Once replacement cost new (RCN) has been calculated, depreciation must be estimated in order to arrive at a current value (unless an improvement is new, some depreciation exists). 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 into 2 types:
  • Obsolescence
  • Physical deterioration
Obsolescence is further divided into 2 subgroups:
  • Economic obsolescence
  • Functional obsolescence
Economic obsolescence is caused by conditions outside the property such as economic changes, legal restrictions, development of new processes, etc. It may divide into 5 types:
  • Adverse influences of supply and demand
  • Changes in locational demands
  • Changes in neighborhood social or economic factors
  • Proximity to negative environmental influences
  • Zoning restrictions
Functional obsolescence is a loss in value to the improvements due to certain existing physical characteristics, and can be divided into 4 types:
  • Lack of modern facilities
  • Out-of-date equipment
  • Poor design or style
    • Excessive ceiling height
    • Inefficient floor plan
  • Super adequacy (over improvement), or inadequacy (under improvement)
Physical Deterioration
Physical deterioration, as the name implies, is a loss in value due to normal aging and deterioration. It can be subdivided into 4 types:
  • Damage from dry rot, pests, etc.
  • Negligent care or lack of maintenance
  • Wear and tear from normal use
  • Wear and tear from the elements (wind, rain, etc.)