An appraiser using the breakdown method has identified curable items, separately treated short-lived components and long-lived components. In what sequence should the long-lived depreciation ratio be applied?
Correct Answer
D) Treat those components first, then apply the long-lived ratio to the remaining cost.
In the breakdown method, remove curable items and separately priced short-lived components before applying a long-lived ratio to the remaining cost. Fixed dollar deductions commute, but percentage bases must match. USPAP does not mandate this as a universal ordering for every loss measurement.
Why This Is the Correct Answer
Option D is correct because the long-lived ratio is based on the remainder after curable and separately treated short-lived components are removed. Treating those components first and then applying the ratio to that remainder matches the stated base and avoids double depreciation of short-lived items.
Why the Other Options Are Wrong
Option A: Apply the long-lived ratio to the original cost and deduct the same components again.
Option A applies the long-lived ratio to the original cost and deducts the same components again. That uses the wrong base and charges the curable and short-lived components twice.
Option B: Ignore the cost base because percentages work like fixed-dollar deductions.
Option B ignores the cost base on the claim that percentages work like fixed-dollar deductions. Fixed dollar deductions can be taken in any order, but a percentage gives a different result depending on the base it is applied to.
Option C: Deduct the external losses first, before the measured physical items.
Option C deducts the external losses first, before the measured physical items. The stated base for the long-lived ratio is the cost remaining after curable and short-lived components, so external loss does not come first.
Match the Percent to Its Base
A percentage only works on the base it was defined for. Remove the separately treated items first, then apply the long-lived ratio to what is left.
How to use: Use this whenever a breakdown problem defines a ratio on a remainder.
Exam Tip
When a question defines the base for a percentage, follow that base exactly; dollar amounts can be reordered but percentages cannot.
Common Mistakes to Avoid
- -Applying the long-lived ratio to total cost new
- -Depreciating short-lived items twice
- -Assuming percentage deductions can be taken in any order
Concept Deep Dive
Analysis
This question tests matching a percentage to its defined base in a breakdown analysis. When the long-lived ratio is defined on the cost remaining after curable and short-lived items are removed, those items must be treated first. Applying the ratio to the full cost would double depreciate the short-lived components.
Background Knowledge
In the breakdown method, physical deterioration is calculated separately for short-lived and long-lived components to avoid double depreciating the short-lived items. The age-life ratio for long-lived items is applied to the cost of those items only. Total depreciation is the sum of the separate, nonoverlapping estimates.
Real-World Application
An appraiser using the breakdown method first prices curable repairs and depreciates the roof and HVAC as short-lived items. She then applies the long-lived age-life ratio only to the remaining structural cost.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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
An appraiser estimates the current cost new of the improvements at $520,000 and depreciation at 20% of that cost. A separate improvement loss of $28,000 does not overlap that depreciation. The site is valued at $140,000, which already reflects any site influences. What is the total indicated value by the cost approach?
Next Question
In a market-value cost approach, how is the supported site input obtained?