An appraiser estimates a commercial office building's total economic life as 60 years and determines its effective age to be 24 years based on physical condition, functional utility, and external influences. What is the building's remaining economic life?
Correct Answer
B) 36 years
Remaining economic life = Total economic life − Effective age. Per USPAP Advisory Opinion 17 and the Cost Approach fundamentals in the Appraisal of Real Estate (15th ed.), remaining economic life is derived by subtracting effective age from total economic life. Here: 60 − 24 = 36 years. Option A confuses remaining life with effective age; C is 60 − 12 (a miscalculation); D is total economic life, not remaining.
Why This Is the Correct Answer
Remaining economic life equals total economic life minus effective age, so 60 years minus 24 years leaves 36 years. The stem deliberately supplies the effective age rather than the actual age because effective age is the figure the formula uses, and the appraiser has already grounded it in condition, functional utility, and external influences. Cross-check the result with the age-life ratio: 24 divided by 60 is 40 percent depreciation, so 60 percent of a 60-year life, or 36 years, remains.
Why the Other Options Are Wrong
Option A: 24 years
Twenty-four years is the effective age itself, offered back as though the life used and the life left were interchangeable. They coincide only when effective age happens to be exactly half of total economic life, which is not the case here. Reciting an input as the answer is the fastest way to lose an easy calculation question.
Option C: 48 years
Forty-eight years is 60 minus 12 and comes from subtracting the wrong quantity, typically a chronological age or half of the effective age, in place of the effective age the stem supplies. The formula does not discount the effective age or blend it with actual age. Whatever the building's calendar age may be, the appraiser's effective age estimate is what the subtraction uses.
Option D: 60 years
Sixty years is total economic life, which is the life of the improvements when new. Reporting it as remaining life ignores 24 years of accrued deterioration and obsolescence and would understate depreciation in the cost approach to zero. It is also inconsistent with the stem, which states the building already has a substantial effective age.
Life Left Equals Life Total Minus Life Used
Picture a 60-unit fuel gauge. Effective age is the fuel burned, remaining economic life is the fuel left, and the calendar age on the title is not on the gauge at all. Burn 24, and 36 remain.
How to use: When the stem gives you two of the three quantities, write TEL minus EA equals REL before reading the options. Then confirm with the depreciation ratio so you can rule out the distractor that simply repeats an input.
Exam Tip
Watch which age the stem hands you. If it supplies actual age and condition commentary but not effective age, the question wants you to reason to an effective age first, and the subtraction comes second.
Common Mistakes to Avoid
- -Substituting actual age for effective age in the subtraction
- -Confusing remaining economic life with remaining physical or useful life
- -Reporting total economic life or effective age itself as the answer
Concept Deep Dive
Analysis
This tests three related life-and-age definitions that candidates routinely blur. Total economic life is the period over which improvements contribute to property value, effective age is the age the improvements appear to be given their condition, utility, and the external forces acting on them, and remaining economic life is simply what is left when effective age is subtracted from total economic life. Effective age is a judgment, not a calendar fact, so it can be shorter than actual age where a building has been well maintained or modernized and longer where deferred maintenance, obsolete layout, or a declining location has aged it prematurely. The same pair of figures also drives the age-life method of estimating depreciation, where the depreciation percentage is effective age divided by total economic life, which gives you a built-in check on your subtraction.
Background Knowledge
You need the definitions of total economic life, effective age, actual age, and remaining economic life, and you need to keep economic life separate from physical life, since a building can stand long after it stops contributing value. You should also know the age-life method of estimating accrued depreciation, in which the depreciation percentage equals effective age divided by total economic life.
Real-World Application
An appraiser valuing a 1985 office building finds a full mechanical replacement and interior rebuild in 2018, sets effective age at 24 years against a 60-year total economic life despite an actual age near 40, and carries 36 years of remaining economic life into both the depreciation estimate and the reasonableness check on the holding period.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Income Approach
8.2% of exam
Previous Question
A 12-unit apartment building has a single, centrally located laundry room serving all units — a design common in 1960s construction. Current market norms require in-unit washer/dryer hookups or at minimum, one laundry room per 6 units. Adding five additional laundry rooms (one per two floors) would cost $185,000 and is physically feasible. However, local rent surveys show no premium for buildings with more laundry access, and tenants consistently accept the existing arrangement. What is the appropriate treatment of this feature under the cost approach?
Next Question
Total accrued depreciation includes: