Estimated Remaining Economic Life

[Restrain]

Just a thought. The functionality of the structure can end far quicker than the physical structure. Unit design, unit size, etc can lead to the functional end of the structure. Just realistically, if you say 60-65 years, you can be on solid ground. While the building may well remain condominium units, the facility will probably be facing a complete makeover (electrical, plumbing, HVAC system designs, unit design,etc), thus the end of the functional life of the structure. An example is a resort structure in Hollywood, FL. While it was still structurally sound, it went through a couple of condo reincarnations, before being sold, and completely renovated and is now a resort hotel.

 

[Restrain]

Just a thought. The functionality of the structure can end far quicker than the physical structure. Unit design, unit size, etc can lead to the functional end of the structure. Just realistically, if you say 60-65 years, you can be on solid ground. While the building may well remain condominium units, the facility will probably be facing a complete makeover (electrical, plumbing, HVAC system designs, unit design,etc), thus the end of the functional life of the structure. An example is a resort structure in Lauderdale. While it was still structurally sound, it went through a couple of condo reincarnations, before being sold, and completely renovated and is now a resort hotel.

 

[J Grant]

I answer the question as well as I can, but imo it is yet another "gotcha " question lenders throw into an appraisal, since no one can predict exactly what remaining economic life a condo will have. One can make a reasonable estimate based on how long the building has been around, its maintenance and repairs and performance of other buildings , but ultimately it's an educated guess....one they can call us on at any time.

 

[Terrel L. Shields]

The functionality of the structure can end far quicker than the physical structure.

Likewise, updating a structure periodically increases the total economic/physical life estimate and as long as utility remains the same could be a long life. That is why you have 200 year old houses that never have had a total life of over 65. Why? Think about what a 200 year old house had 200 years ago. No electricity, no plumbing, no central heat and air. All these things were added. Each item thus added to the remaining life. How many roofs have been replaced? Unless slate/tile probably quite a few. OTOH, yes, we are concerned about the remaining life, a function of condition and utility. And condition is a function of maintenance. So TEL is a sliding number impacted by our tinkering. But today's estimate of the remaining life is an assumption that if we did no further long life repairs the property would basically be unlivable at the end. When a dwelling has a 30 year remaining life, in 30 years most of the systems are shot, the roof is shot, and the entire structure is dozer bait. Few houses get to that point because once within 5-15 years remaining life the question becomes is this ideal for the location and if not, perhaps I should just tear it down and start with a new dwelling/whatever. In any event, repairs and maintenance (even remodeling and additions) generally will not bring a dollar for dollar increase in value. I've advised several people not to remodel or add on, rather to sell and buy anew. Most remodel anyway because they like that particular neighborhood, don't want to have to move, etc. But that is a decision that economically isn't often a winner. I saw my cousin try to talk his wife out of remodeling and just buy a new house but she insisted and in the end it cost $50,000 or more to remodel than the estimate, to end up with a house that wasn't worth near the total investment, and ultimately lead to them splitting. Remodeling creates a number of incurable obsolescences usually, and even the most expensive incurable illustrated above...divorce.

it's an educated guess

The key phrase is can we "support" our educated guess or not, right?

 

[hastalavista]

Plenty of sources with reliable data for estimating the total useful life of a building.
A building of X quality construction will last Y years assuming normal maintenance. As the building ages, it physically deteriorates. That physical deterioration which is not addressed by normal maintenance is physical depreciation. However, in real life, the rate of depreciation is not usually a constant rate.

Appraisers typically rely on the concept of "Total Economic Life", "Effective Age" (a measurement in the context of its economic life), and "Remaining Economic Life". Economic life is not only impacted by physical wear and tear but also by functional obsolescence (the changing tastes of the market or the poor design of the improvement) and externalities (this was a great place for a house 10-years ago, but now the land is worth more as an office-building site).

I wouldn't call it an educated guess (and I don't want to over-parse the use of that phrase, which we all use on a regular basis). But, depending on the quality of the data, there can be "fuzziness" to its precision. And, depending on the methodology used to estimate depreciation, there can be a level of subjectivity which can also add to the fuzziness of its precision.
Thankfully, for our work we only need be credible; and that credibility is defined by the intended use and the level of work (SOW) necessary given the problem to be solved for that intended use.

 

[DWiley]

I wouldn't call it an educated guess...

Neither would I. But I have encountered a number of appraisers who apparently were never educated on how to extract total economic life and effective ages from market data. Anyone who has done a demo report should know how

 

[leasedfee]

Neither would I. But I have encountered a number of appraisers who apparently were never educated on how to extract total economic life and effective ages from market data. Anyone who has done a demo report should know how

I've found it to be interesting to extract long-lived life from shell buildings that acquired for renovation/refurbishment. That way there is no short- or medium-lived depreciation to mess with. 125 to 250 years is a typical number for masonry buildings. Was jealous of my colleague who got to appraise a 6 story post-tension concrete shell that had been gutted to the bone. I came along on the inspection just for fun. The highest and best use was fun as it was an open ended question: was renovated into a medium tier hotel flag.

 

[Stephen J. Vertin MAI]

I have actually been thinking about this for awhile in my older age and I actually believe a rating system would be better than what is happening. Hear me out because I believe it has substance. I deal with 90 to 120 year old buildings many times a year. Let's say the subject was constructed in the 1920’s and has been maintained through the years having an overall effective age is 30-years old. Some appraisers believe that since the property’s effective age is significantly lower than its actual age it must be in good physical condition. To my newer way of thinking this would be a misnomer. The best examples are outside real estate arenas using rating systems in other professions. Further just thinking outside this area of appraising where little information exist.

A good example is auto restoration. There are generally 6 ratings that have nothing to do with age but could be converted easily. What would be equivalent to “average” rating would be “restorable” physical condition. This could be an auto from the 1920’s still up and running but may need complete renovations in order to bring it into good or excellent physical condition. Most cars, from the 1920’s, stopped operating within 30-years of manufacturing. In fact seeing a 30-year old car in operations today is unusual. Thereby we may say most cars have an economic life of 30-years. If it is still in operations at 50 and 60 years it would not be atypical to think of these autos as being in comparable condition to a 25 to 30-year old car. Further the 50 or 60 year old auto could be in good, average or poor overall physical condition. If it is becoming clear to you as to where we are going with this you are correct. The overall actual physical condition really has less effect on life expectancy or an entities effective age. However, the operational aspect and functionality of the item seem dominate. So how is it, all other rating systems see this concept bar real estate? Most profound is the fact many underwriters base loans on this moving target. It rarely stays the same and can change with exterior stimuli. It is an unstable factor.

 

[leasedfee]

Stephen,
And we cannot even agree what "average" or "good" means, much less "fair". There is a reluctance, on some, to describe a building as "poor" for fear of libel.

 

[hastalavista]

I have actually been thinking about this for awhile in my older age and I actually believe a rating system would be better than what is happening. Here me out because I believe it has substance. I deal with 90 to 120 year old buildings many times a year. Let's say the subject was constructed in the 1920’s and has been maintained through the years having an overall effective age is 30-years old. Some appraisers believe that since the property’s effective age is significantly lower than its actual age it must be in good physical condition. To my newer way of thinking this would be a misnomer.

I suspect that for some of the buildings you are talking about, remaining economic life is closely related to useful life which is not always the case with other improvements.
Useful life is defined as "The period of time over which a structure or component of a property may reasonably be expected to perform the function for which it was designed."
A small (say, 10,000sf) industrial building in an industrial neighborhood that was designed to be used as a machine shop in the 1920s: Other than power, what significant changes in small-scope machine shop operations has taken place that would result in a 10,000sf 1920s industrial building (adequately maintained) being functionally obsolete?
For some improvements in specific locations, they are still economically viable because there is demand for the use they were originally designed for, and that 100+ year old design is still functional for a contemporary application of the use. Their condition may be fair to average; things are replaced only when they wear out as there is no benefit to upgrading the components in terms of quality and no need to modernize the components for functionality (other than electrical... which, while a long-lived item, isn't that intrusive to do in the industrial building I am hypothesizing and, once done, addresses that item for the likely foreseeable future).