A property valuer is assessing a 15-year-old commercial building. The replacement cost new is $2,000,000, land value is $800,000, and total depreciation is estimated at 25%. What is the property value using the summation approach?

Q: What is the correct answer to: A property valuer is assessing a 15-year-old commercial building. The replacement cost new is $2,000,000, land value is $800,000, and total depreciation is estimated at 25%. What is the property value using the summation approach?

The correct answer is $2,300,000. Option B ($2,300,000) correctly applies the summation approach formula: Land Value + (Replacement Cost New - Depreciation). The calculation is $800,000 + ($2,000,000 - $500,000) = $2,300,000. Depreciation of 25% on the $2,000,000 building equals $500,000. This follows Australian valuation standards where land value remains constant while only the building component depreciates due to physical deterioration, functional obsolescence, and economic factors over the 15-year period.

Q: What background knowledge is needed for this Valuation question?

The summation approach values property by adding land value to depreciated building replacement cost. Under Australian valuation standards and state legislation, this method recognizes that land has perpetual value while buildings depreciate through physical deterioration, functional obsolescence, and economic factors. The approach is mandated for certain valuations under state Valuation Acts and follows Australian Property Institute guidelines. Depreciation calculations must consider the building's effective age, remaining economic life, and market conditions. This method is particularly important for insurance valuations, newer properties with limited sales evidence, and special-purpose buildings where comparable sales are scarce.

Q: What is a good way to remember the answer to this Valuation question?

Remember 'LAND Never Dies' - Land Always Needs Depreciation... NEVER! Only buildings depreciate because they wear out, become outdated, or lose economic utility. Land is permanent and doesn't deteriorate, so it maintains its full value in the summation approach calculation. When you see summation approach questions, immediately think 'LAND Never Dies' and apply depreciation only to the building component. Add the full land value to the depreciated building value to get your answer.

Q: What exam tip applies to this Valuation question?

In summation approach questions, always apply depreciation only to the building/improvement cost, never to land. Calculate: Land Value + (Building Replacement Cost - Depreciation Amount). Double-check that depreciation percentage applies to building cost only.

Q: How does this Valuation concept apply in Australian real estate practice?

A commercial property valuer assessing a 15-year-old office building for bank lending purposes uses the summation approach as a cross-check against sales comparison. The building shows wear and some functional obsolescence compared to modern offices, justifying 25% depreciation. However, the land in the prime commercial location has actually appreciated due to zoning changes and infrastructure improvements. The valuer applies depreciation only to the building component, recognizing that the land retains full value and could support redevelopment, providing security for the lending institution.

Question

ValuationSummation_approachMEDIUM

A property valuer is assessing a 15-year-old commercial building. The replacement cost new is $2,000,000, land value is $800,000, and total depreciation is estimated at 25%. What is the property value using the summation approach?

Answer Options

A

$2,100,000

B

$2,300,000

C

$2,500,000

D

$2,800,000