[mer415]

AGE-LIFE METHOD
I was hoping someone there could give me a little assistance with a question I have. The question is related to the use of the age-life method to estimate accrued depreciation, functional obsolescence, and deferred maintenance.

(To estimate accrued depreciation with the economic age-life method, the ratio between the effective age and the total economic life of a building is applied to the cost of the improvements as of the effective appraisal date to obtain a lump-sum deduction for accrued depreciation.)**

Formula: (effective age / total economic life) x (replacement cost new) = accrued depreciation.

Age-life method Example:
Effective age (years) 20
Total economic life (years) 40
Ratio (20/40) .50
Replacement cost new $41,493,430
Total accrued depreciation -$20,746,715
Depreciated value of improvements $20,746,715
Site value +$1,143,450
Indicated value $21,890,165

(To apply the modified economic age-life method, the appraiser first estimates the cost to cure all curable items of physical deterioration due to deferred maintenance and functional obsolescence. This sum is deducted from the cost of the replacement cost new as of the effective appraisal date. The appraiser then arrives at a percentage, lump-sum deduction that covers all incurable items by applying the ratio of the effective age to total economic life to the cost of improvements minus all curable physical and functional obsolescence estimated as of the effective appraisal date. In applying the modified economic age-life method, the appraiser must recognize the when curable items are cured, the structure’s remaining economic life may increase and/or the effective age may decrease.)**


Modified age-life method example:
Replacement cost new $41,493,430
Less physical and functional curable items -$6,355,922
Replacement cost less curable items $35,137,508
Effective age (years) 18
Total economic life (years) 40
Ratio (18/40) .45
Replacement cost less curable items $35,137,508
Depreciation -$15,811,878
Depreciated value of improvements $19,325,630
Site value +$1,143,450
Indicated value $20,469,080


The following is an application that was use to estimate a replacement cost approach on a health care facility. Can the economic age-life method be applied in this manner?



Applied method example:
Replacement cost new $41,493,430
Effective age prior to cured items (years) 20
Total economic life (years) 40
Ratio (20/40) .50
Age-life depreciation -$20,746,715
Proposed physical and functional curable items -$6,355,922
Depreciated value of improvements $14,390,793
Site value +$1,143,450
Indicated value $15,534,243


Thank you for your help.
Sincerely,

** Taken from THE APPRAISAL OF REAL ESTATE, Tenth Edition, Appraisal Institute.