Remaining Economic Life

[Mark K]

The economic life is how long on average a structure can be expected to contribute with little/no maintenance and updating.

As for assumptions, there is no approach to value which isn't dependent on significant assumptions. So "assumptions" don't suddenly become a deal breaker just because it's the CA.

Doesn't it seem more reasonable to assume a modicum of maintenance and updating (reflective of the real market) than to assume no maintenance or updating for residential dwellings? To me, that's like saying a car has a life of 50,000 miles assuming you never change the oil.

 

[glenn walker]

Doesn't it seem more reasonable to assume a modicum of maintenance and updating (reflective of the real market) than to assume no maintenance or updating for residential dwellings? To me, that's like saying a car has a life of 50,000 miles assuming you never change the oil.

Agree Mark-In the real world, the reason both physical and economic life are extended is because most properties at some juncture in their life cycle are updated or remodeled. the truth is the economic and physical life are married to each other.

 

[George Hatch]

Doesn't it seem more reasonable to assume a modicum of maintenance and updating (reflective of the real market) than to assume no maintenance or updating for residential dwellings? To me, that's like saying a car has a life of 50,000 miles assuming you never change the oil.

If the only structures M&S estimates for was SFRs then maybe they'd have approached the issue differently. Except they don't.

So regardless of what M&S says, when I can see that the economic lifespan of a gas station buildout is 12-15 years and then confirm the point that a lot of those improvements do get redone in those time frames it's hard for me to say they're wrong. We watch office buildings and retail centers get remodeled in 20yr increments, we see the churn in occupancy types among the industrials change as they get older and so on. So while the accuracy of the numerical expressions of TEL and REL are certainly subject to challenge the trends they depict seem to remain more/less consistent. This makes having a reference or a benchmark of some sort more useful than having nothing at all.

BTW, we don't have any problems *extracting* GRMs and expense ratios or price/sf from the transactions the subject competes with, so I don't see how it becomes unreasonable to do the same with depreciation.

 

[alebrewer]

You keep conflating "physical age" with "economic life". (70 yr old home is already older than it's economic life).

That's an inconsistency in your reasoning. The economic life is how long on average a structure can be expected to contribute with little/no maintenance and updating. Not how long a property can be expected to contribute in any one specific location or when well maintained in order to slow it's decline. That's basic, and you shouldn't be just skipping over that distinction.

As for assumptions, there is no approach to value which isn't dependent on significant assumptions. So "assumptions" don't suddenly become a deal breaker just because it's the CA.

For your 70-yr old home, if the underlying site value is $100k and the value of the property in the market is $300k then what is the apparent contributory value of the improvements in their "as is" condition? And how would you explain that on a consistent basis when considering that in some locations that structure will contribute a lot more to the whole than in others? You can do that using the M&S methodology. You can't do that using most of the other methodologies I've seen appraisers use.

Nope - no conflating here, although I am impressed by your use of big words. Slightly out of context - confusing might have been a better term - but a valiant effort nonetheless.

(1) I had thought that the strong implication in my example would be that the 70 year old home would still be offering contribution under it's intended use - but that's my bad for not making that clear. So, back to my (now clear) example, how can a 70 year old home - that is still offering contribution under its intended use - have a TEL of 55 years?

In addition, while physical physical age is not the same as economic life, would you agree that there is a relationship between actual age and effective age? And, if so, you'd hopefully also agree that there is a relationship between effective age and TEL? In which case, logic would demand that there is also a relationship between actual age and economic life...

(2) unsupported assumptions are deal breakers - regardless of the approach.

(3) In your example, are you saying the underlying site value is $100k in every location? If so, and if the overall value is $300k in every location, then the contributory value of the improvements is $200k in every location... I'm guessing, though, that (a) the site value is not the same in every location, and (b) the overall value is not the same in every location. And there goes your consistency...

 

[alebrewer]

George I agree with you and I think the problem is most residential appraisers no matter how hard they try cannot separate physical and economic life.

It is SO annoying when folks make statements like this - you know, kind of like when you're sitting in the dark and you can hear the mosquito, but can't see it - that kind of annoying. Regardless, since you are an omniscient commercial appraiser (unlike us ignorant residential appraisers), maybe you can answer the question - how can a 70 year old structure (residential or otherwise) that still offers contribution under it's intended use, have a TEL of 55 years?

 

[alebrewer]

I'll mention one more thing: Regardless of which benchmark you use for TEL, if you adjust the depreciation rate to match the results will come out similarly. The reason they would come out differently would be if adjust your TEL (which is what you've been doing) without adjusting the depreciation rate to fit the same timeline.

thus making it a circular function.

 

[alebrewer]

economic and physical life are married to each other.

Careful - that sounds like conflation to me...

 

[George Hatch]

thus making it a circular function.

The "R" in REL itself is relational, which is not the same thing as circular.

 

[alebrewer]

The "R" in REL itself is relational.

That's one way to put it...

 

[George Hatch]

Suffice it to say that the only people who are talking about the CA making a comeback in SFR appraisals have nothing to do with appraising and don't know what they're talking about.

I just had a private party client hassling me about the SOW for one of their properties, telling me they need a Complete Appraisal with all 3 approaches to value; and not liking it when I'm telling them that I'm not doing a CA on an office condo.