The Depreciated Cost technique is based upon knowing the percentage of cost new being paid by the market. In the URAR, this percentage is the same as the ratio of Remaining Economic Life to Economic Life. Also in the URAR:
Economic Life - Effective Age = Remaining Economic Life.
These relationships become useful when we understand that Economic Life is a specification in the same cost data that we use to calculate current replacement cost.
Examples:
In the cost data we license, a Q4 house has an Economic Life of 60 years. When the Effective Age is 15 years, the Remaining Economic Life is 45 years (60 - 15). The percentage of depreciation is 25% (15 / 60). The market reaction to the house is 75% of replacement cost (45 / 60).
If Remaining Economic Life is 40 years, the market is paying 67% of replacement cost (40 / 60).
An appraiser who states that the Effective Age of a Q4 house is 12 years is asserting that depreciation is 20% and the market is paying 80% of replacement cost.
Remaining Economic Life
“the estimated period over which existing improvements are expected to continue to contribute economically to a property”
Economic Life
“The period over which existing improvements are expected to contribute economically to a property ”
National Building Cost 2018 assumes the following Economic Life values:
Q1 though Q3: 70 Years
Q4 and Q5: 60 Years
Q6: 55 Years
Age-Life Method
“A method of estimating depreciation in which the ratio between the effective age of a building and its total economic life is applied to the curent cost of the improvements to obtain a lump-sum deduction; also known as the economic age-life method”
Depreciation
“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 an improvement on the same date”
“In applying the concepts of economic life, effective age, and remaining economic life expectancy, the appraiser considers all elements of depreciation in one calculation. Therefore, the effective age estimate includes not only physical wear and tear but also any loss in value for functional and external considerations. ”