Depreciation is defined as a loss in value due to any cause
. Land does not depreciate, only improvements. Land may suffer value loss, but not due to depreciation. Depreciation is divided as follows: physical deterioration and obsolescence.
, as the name implies, is a loss in value due to normal aging and deterioration. It can be subdivided into four types:
negligent care or lack of maintenance;
wear and tear from normal use;
damage from dry rot, pests, etc.;
wear and tear from the elements (wind, rain, etc.)
Obsolescence is further divided into two subgroups: functional obsolescence and economic obsolescence.
Functional obsolescence is a loss in value to the improvements due to certain existing physical characteristics, and can be divided into four types:
- poor design or style; inefficient floor plan; excessive ceiling height
- lack of modern facilities
- out-of-date equipment
- super-adequacy (over-improvement), or inadequacy (under-improvement)
Economic obsolescence is caused by conditions outside the property such as economic changes, legal restrictions, development of new processes, etc. It may divided into five types:
proximity to negative environmental influences , zoning restrictions
adverse influences of supply and demand
changes in neighborhood social or economic factors
changes in locational demands
Regardless of the type of depreciation, it can be classified as either curable or incurable. Loss in value due to physical causes can usually be controlled by proper care, usage, or maintenance. Losses due to functional obsolescence are less likely to be curable. Losses in value due to economic obsolescence are rarely curable. For depreciation that can be cured, the cost to cure may be so high that it prohibits the restoration of the property. All of these factors must be taken into consideration when arriving at replacement cost new less depreciation (RCNLD).