Estimated Remaining Economic Life

[Stephen J. Vertin MAI]

Tim: I get it I really do. However, if you really think of it, we are limited in a 50-year time frame. Why? Because the only source outside of preforming extraction is Marshall's when estimating economic-life. While I believe there may be a handful of properties in the 55-60 year category I do not recall higher.

But that is Ok, because it serves as a rating gauge... an anchor. With substantial limitations I use to come up with these crazy ages outside the box of referenced support. Whether for good or bad it seems Marshall's has clout. So to say a 100-year old building cannot have a 50-year economic life is unrealistic and given sources simply unsupportable. Further saying a 100-year old building cannot have a 15-year effective age is equally unsupportable. You really only have a range of 0 to 50-years on either side. Unless you want to forge out extraction in every report.

I guess you could use exaction but how that works out for others as far as productivity is another question. Most appraisal preformed in Chicago's commercial arenas have sales and income. Cost are dead. Most clients still require effective age and economic life. I have never heard a client say don't use Marshall's. Have you? It has been around longer than all of us.

With that said, the disagreements in age/life are substantial and always have been. Why? Most text are clear as mud on the matter. So I am not sure disagreeing with each other on a rating system is anything new. However, if one were used it seems a simple model everyone could understand. While you could disagree on the rating it would be hard to disagree with how in functions. As stated appraisers disagree with age/life ratings and how the model functions currently so it is sort of a double disagreement whammy.

 

[Stephen J. Vertin MAI]

Tim: I get it I really do. However, if you really think of it, we are limited in a 50-year time frame. Why? Because the only source outside of preforming extraction is Marshall's when estimating economic-life. While I believe there may be a handful of properties in the 55-60 year category I do not recall higher.

But that is Ok, because it serves as a rating gauge... an anchor. With substantial limitations I use to come up with these crazy ages outside the box of referenced support. Whether for good or bad it seems Marshall's has clout. So to say a 100-year old building cannot have a 50-year economic life is unrealistic and given sources simply unsupportable. Further saying a 100-year old building cannot have a 15-year effective age is equally unsupportable. You really only have a range of 0 to 50-years on either side. Unless you want to forge out extraction in every report.

I guess you could use exaction but how that works out for others as far as productivity is another question. Most appraisal preformed in Chicago's commercial arenas have sales and income. Cost are dead. Most clients still require effective age and economic life. I have never heard a client say don't use Marshall's. Have you? It has been around longer than all of us.

With that said, the disagreements in age/life are substantial and always have been. Why? Most text are clear as mud on the matter. So I am not sure disagreeing with each other on a rating system is anything new. However, if one were used it seems a simple model everyone could understand. While you could disagree on the rating it would be hard to disagree with how in functions. As stated appraisers disagree with age/life ratings and how the model functions currently so it is sort of a double disagreement whammy.

 

[Stephen J. Vertin MAI]

I am not sure why that posted twice.

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.

I do not want to mislead. But aren't remaining and useful life just words with no substance. And certainly I am no referring to your post only the terms. I mean useful life has connotation of functionality which in theory are intrinsic to remaining life. Again even our vocabulary lacks precision in the area. Not yours... the industries.

So my solution is the Great and Powerful Marshall's indicates ranges can only reach 45 to 50 years (in most cases) and the effective age within this range only relates to its age point within this time lapse. In other words think of it backwards. Within 45 to 50-years life how many years does the subject have left? If you say 20-year than the effective age is 30-years. Straightforward, no fuss no muss. Further no made up rules such and a 100-year old building cannot have a 15-year effective age. That is simply untrue. Further another made up rule is a building is a 100-years old, if it has an effective age of 25-years it must be in good physical condition. Right? No wrong, it only has 20 years remaining and most of its life is gone given a 45-year economic life. So why would it be rated good? While it may be, I am saying it does not necessarily have to be.

That is just the way I look at it lately. It is not always the way I thought about it. It just reflects my thoughts now.

 

[Terrel L. Shields]

While I believe there may be a handful of properties in the 55-60 year category I do not recall higher.

Unless you want to forge out extraction in every report.

Since I only do the occasional industrial I basically do extraction on each of those types of buildings.

The red iron steel frame building can last 100 years. The masonry buildings can last 100 years. What has changed is utility. So no matter the design, we cannot predict the future. So yesterdays modern buggy whip factory is obsolete in years. Converted to a motorcycle manufacturing facility it quickly gets outgrown and becomes a repair shop. The road changes and again it isn't functional.

Locally we had a number of plants built that are no longer viable and are basically storage for a canning plant and a greeting card company. WH rents haven't budged in over 10 years. So perhaps it isn't the remaining life of the building that counts rather the remaining life of the current paradigms the building was constructed under. 20 years ago who would have predicted the demise of new Malls pressured by Amazon, or that packages delivered by drone will impact UPS delivery service, which itself changed the delivery business 40 years ago?

 

[hastalavista]

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.

I do not want to mislead. But aren't remaining and useful life just words with no substance. And certainly I am no referring to your post only the terms. I mean useful life has connotation of functionality which in theory are intrinsic to remaining life. Again even our vocabulary lacks precision in the area. Not yours... the industries.

I appreciate the above and agree this is an academic discussion; in this arena, we are using the terms of the trade.

I have a different read on useful life and remaining life in terms of "remaining economic life".
I can design a house that can be used as designed. It will function as a residence. And it may be made of high quality which, based on reasonable estimates of the lifespan of the components, may have a useful life of 90 years (I maintain it and replace all the short-lived items, but I don't replace long-lived items; therefore, my useful life is defined by the life of the shortest life span of the long-lived items... there's a mouthful!).
But if the design of that well constructed and high-quality house which can function as a residence is, say, 2br/1ba, 1,000sf on a site/within a neighborhood (Beverly Hills, let's say) that demands 6,500sf homes, there is a high probability that my total economic life is zero for the brand new house that functions as a residence and that would last 90 years with normal maintenance and replacement.

IMO, the connotation of functionality in the term "useful life" has to do with what the improvement was designed to do; it doesn't account for economic obsolescence or externalities.
While remaining life (or, remaining economic life) is dependent on economic obsolescence or externalities. In my same example of the house, if the zoning were rezoned to allow office, and the site was more valuable as an office development site vs.retaining the SFR, I still have remaining useful life for what my improvement was designed to do, but I have no remaining economic life.
And that's what I was getting at in posting my thoughts: Age estimates based on an economic principle (contributory value as measured by remaining economic life) can be significantly different for different improvement types due to factors that are not related to physical deterioration and necessarily chronological age. So I'm not surprised to hear, in your market, that you have 90+ year old improvements with an effective age of 35 years and with a total economic life of 50 years; even when they are in less than average condition, if that less-than-average condition is the due to short-lived items needing replacement and the original use the improvement was designed for still has demand (which implies it is functional) in the current market

In the discussion of depreciation, MVS (and I summarize) states the following:

The life expectancy tables for buildings are based on average mortality rates for the buildings (sounds gruesome); they exclude economic obsolescence or poor management practices.
MVS notes that in some cases, it is easier to estimate how much longer an improvement has to run based on a total life expectancy than it is to estimate its effective age (how old is it) with a total life expectancy. ​

I'd say the second sentence best fits the case with the chronologically aged 90 year building. It would be easier for me to estimate how much longer, based on current condition, it can last and use that remaining economic life estimate as the component I subtract from a given life expectancy. For a newly constructed building, I'd obviously estimate its effective age (0-3 years) rather than trying to estimate it may have 47 years to go.
Effective age, since it can be directly affected by renovation, replacement, and renovation, is the moving variable. Total life expectancy based on no major renovations/remodeling is a static number. 90 year old improvements, designed when they were built to do X and that design is still functional and demanded in today's market, would be expected to have a higher chronological age with continued remaining economic life than those improvements whose design no longer meets the current standard or is no longer in demand at its location.

So, I don't see this being an issue as you do (or, I am not understanding the issue as you do ).

 

[leasedfee]

With substantial limitations I use to come up with these crazy ages outside the box of referenced support.

I've had good experience consistently extracting 45 to 55 years -- except when faced with a positive externality of an over-improved site or a shell building.

So perhaps it isn't the remaining life of the building that counts rather the remaining life of the current paradigms the building was constructed under.

As a hypothesis to be tested: The economic life of a building could be the ever popular 50 years because based on time value of money principles, anything beyond 50 years contributes practically $0 present value or under 1% of value. Whereas the land component is at a lower yield rate and having a longer recapture period, it figures that the building component would be shorter at a higher yield rate (Y_B). This associates with the mortgage's amortization period. Market forces push the variables to this end.

UPS delivery service, which itself changed the delivery business 40 years ago?

Forgive my ignorance, as a GenXer I thought UPS was around forever. . . . what was delivery like before then?

 

[Michigan CG]

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

And that is one of the reasons (one of many reasons) I think that one should have to complete a demo type report or a similar class to get a license. Surely after two-three years of mentorship one should be able to take a class like this or write a demo?

EDIT: I am referring to residential practice, not commercial.

 

[Terrel L. Shields]

what was delivery like before then?

I was in college when UPS blossomed but they were shippers before then.

Finally, in 1975, the Interstate Commerce Commission granted UPS the authority to begin interstate service to and from Montana and Utah and to extend statewide its partial service areas in Arizona, Idaho and Nevada. UPS was also authorised to connect service in these five states with existing service on the Pacific Coast and with all states to the east. As a result, UPS became the first package delivery company to serve every address in the 48 contiguous United States. This historic convergence of service areas became known within UPS as the “Golden Link.”​

All packages here until the 80's was strictly USPS, train, bus, or truck. No one except USPS delivered to the door. UPS spread from regional delivery and even then they delivered my packages to my bank for several years. We actually shipped hounds by train back when trains delivered within 48 hours. I supplied my well logging hands equipment by bus in the 1980's. A shipment of samples (~100#) by truck from Cortez to Mobil's geology lab in Houston ate an entire $100 bill...circa 1977.

 

[techbiker]

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).

We have been wondering the same thing regarding our free standing 9000sf office building.

-The frame is Vulcraft-built red iron with a nearly 100% clear span design.
-The window wall system allows re-arrangement of all windows. The windows are single-pane however this permits the use of really interesting butt glazings. Maintenance is inexpensive.
-Part of the concrete slab is suspended, allowing easy utility and maintenance access.
-Original 32 year old tar and gravel roof has no significant leaks. Our roofer suggests at least 10 years of life remaining. A slope is engineered into the frame.
-HVAC is comprised of 7 heat pumps/AC units (most of these have been replaced within last decade).
-Brick façade.
-Parking lot is jointed reinforced concrete in generally great condition.
-High demand for free-standing office properties with street frontage (located on 27k vpd road).
-Only real negative is the drop ceilings cannot be raised much above 9 feet.

I remember our appraisal indicating only 15 years of economic life remaining but I could never figure out why. Given the stability of the area, I can imagine our building remaining economically viable for another 50 years. If done properly, probably 2 roofs in 80 years. I would prefer a grading system over years-remaining.

 

[leasedfee]

I can imagine our building remaining economically viable for another 50 years.

If done properly, probably 2 roofs in 80 years.

Those are contradictory concepts. If your roof (and other stuff) have to be replaced twice, i.e., $$$ outlay, then you aren't economically viable for 50 years. Physically 50 years, yes. Economic life of 50 years would be no capital expenditures necessary, notwithstanding routine repairs and maintenance.