An appraiser is valuing an older Alberta property and applies the cost approach. What types of depreciation must be considered?

Q: What is the correct answer to: An appraiser is valuing an older Alberta property and applies the cost approach. What types of depreciation must be considered?

The correct answer is Physical depreciation (wear and deterioration), functional obsolescence (outdated design or layout), and external/economic obsolescence (factors outside the property). Under standard appraisal practice applied in Alberta, the cost approach requires deducting three types of depreciation: physical depreciation (wear, age, deterioration), functional obsolescence (outdated design, layout, or systems), and external/economic obsolescence (neighbourhood decline, zoning changes, economic factors). All three must be considered to arrive at an accurate value estimate under Alberta assessment standards.

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

The cost approach estimates value as: land value + replacement cost of improvements - total depreciation. The three depreciation types are: physical (wear and tear), functional (design deficiencies or superadequacies), and external/economic (factors outside the property). In Alberta, economic obsolescence is common in oil-dependent regions during commodity downturns.

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

Remember PFE: Physical (wear), Functional (outdated design), External (outside factors). All three must be deducted in the cost approach. When a cost approach question asks about depreciation, mentally check all three PFE categories. If an answer omits any one, it is incomplete.

Q: What exam tip applies to this Property Valuation question?

Cost approach depreciation questions almost always have the correct answer listing all three types. Any answer mentioning only one type of depreciation is incomplete and therefore wrong.

Q: How does this Property Valuation concept apply in real world practice?

An appraiser values a 1970s office building in downtown Edmonton. Physical depreciation accounts for the aging roof and HVAC. Functional obsolescence comes from the outdated open-plan layout with low ceilings. External obsolescence reflects reduced demand for office space due to energy sector layoffs. All three reduce the building's value below its replacement cost.

Question

Property ValuationABHARD

An appraiser is valuing an older Alberta property and applies the cost approach. What types of depreciation must be considered?

Answer Options

A

Only physical depreciation from age and wear

B

Physical depreciation (wear and deterioration), functional obsolescence (outdated design or layout), and external/economic obsolescence (factors outside the property)

C

Only the depreciation claimed on the owner's tax return

D

Depreciation is not considered in the cost approach