DarkRange55
We are now gods but for the wisdom
- Oct 15, 2023
- 2,107
this is a follow up to a previous post from a while ago.
It's also going to be both inflation and random factors. Example for Seattle is Cost of Wages is severely increasing costs for both in house and out of house labor compared to say the next biggest city to the Seattle area, Denver.
As for biggest levers I would list out the following as deciding factors
Example: The Grand was built well with only one proprietary system and is in a locally well spot. While maintenance was deferred and the building does suffer from it we overall can operate leaner and for less than say The Lake.
The Lake was built well but has several proprietary systems and is located next to the lake which is causing structural issues early on in its life. Quality of Management and on time PMs are critical as cost of operating is already higher than usual and cutting corners anywhere with that building quickly deteriorates the asset.
Every asset in a structure is assigned a life cycle in years, and its value depreciates annually relative to the initial investment.
For example, using straight-line depreciation:
Air Handler – Asset Life: 25 Years
Initial Investment: $100,000
Annual Depreciation: $100,000 ÷ 25 = $4,000/year.
Typically, once an asset is fully depreciated, it can be replaced without any remaining book value. In theory, it wouldn't make sense to replace an asset that still has value on the books unless operational needs justify it. Governing bodies like ASHRAE assign an expected life span to major equipment, and that lifespan is used for depreciation planning. So, for example, even if a boiler is well maintained and continues functioning beyond 30 years, its depreciation would stop after its assigned 24-year life, regardless of continued use.
So, cost of repairs and parts is a factor as to why those units will have certain end of life and Cost of install why others might be postponed indefinity. air handlers can be often the heart of a facility and a pure like for like replacement would far exceed the cost of repairs and renovations so instead of replacement at year 25 you replace the motors in year 15, add a VFD and tach on a ROI (Return of Investment) to justify the cost. Then year 25 comes along and you look at coil and compressor replacement and do the same thing. ASHREA audit also looks at energy consumption and factors in that to replacement.
Example: You have a Hot Water Heater Tank that is a Year old and has a Warranty for 10 years, however it is 100 gallons and is only used 3-4 times a quarter and you cannot turn it off to save energy due to business. Your ASHREA auditor puts a recommendation to replace it with a Tankless on Demand heater. That will Give you a ROI of 1 year and sees a reduction of energy usage that will save a big number every year afterward. In this example even though you lost 8 years of life from that asset you still choose to move forward with a replacement as the bottom dollar that goes back to ownership is worth the re-investment.
Buildings like the Empire State Building are still standing today in part because structural steel is encased—for both fireproofing and corrosion protection. Concrete itself has a long lifespan, too. Of course, longevity depends on factors like materials used, geographic location, and environmental risks such as earthquakes, tornadoes, or land movement. In many cases, properties are renovated to avoid demolition, but sometimes a decision has to be made about whether the historical value is worth the rising cost of upkeep. When you start needing foundational repairs to an existing building, it might be time to look at building a new building. But you may not be able to because of restrictions on historical designations. They bought it because they got tax breaks but now, they're stuck with it.
Building codes and engineering standards. American Concrete Institute (ACI 318), ASCE load standards, ASTM, etc., implicitly assume a default service life of about 50 years for "ordinary" buildings. Owners can specify a longer design life (75, 100, 150 years) and engineers will adjust detailing, cover thickness, and corrosion protection accordingly. Bridges, offshore platforms, and nuclear plants routinely get 75–100+ year designs.
• Government and institutional guidelines. The U.S. General Services Administration, Department of Defense, universities, and reserve-study firms publish "useful life" tables for budgeting. You'll see entries like "Major Structure: 50 years" or "Superstructure: 75 years." Those tables migrated into the hospitality world as rules of thumb for capital planning.
• Historic experience and appraisers. Many urban hotels built in the early 1900s are still standing. Appraisers, lenders, and asset managers nevertheless need a planning number, so they often peg a high-rise shell at 50–60 years of "economic life" and assume major reinvestments extend that life.
Thus "50–100 years" represents a conservative estimate of service or economic life, not the actual physical lifespan. With maintenance, shells routinely last 100–150+ years.
Physical life is how long the concrete or steel will stand before catastrophic failure. With proper upkeep, many shells far exceed 100 years.
• Service or economic life is how long before it's cheaper to gut, reconstruct, or demolish than to keep renovating—or simply how long the current owner expects to hold the asset. That's often 50–75 years in financial models.
Finance teams adopt the shorter service life to plan for at least one major reinvestment within the holding period even though the frame could stand much longer.
GAAP (book) depreciation vs. tax depreciation
Tax depreciation
Under the IRS's MACRS system:
• All commercial buildings (including hotels) must use 39-year straight-line depreciation.
• Residential rental property uses 27.5 years.
• Land improvements are typically 15 years.
• Equipment and FF&E are 5–15 years.
These are statutory. You do not get to choose a 50- or 100-year tax life.
Book (GAAP) depreciation
For financial statements (GAAP), you're supposed to depreciate assets over their estimated useful life—whatever management reasonably believes reflects the period of benefit. There is no IRS table for this. Hotels, REITs, and institutions often use:
• Structural shell 40–60 years (sometimes 75+ for a concrete/steel tower)
• Major systems 15–30 years
• FF&E 5–7 years
• Land improvements 15–20 years
This practice is called component depreciation or componentization. You break the building into parts with materially different lives and depreciate each separately for the books. Auditors expect you to do this if it's material. Public companies under IFRS are explicitly required to; under U.S. GAAP it's strongly encouraged.
Why keep two ledgers?
Because:
• Tax depreciation determines your actual cash tax deduction.
• Book depreciation gives owners, lenders, and auditors a truer picture of how assets are consumed and replaced, and smooths income statements. It's part of producing GAAP-compliant financials.
So even though book lives don't affect taxes, they're required for financial reporting and for managing the property intelligently.
Reserve studies and engineering input
You normally don't have a structural engineer sign off on "this frame expires in 50 years." Instead:
• The design engineer designs to code (default ~50 years) unless asked for longer.
• After construction, asset managers hire reserve study or cost segregation firms to forecast system replacements and to break out components for depreciation. These studies combine engineering data (typical lifespans, inspection results) with accounting practice to assign lives.
On the GAAP (book) side
When the building was first capitalized, management picked a useful life — maybe 40 or 50 years — and depreciated it straight-line. After that period ends:
• Accumulated depreciation = cost. On the balance sheet the asset is now at zero "net book value."
• But you still own it. The building stays on the books at its original cost with an offsetting accumulated depreciation. It isn't removed unless you dispose of it.
• No more depreciation expense. Once fully depreciated, you stop recording depreciation on that original cost. Your income statement no longer shows expense for that asset.
If you do a major renovation or improvement, that's a new capital asset with its own useful life. You start depreciating that cost separately, even though it's in the same physical building.
⸻
2. On the tax side
You would have taken 39 years of deductions and the building is also fully depreciated for tax purposes. You can't deduct any more on the original cost. New improvements start new depreciation schedules.
⸻
3. Operationally
The building's physical life can be 100+ years, but your accounting book life is just an estimate you used to spread the cost. When the asset has no remaining book value but is still in service, you keep using it — it's just "fully depreciated." If you later sell it, you may have a taxable gain because its tax basis is zero.
⸻
4. Why owners do this
• Book life is about matching expense with expected service, not predicting collapse.
• Physical life is whatever you maintain. With regular reinvestment, a 110-year-old hotel can still be viable.
• Accounting treatment: original shell is fully depreciated, but every major renovation (new roof, new HVAC, façade restoration) is capitalized and depreciated on its own schedule, so your financials still show depreciation expense for the new pieces.
⸻
Bottom line:
Nothing "happens" to the building at year 50 or 100 in the accounting sense. The original cost is fully depreciated, but the building keeps running and you keep capitalizing and depreciating major improvements. Physically it may last centuries; in your books it's just a series of overlapping depreciation schedules.
It's also going to be both inflation and random factors. Example for Seattle is Cost of Wages is severely increasing costs for both in house and out of house labor compared to say the next biggest city to the Seattle area, Denver.
As for biggest levers I would list out the following as deciding factors
- Quality of Construction
- How many Proprietary systems are in the building
- How punctual Preventative Maintenance is completed.
- Location and environmental factors
- Quality of management
Example: The Grand was built well with only one proprietary system and is in a locally well spot. While maintenance was deferred and the building does suffer from it we overall can operate leaner and for less than say The Lake.
The Lake was built well but has several proprietary systems and is located next to the lake which is causing structural issues early on in its life. Quality of Management and on time PMs are critical as cost of operating is already higher than usual and cutting corners anywhere with that building quickly deteriorates the asset.
Every asset in a structure is assigned a life cycle in years, and its value depreciates annually relative to the initial investment.
For example, using straight-line depreciation:
Air Handler – Asset Life: 25 Years
Initial Investment: $100,000
Annual Depreciation: $100,000 ÷ 25 = $4,000/year.
Typically, once an asset is fully depreciated, it can be replaced without any remaining book value. In theory, it wouldn't make sense to replace an asset that still has value on the books unless operational needs justify it. Governing bodies like ASHRAE assign an expected life span to major equipment, and that lifespan is used for depreciation planning. So, for example, even if a boiler is well maintained and continues functioning beyond 30 years, its depreciation would stop after its assigned 24-year life, regardless of continued use.
So, cost of repairs and parts is a factor as to why those units will have certain end of life and Cost of install why others might be postponed indefinity. air handlers can be often the heart of a facility and a pure like for like replacement would far exceed the cost of repairs and renovations so instead of replacement at year 25 you replace the motors in year 15, add a VFD and tach on a ROI (Return of Investment) to justify the cost. Then year 25 comes along and you look at coil and compressor replacement and do the same thing. ASHREA audit also looks at energy consumption and factors in that to replacement.
Example: You have a Hot Water Heater Tank that is a Year old and has a Warranty for 10 years, however it is 100 gallons and is only used 3-4 times a quarter and you cannot turn it off to save energy due to business. Your ASHREA auditor puts a recommendation to replace it with a Tankless on Demand heater. That will Give you a ROI of 1 year and sees a reduction of energy usage that will save a big number every year afterward. In this example even though you lost 8 years of life from that asset you still choose to move forward with a replacement as the bottom dollar that goes back to ownership is worth the re-investment.
Buildings like the Empire State Building are still standing today in part because structural steel is encased—for both fireproofing and corrosion protection. Concrete itself has a long lifespan, too. Of course, longevity depends on factors like materials used, geographic location, and environmental risks such as earthquakes, tornadoes, or land movement. In many cases, properties are renovated to avoid demolition, but sometimes a decision has to be made about whether the historical value is worth the rising cost of upkeep. When you start needing foundational repairs to an existing building, it might be time to look at building a new building. But you may not be able to because of restrictions on historical designations. They bought it because they got tax breaks but now, they're stuck with it.
Building codes and engineering standards. American Concrete Institute (ACI 318), ASCE load standards, ASTM, etc., implicitly assume a default service life of about 50 years for "ordinary" buildings. Owners can specify a longer design life (75, 100, 150 years) and engineers will adjust detailing, cover thickness, and corrosion protection accordingly. Bridges, offshore platforms, and nuclear plants routinely get 75–100+ year designs.
• Government and institutional guidelines. The U.S. General Services Administration, Department of Defense, universities, and reserve-study firms publish "useful life" tables for budgeting. You'll see entries like "Major Structure: 50 years" or "Superstructure: 75 years." Those tables migrated into the hospitality world as rules of thumb for capital planning.
• Historic experience and appraisers. Many urban hotels built in the early 1900s are still standing. Appraisers, lenders, and asset managers nevertheless need a planning number, so they often peg a high-rise shell at 50–60 years of "economic life" and assume major reinvestments extend that life.
Thus "50–100 years" represents a conservative estimate of service or economic life, not the actual physical lifespan. With maintenance, shells routinely last 100–150+ years.
Physical life is how long the concrete or steel will stand before catastrophic failure. With proper upkeep, many shells far exceed 100 years.
• Service or economic life is how long before it's cheaper to gut, reconstruct, or demolish than to keep renovating—or simply how long the current owner expects to hold the asset. That's often 50–75 years in financial models.
Finance teams adopt the shorter service life to plan for at least one major reinvestment within the holding period even though the frame could stand much longer.
GAAP (book) depreciation vs. tax depreciation
Tax depreciation
Under the IRS's MACRS system:
• All commercial buildings (including hotels) must use 39-year straight-line depreciation.
• Residential rental property uses 27.5 years.
• Land improvements are typically 15 years.
• Equipment and FF&E are 5–15 years.
These are statutory. You do not get to choose a 50- or 100-year tax life.
Book (GAAP) depreciation
For financial statements (GAAP), you're supposed to depreciate assets over their estimated useful life—whatever management reasonably believes reflects the period of benefit. There is no IRS table for this. Hotels, REITs, and institutions often use:
• Structural shell 40–60 years (sometimes 75+ for a concrete/steel tower)
• Major systems 15–30 years
• FF&E 5–7 years
• Land improvements 15–20 years
This practice is called component depreciation or componentization. You break the building into parts with materially different lives and depreciate each separately for the books. Auditors expect you to do this if it's material. Public companies under IFRS are explicitly required to; under U.S. GAAP it's strongly encouraged.
Why keep two ledgers?
Because:
• Tax depreciation determines your actual cash tax deduction.
• Book depreciation gives owners, lenders, and auditors a truer picture of how assets are consumed and replaced, and smooths income statements. It's part of producing GAAP-compliant financials.
So even though book lives don't affect taxes, they're required for financial reporting and for managing the property intelligently.
Reserve studies and engineering input
You normally don't have a structural engineer sign off on "this frame expires in 50 years." Instead:
• The design engineer designs to code (default ~50 years) unless asked for longer.
• After construction, asset managers hire reserve study or cost segregation firms to forecast system replacements and to break out components for depreciation. These studies combine engineering data (typical lifespans, inspection results) with accounting practice to assign lives.
On the GAAP (book) side
When the building was first capitalized, management picked a useful life — maybe 40 or 50 years — and depreciated it straight-line. After that period ends:
• Accumulated depreciation = cost. On the balance sheet the asset is now at zero "net book value."
• But you still own it. The building stays on the books at its original cost with an offsetting accumulated depreciation. It isn't removed unless you dispose of it.
• No more depreciation expense. Once fully depreciated, you stop recording depreciation on that original cost. Your income statement no longer shows expense for that asset.
If you do a major renovation or improvement, that's a new capital asset with its own useful life. You start depreciating that cost separately, even though it's in the same physical building.
⸻
2. On the tax side
You would have taken 39 years of deductions and the building is also fully depreciated for tax purposes. You can't deduct any more on the original cost. New improvements start new depreciation schedules.
⸻
3. Operationally
The building's physical life can be 100+ years, but your accounting book life is just an estimate you used to spread the cost. When the asset has no remaining book value but is still in service, you keep using it — it's just "fully depreciated." If you later sell it, you may have a taxable gain because its tax basis is zero.
⸻
4. Why owners do this
• Book life is about matching expense with expected service, not predicting collapse.
• Physical life is whatever you maintain. With regular reinvestment, a 110-year-old hotel can still be viable.
• Accounting treatment: original shell is fully depreciated, but every major renovation (new roof, new HVAC, façade restoration) is capitalized and depreciated on its own schedule, so your financials still show depreciation expense for the new pieces.
⸻
Bottom line:
Nothing "happens" to the building at year 50 or 100 in the accounting sense. The original cost is fully depreciated, but the building keeps running and you keep capitalizing and depreciating major improvements. Physically it may last centuries; in your books it's just a series of overlapping depreciation schedules.
