Sunk Costs and the Measurement of Commercial Property Depreciation

Abstract

This paper develops a new framework for measuring prices and quantities of commercial properties. In particular, it addresses problems associated with obtaining separate estimates for the land and structure components of a property. A key contribution is to address the problem of estimating structure depreciation taking into account the fixity of the structure. We find that structure depreciation is determined primarily by the cash flows that the property generates rather than physical deterioration of the building.

Keywords: Property price indexes, net operating income, discounted cash flow, System of National Accounts, Balance Sheets, land and structure prices, goodwill amortization, intangible assets

JEL Classification: C2, C23, C43, D12, E31, R21