Valuation Concepts - Residential and Commercial Property Guideline Page 4
Physical deterioration is the loss in value due to wear and tear and disintegration of the structures from the forces
of nature and man. The two most common methods of estimating physical deterioration are depreciation tables and
observed conditions. Generally, assessment ocials prefer the use of depreciation tables that can be obtained from
professional cost services.
Functional obsolescence is a loss in value as a result of defects in design or of changes which have taken place
over the years which have made some aspects of the structure, materials or design obsolete by current standards.
Examples of functional obsoles cence include very high ceilings in residential structures or low-hanging pipes in
commercial or industrial structures. One method of measuring functional obsolescence is to determine the dier ence
between reproduction cost new and replacement cost new. Reproduction cost new is the current cost of producing
an exact replica of a building or improvement using the same or very similar materi als, design and workmanship.
Replacement cost new is the current cost of producing a building or improvement having the same utility but using
modern materials, design and workmanship. Gener ally, if the cost approach is based upon a replace ment cost
estimate instead of reproduction cost estimate, costs of excesses or deciencies of con struction are not included.
External obsolescence (EO) is the loss in value resulting from adverse inuences outside the proper ty itself. These
include changing neighborhoods, shifting business districts and adverse economic conditions. Since EO is caused by
factors external to the property, its adverse eect upon value may oset the land value, the structure value, or both.
EO is sometimes referred to as location or communi ty depreciation. It may be determined by market comparisons of
similar properties that have recent ly sold. The RCN of the comparable property minus the contributory value of the
structures (sale price minus land value) equals the accrued deprecia tion. Accrued depreciation minus depreciation
due to physical deterioration and functional obsolescence results in depreciation attributable to external obsolescence
of the comparable property and should be expressed as a percentage of the structure value after physical and
functional depreciation. For example:
RCN of structures sold $ 57,500
Sale price of property sold $ 45,000
Land value of property sold - 15,000
Contributory value of structures 30,000
Accrued depreciation $ 27,500
Physical deterioration
30% from table (30% x $57,500) - 17,250
Remaining depreciation $ 10,250
Structure value after physical deterioration $40,250
Functional obsolescence
Reproduction cost new of deciency
or superadequacy $ 3,000
30% physical deterioration - 900
Plus cost to remove/replace + 1,000
Net functional obsolescence 3,100
Structure value after physical deterioration and
functional obsolescence $37,150
Remainder attributable to external obsolescence or
19.2% of $37,150 structure value after physical and
functional depreciation $ 7,150
Value of structures after physical, functional and external
depreciation = contributory value of structure (above) $30,000
G-26a