Depreciation
Once replacement cost new (RCN) has been calculated, depreciation must be estimated in order to arrive at a current value (unless an improvement is new, some depreciation exists). Depreciation is defined as a loss in value due to any cause. Land does not depreciate, only improvements. Land may suffer value loss, but not due to depreciation.
Depreciation is divided into 2 types:
Obsolescence is further divided into 2 subgroups:
Economic obsolescence is caused by conditions outside the property such as economic changes, legal restrictions, development of new processes, etc. It may divide into 5 types:
Functional obsolescence is a loss in value to the improvements due to certain existing physical characteristics, and can be divided into 4 types:
Physical deterioration, as the name implies, is a loss in value due to normal aging and deterioration. It can be subdivided into 4 types:
Depreciation is divided into 2 types:
- Obsolescence
- Physical deterioration
Obsolescence is further divided into 2 subgroups:
- Economic obsolescence
- Functional obsolescence
Economic obsolescence is caused by conditions outside the property such as economic changes, legal restrictions, development of new processes, etc. It may divide into 5 types:
- Adverse influences of supply and demand
- Changes in locational demands
- Changes in neighborhood social or economic factors
- Proximity to negative environmental influences
- Zoning restrictions
Functional obsolescence is a loss in value to the improvements due to certain existing physical characteristics, and can be divided into 4 types:
- Lack of modern facilities
- Out-of-date equipment
- Poor design or style
- Excessive ceiling height
- Inefficient floor plan
- Super adequacy (over improvement), or inadequacy (under improvement)
Physical deterioration, as the name implies, is a loss in value due to normal aging and deterioration. It can be subdivided into 4 types:
- Damage from dry rot, pests, etc.
- Negligent care or lack of maintenance
- Wear and tear from normal use
- Wear and tear from the elements (wind, rain, etc.)