The cost-depreciation approach

Building value from cost

The cost-depreciation approach estimates property value by adding the current value of the land to the depreciated value of the improvements. It rests on substitution: a buyer generally will not pay more for a property than the cost of acquiring a comparable site and constructing an improvement of equivalent usefulness, allowing for time and other relevant conditions.

Estimate land value as though vacant and available for its highest and best use, commonly using comparable land sales. Estimate the current cost new of improvements, subtract accrued depreciation, then add the land value. Land is valued separately; do not apply the building's depreciation percentage to it.

Land value of ninety thousand dollars is added to depreciated improvement value. Improvements cost three hundred thousand dollars new. Ten years of effective age divided by fifty years of economic life gives twenty percent depreciation, or sixty thousand dollars. The remaining improvement value is two hundred forty thousand dollars, producing a total indicated value of three hundred thirty thousand dollars. — Value the land separately, then add depreciated improvement value.

Cost new is not the old construction bill

Reproduction cost creates a replica with the same materials, design, and workmanship. Replacement cost creates equivalent utility using current materials and standards. The comparative square-foot or cubic-foot method uses costs of comparable construction. The unit-in-place method estimates installed components such as walls or roofing. The quantity-survey method itemizes materials, labor, and associated costs in detail. Include appropriate direct construction costs, indirect costs such as design and permits, and entrepreneurial incentive without double counting.

Three sources of depreciation

Appraisal depreciation is loss in improvement value from any cause, not an income-tax deduction. Physical deterioration is wear, damage, or deferred maintenance. Functional obsolescence is a loss from inadequate or outdated design, layout, or features; an overimprovement can also create functional obsolescence. External, or economic, obsolescence comes from influences outside the property, such as adverse neighboring uses or declining demand.

A deficiency is curable when the value added by correction justifies its cost. Physical and functional problems can be curable or incurable. External obsolescence is generally incurable by the owner. Physical ability to fix something does not establish economic curability.

Age-life calculation

For a simplified age-life estimate, divide effective age by total economic life and multiply by improvement cost new. Effective age reflects condition and utility, not simply years since construction. Total economic life equals effective age plus remaining economic life. Economic life is the period of value contribution; physical life may last longer.

Suppose land is worth $90,000, improvement cost new is $300,000, effective age is 10 years, and total economic life is 50 years. Depreciation is 10 divided by 50, or 20%; $300,000 times 20% is $60,000. Improvement value is $240,000; adding $90,000 land gives $330,000. Do not deduct a loss twice if it is already captured in the depreciation estimate.

The approach is particularly useful for newer improvements and special-purpose properties with limited comparable sales. Older properties with substantial obsolescence make depreciation harder to estimate.

Florida assessment context

Florida Statutes section 193.011 requires consideration of property cost, present replacement value of improvements, and condition, alongside other just-valuation factors. This is not a direction to equate cost with market value or to disregard the other factors.