The above are, of course, all good replies and solutions. If I may, I have $.02 to add.
The real problem in the effective age issue is not effective age at all. It's remaining economic life. The reason your client wants an effective age is so they can figure out whether the remaining economic life is longer than the proposed financing term. They don't want to put a 30-year loan on a property that is projected to only last 10 more years.
Complicating this is the use of arbritrary and fixed physical and economic life spans. Everyone knows that a 50-year or even 70-year lifespan for a structure is in may cases ridiculous as long as regular maintenance is performed.
Marshall and Swift, used by many appraisers as their cost source, addresses this issue in an unexpected way. The method for calculating effective age and remaining economic life is different in Marshall and Swift than the way most appraisers have been trained. If an appraiser is going to use M&S, including their depreciation section, as their cost source, they should also use the same method of determining depreciation.
As appraisers, most of us are taught a formula for determining effective age and remaining economic life. Marshall and Swift currently uses a different formula. Below are the two formulae:
Traditional:
Economic Life - Effective Age* = Remaining Economic Life
Marshall and Swift
Economic Life - Remaining Economic Life* = Effective Age
* = the valuers estimate.
The traditional formula requires the appraiser to use Don's "Clock Method" or some variation. And if done properly, that's certainly a valid solution. But the downside is that it addresses primarily physical elements and does not neccesarily take into account the excess functional or external elements. This forces the appraiser to add in a little extra judgement . Like I said, this is still a very valid and recognized approach.
The newer (?) method is based off of what M&S refers to as the 'extended life theory of loss, similar to the concept that a proven ability to exist leads to continued existance'. Kind of like "I am, therefore I will continue to exist"...LOL. Rather than have the appraiser estimate the effective age, the appraiser will estimate the remaining economic life for the structure, the residual being attributed to effective age. As a practical application, it allows and includes consideration of not only the physical attributes, but also design elements, neighborhood elements and market reactions.
So in application to the hybrid house described above, the appraiser using this method would use the arbritrary 55 or 65 years and subtract the estimated remaining economic life of the improvements after the rehab/rebuild. The result will be the effective age. The appraiser also gets to put these improvements into context of what is happening in the neighborhood, an element the traditional method does not directly consider. There's still some judgement involved, there's still the arbritrary 55-year economic life (which is the real villain in the process), and the resulting effective age is still a farce. But it does allow the appraiser to directly address the clients real concern - remaining economic life.
Where this variation of depreciation calculation really comes in handy is in areas subject to economic decline or redevelopment. If all the homes in a neighborhood are in what we would normally classify as "Fair" or "Poor" physical condition, yet there is no redevelopment in sight, the appraiser gets to correlate the remaining economic life with what is actually happening in the neighborhood. It is very possible that regardless of physical condition (within reason), the improvements may have a remaining economic life in that neighborhood of another 30 or 40 years. Thus, this method becomes very handy for appraisals in inner city areas from a fair lending standpoint.
The flip side of this is that a structure in average condition may have only a limited remaining economic life if the neighborhood is in transition to a different use or there are dynamic economic conditions afloat. Witness the Las Vegas hotel that was 10 years old and had 5,000 rooms that was demoed in favor of a new hotel with 10,000 rooms. Physical condition really was irrelevant to that particular remaining economic life. A residential appraisal example would be someone trying to rehab an old small home in a neighborhood where the trend is toward big new homes with modern floorplans, materials, and technology. The rehab may not be economically viable within that market.
The other advantage to using this method is that it's the same one used in M&S, so no one can really argue it with you. Matter of fact, not using it could conceiveably cause you a problem if someone decides to get technical with you for using only part of the M&S method. On a more personal note, using the current M&S methodology has made my cost approaches work a lot better, almost without exception. But don't take my word for it. Check it out in Marshall and Swift and try it for yourself.
George Hatch
Round here if they date back (and we have some back to the early 1600's) there usually not added onto, as they don't want to spoil the History.