A reasonable test, or challenge to this premise is to ask, "What evidence links physical aging/depreciation to lower 'Market Value'?", which might reasonably be analyzed as follows. Consider a common occurrence; a 100 year-old dwelling at an adequate level of maintenance which has currently been sold for $150,000 which, for the sake of this example, is typical Market Value in its market. Its actual cost-new in 1893 may reasonably have been $3,500 with the Market Value of its site having been $300 with an overall Market Value of $4,200. And, while changes in the economic forces of supply and demand have increased the ratio of the Contributing Value of the land to the overall Market Value, the original question remains, "What evidence links physical aging/depreciation to lower 'Market Value'? ", with the answer having to be, "There is no such evidence." Thus, it would appear reasonable to conclude that, neither the accepted methods for measuring physical "depreciation" nor for forecasting remaining economic life, have a relationship to market reality, thus, cannot result in an indication of Market Value.
Observation and experience provide the conclusion that most appraisers who develop a cost-new estimate of existing building improvements in Market Value, as well as appraisal assignments for other types of value, use data provided by national cost estimating services. When using such a service, appraisers typically develop the cost-new estimate using the data which provides an estimate of replacement cost-new; seemingly an unreasoned selection which leads one to believe that this selection results from a lack of understanding of its definition and value implications as evidenced when, almost invariably, the appraiser applies a negative charge against the cost-new estimate of the replacement building citing, "functional inadequacies contained within the existing subject building improvement. " which, by the very definition of "replacement cost-new", cannot possibly be considered because the replacement building is built to current optimal functional standards. If, in fact, the building whose cost-new is being considered has functional inadequacies, the only appropriate methodology for estimating its cost-new would be to calculate reproduction cost-new which would literally reproduce an exact duplicate of the subject, including all of its functional inadequacies, which, again, would not provide for consideration of a negative charge against cost-new for functional inadequacies because they are already considered in the cost-new estimate, leaving us with the question, "Should functional depreciation caused by such inherent things as floor plan layout, ceiling height, etc., even be considered as 'depreciable items in a cost-new estimate?", to which the answer must reasonably be "No. Because using the appropriate cost-new estimate eliminates that consideration."
Another major concern is the notion that the cost-new estimate of an existing building improvement should have a negative charge taken against it for "economic/external obsolescence", a fictitious premise since, as all appraisers are required to know, when estimating the value of the land/site as if vacant an appraiser is responsible to consider all social, economic, governmental, and environmental influences upon the vacant land/site in order to determine both its value and its highest and best use. This includes all external or locational factors. In this undertaking, the appraiser is required to contrast the Market Value of the land/site as if it was vacant, against the estimated Market Value of the property as it is currently improved. In estimating the Market Value of the theoretically vacant land/site by the most appropriate method, every such method must include consideration of the Contributing Value influence upon the subject land/site from LOCATIONAL FACTORS, including any and all negative external influences upon the subject's location.
Further, if there is a negative influence upon the subject parcel of land/site from a source outside of its boundaries that would be so substantial as to render its land value at zero (or below zero, so as to have to carry the remainder of the negative value impact onto the proposed [actually existing] building improvement), at that point in the valuation process, an appraiser must conclude that the highest and best use of the subject land/site, as if vacant, is for it to remain vacant until such time as the source of the negative influence is removed or its impact is sufficiently diminished to the point where there would be measurable market demand for the development of the land/site with improvements that would meet all 4 tests for highest and best use at that future point in time.
This leads to, perhaps, the most important question to be asked, "Is the use of the Cost Approach in appraisal assignments for the purpose of estimating the 'Market Value of the Fee Simple estate of existing building improvements, regardless of their age, in compliance with USPAP Provisions and Standards? " Upon examining USPAP, we find that The Appraisal Foundations Preamble to the Provisions and Standards states, "It is essential that a professional appraiser arrive at and communicate his or her analyses, opinions, and advice in a manner that will be meaningful to the client and will not be misleading in the marketplace. " The Conduct portion of USPAP's Ethics Provision states, "An appraiser must perform ethically and competently in accordance with these standards and not engage in conduct that is unlawful, unethical, or improper. ". The clarifying comment regarding this statement of proper conduct says, "The development of an appraisal, review, or consulting service based upon a hypothetical condition is unethical . . . ", which begs the question, "What can be more hypothetical than pretending that an existing building isn't there?". However, a terribly more disturbing question is, "What could possibly be more misleading, hypothetical, and further from the reality of the activities in the market than having the appraiser develop a so-called "valuation " methodology which is virtually NEVER used by typical market participants? " And, to those who would ask, "What about the Principle of Substitution?", be reminded, while it states that, if there are 2 items of equal utility the item with the lowest price will gain the widest distribution, this basic economic principle is based upon the premise that both items currently exist!
Further, to put forth the concept that the typical buyer would typically build a substitute building if it was more economical is only "supported" by a number of unreasonable hypotheticals, including 1) ignoring consideration of the highest and best use of the vacant site, 2) ignoring the economic supply/demand issues in an over-supplied market, 3) the assumption of the availability of a substitute parcel of vacant land able to be purchased at the same price as the Market Value of the subject site, 4) the ability and willingness of the typical buyer to pay normal front-end expenses for site plan engineering, architectural services and environmental evaluations, all before negotiating the purchase price of the land which may prove undesirable subsequent to these preliminary studies, in addition to considering 5) whether or not this typical market participant has the expertise to successfully conduct such an undertaking, which is quite unlikely, evidenced by the virtual absence of such undertakings in the market.
Therefore, based upon the realities of fundamental economic principles, as well as the actions of the virtual entirety of typical market participants, I believe that: 1. The results of developing a cost-new estimate of a tangible physical structure cannot possibly provide an indication of the Market Value of intangible real property rights, and 2. To develop a methodology during an appraisal assignment which is virtually never used by typical market participants, and to include that never used methodology in reporting that appraisal, is a gross misrepresentation of actual market activities, therefore, is misleading to the user of the report, and should reasonably be considered a serious violation of the USPAP Ethics Provision and Standards Rule 1 and 2. (1) The Appraisal of Real Estate, 10th Edition, Appraisal Institute, Chicago, Illinois, p 313