or design of a structure. As we will see in a moment, renovation or rehabilitation may decrease the effective age of a structure.
Actual Age -
The number of years that have elapsed since the construction of an improvement was completed; also called historical or chronological age.
Excellent
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.
Good
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.
Low Cost
These buildings are generally constructed to minimum code requirements often with little regard for architectural appearance or amenities.
Average
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.
Breakdown 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.
Age-Life 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.
Economic Life -
This is the period over which improvements to real property contribute to property value. It is usually shorter than physical life (i.e., how long the building will stand and provide shelter). The period can be extended by means of renovations or remodeling of the improvements. You can have a building that is still standing (such as an old barn) but is no longer being put to use as it was intended. Its economic life is long gone, but it is still physically standing (until a strong wind comes along and topples it)
physical components of a structure simply wear out over time; they rust, rot, warp, peel, and settle.
This process can be hastened by infestation—such as termites and other wood destroying insects and action of the elements—such as moisture infiltration, sun bleaching, and other forces of nature. It can also be caused by the actions of humans, including vandalism. Most physical depreciation, if present, is tangible and observable.
Construction Class Summary
To place some perspective on the various classes of construction, a typical single-family wood-frame structure would be a Class D building. Class S might be a corrugated metal storage building or a do-it-yourself car wash structure. A high rise office building would be a Class A steel-frame structure, while a mid-rise office building constructed of reinforced concrete is a Class B construction type. A concrete tilt-wall industrial building would be a class C structur
Which of the following statements regarding physical deterioration is the most correct?
all of these answers Physical deterioration can be caused by insect infestation. Physical deterioration can be caused by action of the elements Physical deterioration can be caused by wear and tear.
Which of the following describes the number of years that have elapsed since the construction of the improvements was completed?
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. actual age chronological age historical age
The older a building becomes, the greater 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. physical deterioration. external obsolescence. functional obsolescence.
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 describes the period of time over which the improvements will contribute to property value?
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.
Within each construction class, Marshall Valuation Service assigns a quality rating. What are the four quality ratings?
excellent, good, average, low-cost
An appraisal of a single-family residence located adjacent to a busy highway might suffer from which of the following forms of depreciation?
external obsolescence Forces external to a property as a result of being located next to a busy highway, such as noise, smoke, dust, and vibration, can cause a loss in value.
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.
The older a building becomes, the greater is the likelihood of it having
external obsolescence. physical deterioration. functional obsolescence. 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 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).
Remaining Economic Life
his is the estimated period over which existing improvements are expected to contribute economically to a property. What is left of the property to contribute to its usefulness.
Physical deterioration
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.
Functional obsolescence
is the impairment of functional capacity attributed to a particular property according to market tastes and standards.
External obsolescence
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.
An appraiser observing infestation and action of the elements would classify them as
physical deterioration.
Depreciation is a loss in value. Which of the following categories can these losses be attributed to?
physical, functional, or economic
Depreciation is the fifth step of the cost approach
requires the appraiser to estimate the amount of depreciation in the structure and, if necessary, allocate it among the three major categories: Physical deterioration Functional obsolescence External obsolescence
Market Extraction Method
taking the cost new and subtracting the current depreciated cost of the building.
