Considering Economic Obsolescense?

Friday, 01 May 2009

There are three principal components to depreciation: physical deterioration, functional obsolescence and economic obsolescence.

When valuing personal or real property, we all recognize deterioration (wear and tear), and obsolescence (a decline in usefulness because of design or an inability to upgrade to serve current needs).

Given our latest economic downturn—that began in 2006—depreciation’s third component is on the top of everyone’s mind: economic obsolescence (or value loss due to external factors). Economic obsolescence may be caused by reduced demand; increased competition; raw materials’ availability; inflation and/or deflation; less financing availability; new legislation; and environmental concerns, among other factors.

In America, economic obsolescence is everywhere: larger cars and SUV prices have dropped dramatically in price (and demand) because of high gasoline prices, and concerns about the overall economy. Home prices have fallen off steeply due to harder-to-obtain financing and more volatile markets. The publishing and musical recording industries have been decimated as content is becoming readily available digitally, and more often, online.

All the assets (personal and real property) associated with these industries and their suppliers and vendors have been hit with additional losses in value. And this loss is much greater than any physical deterioration or functional obsolescence that is built into assessors’ “Percent Good” tables.

Valuation experts can measure this newer, more dramatic loss (economic obsolescence) via techniques used in the income approach, market transactions, and the cost approach. It will be to your potential benefit to consult with one of our Property Tax experts, to see if your assessor has recognized the importance of this depreciation component in your property’s assessment.

For more information on Streamline’s Property Tax services, please contact me at

(972) 838-1900.

Sincerely,

Shannon Goertz

President, Streamline

972-838-1900 Phone

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