Remaining economic life matters to a lender primarily because:
Correct Answer
B) It should comfortably exceed the loan's amortization term
Why this is correct: Lenders require the remaining economic life (REL) of the improvements to exceed the loan term to ensure the collateral (the building) retains value and utility throughout the loan repayment period, protecting their security interest. Why the other choices are wrong: Tax assessment is based on value, not REL. Down payment is based on loan-to-value ratio. Interest rate is based on credit and market factors, not REL. Exam tip: For a 30-year loan, the REL should be significantly longer than 30 years to provide a safety margin for the lender.
Why This Is the Correct Answer
The lender's security depends on the improvements continuing to contribute value throughout the loan term, so remaining economic life should comfortably exceed the amortization period.
Why the Other Options Are Wrong
Option A: It directly determines the property's annual tax assessment
Tax assessments are based on assessed value under local practice, not on an appraiser's economic life estimate.
Option C: It sets the required down payment percentage
Down payment requirements follow the lender's loan-to-value policy and the borrower's credit.
Option D: It fixes the interest rate the borrower will pay
Interest rates are set by credit quality, loan characteristics and market conditions.
Will It Still Be Worth Something in Year Thirty?
Will It Still Be Worth Something in Year Thirty? If not, the lender is holding land as security for a building loan.
How to use: Distinguish economic from physical life. Obsolescence can end the first long before the second.
Exam Tip
Effective age plus remaining economic life equals total economic life, which is the relationship underlying age-life depreciation.
Common Mistakes to Avoid
- -Confusing economic life with physical life
- -Ignoring functional and external obsolescence in the estimate
- -Treating the estimate as unconnected to the age-life relationship
Concept Deep Dive
Analysis
A lender's security is the property, and the loan is repaid over an amortization period that may run thirty years. If the improvements' remaining economic life is shorter than that term, the building will have ceased to contribute meaningfully to value while the debt is still outstanding, leaving the loan secured increasingly by land alone. That is the lender's concern, and it is why remaining economic life appears on residential appraisal forms and why a short estimate can affect loan terms or approval. Remaining economic life is the period over which improvements are expected to continue contributing to property value, which is distinct from physical life — a building can stand for decades after it has stopped adding value, and functional or external obsolescence can end economic life well before physical deterioration would. The distractors attach the measure to matters it does not determine: assessments follow assessed value, down payments follow loan-to-value policy, and interest rates follow credit and market conditions.
Background Knowledge
Remaining economic life is the period over which improvements are expected to continue contributing to property value. It is distinct from physical life and can be shortened by functional or external obsolescence.
Real-World Application
An appraiser estimating 25 years of remaining economic life on a property proposed for a 30-year loan notes the shortfall explicitly in the report.
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:
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