7.6.11 Remaining Economic Life (REL)

A. HUD Multifamily Housing programs allow for long term amortization periods. The HUD Underwriter must determine the REL and the remaining useful/physical life based on review and reconciliation of the appraisal, capital needs assessment (CNA), recommendations from the appraisal review, and their own observation. This estimate is not a strictly formulaic calculation. REL is defined as the estimated period during which improvements will continue to contribute to project value and an estimate of the number of years remaining in the economic life of the structure or structural components as of the date of the appraisal. For new construction and substantial rehabilitation projects, the maximum mortgage term is

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the lesser of 40 years, or 75 percent of the REL. For existing properties, the maximum mortgage term is the lesser of 35 years, or 75 percent of the REL.

• B. When used in this section, the words and terms below are defined as follows:

1. Physical Life. The period from the time of completion (as new or after substantial rehabilitation) of a structure until it is no longer fit or safe for use, or when maintaining the building in a safe, usable manner is no longer practicable. Because a building is subject to physical deterioration and obsolescence, its period of usefulness is limited. As a building deteriorates or becomes obsolete, its ability to serve useful purposes decreases and eventually ends. This may occur gradually or rapidly.

2. Economic Life. The period over which improvements to real property contribute to property value. Economic life can never be longer than the physical life but may be shorter. Both Physical and Economic life will be affected by the underlying construction quality, market incentives, level of maintenance/updating to correct physical deterioration, and/or functional obsolescence.

3. Functional Obsolescence. Reduction in the usefulness or desirability of the improvements to real property due to the presence of outmoded features, such as lack of closet space or the number of bathrooms commensurate with the number of bedrooms. Such features are often not curable and may or may not be relevant in evaluating the REL.

4. Effective Age. The apparent age of the improvements to the real property, which may vary from its actual or chronological age. The effective age is determined by the appraiser assuming the required repairs to be made as specified in the CNA are a condition of refinancing, and based on the following factors:

   • Workmanship, durability of construction, and the rate with which natural forces cause physical deterioration;

• The physical condition and probable cost of maintenance and repair, the maintenance policy of owners and occupants, and the use or abuse to which structures are subjected;

• The economic background of the community or region and the need for accommodations of the type represented;

• The relationship between the property and the immediate environment, the architectural design, style, and utility from a functional point of view, and the likelihood of obsolescence as attributable to new inventions, new materials, and changes in tastes; and

• The trends and rate of change of characteristics of the neighborhood and their effect on land values.

C . Remaining Economic Life is the Economic Life less the Effective Age. The effective age is determined by the appraiser based on the actual condition of the subject considering all applicable forms of depreciation. The appraiser should assume the required repairs to be made as specified in the CNA are a condition of refinancing, and consider the type and quality of construction, maintenance factors, and any other relevant market and economic factors that might influence the long-term success of the project. The following are examples that illustrate the implementation of these concepts:

1. An older structure with functional obsolescence remains competitive in an area characterized by chronic high costs and a shortage of moderately priced apartments.

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Such structure could be a market-rate project in a particularly desirable location, or a former affordable housing project. The MAP Appraiser's market analysis indicates that there is sustained demand in the market area that likely will allow the project to remain competitive for a long term. This can cause the effective age to be lower, with a commensurate increase in REL.

2. A structure that is sound and in good physical condition with many years of physical life remaining may have reached the end of its economic life - if its remaining years of physical usefulness will not provide a competitive return on investment.

Low rise apartment projects in a given market area are no longer consistent with emerging trends or investment patterns, e.g., changes resulting from construction of a new transit system or facility stimulate demand for higher density commercial and residential uses.

D. The presence or prevalence in a market area of persons or families of any race, color, national origin, religion, sex, disability, or familial status, (which are all are Fair Housing Act protected classes) shall never be considered when conducting an appraisal.