Analysis of Economic Depreciation for Multi-Family Property

16 Pages Posted: 27 Dec 2006

See all articles by Jeffrey D. Fisher

Jeffrey D. Fisher

Indiana University - Kelley School of Business - Department of Finance

Brent C. Smith

Virginia Commonwealth University

Jerry Stern

Indiana University - Kelley School of Business - Department of Accounting

R. Brian Webb

UBS Brinson Realty Investors LLC

Abstract

This paper uses a hedonic pricing model and National Council of Real Estate Investment Fiduciaries data to estimate economic depreciation for multi-family real estate. The findings indicate that investment grade multi-family housing depreciates approximately 2.7% per year in real terms based on total property value. This implies a depreciation rate for just the building of about 3.25% per year. With 2% inflation, this suggests a nominal depreciation rate of about 5.25% per year. Converted into a straight-line depreciation rate that has the same present value, this suggests a depreciable life of 30.5 years - as compared to 27.5 years allowed under the current tax laws. Thus, these laws are slightly favorable to multi-family properties by providing a tax depreciation rate that exceeds economic depreciation, which is in part due to inflation that has been less than expected during the past decade.

Keywords: multi-family, depreciation, economic, property value

JEL Classification: C22, C32, C51, C53, E31, K23, Kll, O23, R11, R14

Suggested Citation

Fisher, Jeffrey D. and Smith, Brent C. and Stern, Jerry and Webb, R. Brian, Analysis of Economic Depreciation for Multi-Family Property. Journal of Real Estate Research, Vol. 27, No. 4, 2006. Available at SSRN: https://ssrn.com/abstract=953755

Jeffrey D. Fisher (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-7972 (Phone)
812-855-5875 (Fax)

Brent C. Smith

Virginia Commonwealth University ( email )

1015 Floyd Avenue
Richmond, VA 23284
United States

Jerry Stern

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

R. Brian Webb

UBS Brinson Realty Investors LLC ( email )

Bahnhofstrasse 45
Zurich, 8001
Switzerland

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