Whether you are an owner or investor, depreciation is a key topic in commercial real estate. With that in mind, today we take a closer look at curable depreciation (as well as other types of depreciation) in real estate.
What Is Curable Depreciation in Commercial Real Estate?
In commercial real estate, the term “curable depreciation” refers to damage or wear and tear that can be fixed for less than the increase in property value that would result from the repairs.
Take, for example, an office with an HVAC system that requires basic repairs and maintenance. In this case, the depreciation is curable because the landlord can repair the HVAC and then recoup those costs by charging higher rent.
Another way to look at curable depreciation is as deferred maintenance — In other words, repairs that were not carried out in due time.
Curable Depreciation vs Incurable Depreciation in Commercial Real Estate
The opposite of curable depreciation is incurable depreciation.
Here, the term “incurable depreciation” is not to be interpreted as damage that is impossible to repair but rather as damage whose repair costs would exceed the property’s subsequent increase in value.
For example, if the foundation of an hypothetical office building were crumbling, it would not be economically practical to repair the problem. Severe structural damage is generally considered incurable depreciation because, in most cases, the alternative that makes the most economic sense is to raze the building instead of repairing it.
Types of Depreciation in Real Estate
There are different types of depreciation in real estate. Below is a breakdown of the basic categories you need to know.
- Physical depreciation. Refers to the wear and tear of a building over time. In turn, physical depreciation can be divided into curable depreciation and incurable depreciation (see above)
- Functional obsolescence. When a property loses value due to changes in market preferences (for example, outdated design, or inadequate amenities)
- Economic obsolescence. Loss of value due to factors beyond the owner’s control, such as zoning changes or market fluctuations
Interested in learning more about commercial real estate? Read our previous blogs: “Usable vs Rentable Square Footage: What Is the Difference?” and “A Commercial Lease Negotiation Checklist.”
Chantel Aguilar: Your Commercial and Investment Property Expert in Orange and LA Counties
Whether you are a landlord or tenant, if you need help making sense of complex commercial real estate indicators, Chantel Aguilar can help.
Chantel has a proven track record of success in helping clients navigate even the most challenging CRE lease negotiations. Contact Chantel by telephone at 562-447-0665 by email at [email protected].