Depreciated Replacement Cost: Improving the Method Through a Variant Based on three Cornerstones

Abstract

Abstract Within the scope of real estate appraisal, the Depreciated Replacement Cost method is mostly seen as a solution of last resort, when no other option is available. Nonetheless, it is ever more useful in addressing various estimation needs. In its basic formulation, the method suffers from several simplifications that lead to rather rough results. Here we try to go beyond these limits. To this end, we propose a variant based on the following three cornerstones. The first is the partition of the replacement cost into its fundamental components, at least according to three cost items: building structure, finishes, and installations. The second cornerstone is the formulation of different depreciation curves for each of the cost items mentioned above, by processing distinct data on useful life and residual life. Finally, the third cornerstone is represented by the definition of a complex depreciation function to take into account both the original useful life of the construction and its lengthening due to partial or full refurbishments.