Things external have caused a loss in value to the land. When there is loss of value due to external influences, the depreciation applies to both land and improvements. The whole property suffers.
But at what rate?
Have you done an analysis of depreciation rates for vacant land vs depreciation rates for improved lots?
Here's are four easy examples:
In Sulpher Springs, from this year to the prior year residential lots under 10,890sf have decreased in value $5,000 on average. They were selling at $36,500 and now are selling at $31,500. That's a drop in value of 13.7%. But the houses on similar sized lots that were recently improved (defined as built after 2000 because there aren't enough built within 2 or 3 years) have declined in year over year stats from $165,000 to $162,450, or -1.5% (which is less than $5,000). But during this period, per cost manuals, building costs increased 1.5% (see rates in the Marshall & Swift for 1st Q 2008 and 1st Q 2007 for FL). So there is a total of 3% lost, that is the 1.5% in value and the 1.5% increase in cost. If you take the land value loss of $5,000 and divide it by the original price of $165,000, you get 3%. So the economic depreciation in this case is ALL related to the land. In such a case you can simply state in the cost approach the site value is $31,500 and not show it as economic depreciation because it is the actual land value and there were no other losses. The rest will fall in place.
The situation is similar in Valrico. Values for houses 2 years old or less on 1/4 to 1/2 acre lots actually increased from $399,196 to $399,500 in year over year stats while the land value for such lots decreased from $88,750 to $78,000 or 12.11%. We can call the land value $89,000 and take a $10,000 economic condition adjustment, or we can simply make the land value $78,000. All the loss in this case is also related to the land.
In Riverview, however, things are a little different. There values of lots on up to 1/4 acre dropped from $45,000 to $29,500, which is 34%, while the value of single family houses 2 years old or less built on similar lots declined from $256,000 to $230,000, which 10.15%. The costs have increased here by 1.5% as well, so the loss related to the improvements is slightly higher as they cost roughly $3,000 more to build today. So the loss to the improvements and land combined is going to be on average (using median values) $19,000 while the loss to the land alone was $15,500. If you place $29,500 as your site value in the cost approach (which is what a vacant piece of land sells for that is similar) all other things being equal, you still have $3,500 to account for in depreciation. That $3,500 is a loss related to the price of construction and I will show it as economic depreciation.
But in Lakeland for vacant lots and 2 year old or less houses on up to 1/4 acre things are very different. The vacant lot values have increased in year over year stats from $17,000 to $21,750 while the median values of houses on similar lots, 2 years old or less, have decreased from $231,350 to $202,990. This decrease on improved lots of course happened during a time when costs increased 1.5%, which adds about $3,000 to build, so the entire loss is $31,360 while land values increased $4,750. The loss is not related to the land at all. There is an economic loss related to the building of the structure only at about $36,000 and this would be used, in my report, as economic depreciation with the site value shown at $22,000 (rounded).
Obviously these things are not difficult to figure out. I just did four of them in the span of 6 or 7 minutes. But wrapping your head around the logic and considering them valid is something different. If doing a review on a report where an appraiser tackled the problem differently, I certainly would not call attention to it. I don't attack methodology unless its winds up with poor results. In other words, this is how I do it and it works for me and I have demonstrated to myself that economic depreciation does not always affect the land and the improvements as a whole, but affects each one differently.
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