Economic Life, Effective Age and Remaining Economic Life
There is an old adage that more buildings are torn down than fall down. This is true and adds to the importance of understanding the concepts of economic life, effective age and remaining economic life. Otherwise, depreciation can be estimated neither accurately nor allocated among the causes of such depreciation (i.e., physical deterioration, functional obsolescence and external obsolescence).
Economic life is "the period over which improvements contribute to property value" (The Dictionary of Real Estate Appraisal, Fourth Edition). Other terms closely associated with economic life are "effective age" and "remaining economic life." The sum of the latter two is economic life.
Effective age is a measure of the condition and functionality of improvements. If a building is actually 10 years old but compares closely with otherwise similar 5-year-old buildings, the effective age of the former is likely to be 5 years old. Conversely, buildings that have been poorly maintained or have significant functional problems may well have effective ages greater than their actual ages.
Remaining economic life is that period of years over which the improvements can be expected to serve the purpose for which they were designed. It may be affected by the physical condition of the improvements, the extent to which the building serves the needs of users and the influence of nearby uses, positive or negative. Effective age may be decreased and remaining economic life increased by extraordinarily good maintenance, renovation or both.
These three concepts (economic life, remaining economic life and effective age) are inextricably interrelated to the concept of highest and best use. It is interesting to note that the economic life of improvements on a very expensive (and rapidly appreciating) site is likely to be considerably shorter than that of improvements on a low-priced site in a slow-growing area. In the case of the former, the period over which the improvements contribute value to the site as vacant is likely to be shortened as the site becomes more valuable.
There is an old adage that more buildings are torn down than fall down. This is true and adds to the importance of understanding the concepts of economic life, effective age and remaining economic life. Otherwise, depreciation can be estimated neither accurately nor allocated among the causes of such depreciation (i.e., physical deterioration, functional obsolescence and external obsolescence).
Economic life is "the period over which improvements contribute to property value" (The Dictionary of Real Estate Appraisal, Fourth Edition). Other terms closely associated with economic life are "effective age" and "remaining economic life." The sum of the latter two is economic life.
Effective age is a measure of the condition and functionality of improvements. If a building is actually 10 years old but compares closely with otherwise similar 5-year-old buildings, the effective age of the former is likely to be 5 years old. Conversely, buildings that have been poorly maintained or have significant functional problems may well have effective ages greater than their actual ages.
Remaining economic life is that period of years over which the improvements can be expected to serve the purpose for which they were designed. It may be affected by the physical condition of the improvements, the extent to which the building serves the needs of users and the influence of nearby uses, positive or negative. Effective age may be decreased and remaining economic life increased by extraordinarily good maintenance, renovation or both.
These three concepts (economic life, remaining economic life and effective age) are inextricably interrelated to the concept of highest and best use. It is interesting to note that the economic life of improvements on a very expensive (and rapidly appreciating) site is likely to be considerably shorter than that of improvements on a low-priced site in a slow-growing area. In the case of the former, the period over which the improvements contribute value to the site as vacant is likely to be shortened as the site becomes more valuable.
