A laundry arrangement differs from newer designs, but relevant investigation finds no supported value, occupancy or operating penalty. Proposed expansion costs $185,000 with no supported benefit. What is appropriate?
Correct Answer
C) Do not deduct the expansion cost as functional loss on this evidence.
The supplied lack of a supported rent/price/vacancy penalty does not justify a $185,000 functional-loss deduction merely because a newer arrangement is common. Investigate relevant value evidence; cost alone does not establish loss.
Why This Is the Correct Answer
Option C is correct because relevant investigation found no supported value, occupancy or operating penalty, so the $185,000 expansion cost is not shown to be a functional loss. Costs are not direct evidence of market value, and a newer design being common does not by itself create a loss.
Why the Other Options Are Wrong
Option A: Deduct $185,000 as curable loss, since expansion is feasible.
Option A deducts $185,000 as curable loss because expansion is feasible. Curability requires a loss to exist and a benefit at least equal to the cost, and here no benefit or penalty is supported.
Option B: Deduct $185,000 as incurable loss, since the design is old.
Option B deducts $185,000 as incurable loss because the design is old. Age of design alone does not prove a market penalty, and the evidence shows none.
Option D: Call the layout physical deterioration without worn equipment evidence.
Option D calls the layout physical deterioration without evidence of worn equipment. Physical deterioration is wear and tear, and a layout difference is not shown to be either physical or functional loss here.
No penalty, no deduction
If the market does not pay less for the feature, there is no functional loss to deduct, whatever the fix would cost.
How to use: Use this when a stem gives a cure cost but no supported market penalty.
Exam Tip
A cost to change a feature is not itself a loss; look for market evidence of a penalty before deducting.
Common Mistakes to Avoid
- -Treating any cure cost as functional obsolescence
- -Assuming an older design by itself lowers value
- -Calling a layout issue physical deterioration
Concept Deep Dive
Analysis
This question tests whether a cost alone proves functional obsolescence. Functional loss must be shown by market evidence such as a rent, price or vacancy penalty. If investigation finds no supported penalty, an expansion cost should not be deducted as demonstrated loss.
Background Knowledge
Functional obsolescence is a loss in value from design or layout deficiencies relative to market standards. It must be supported by market evidence, since neither costs nor incomes alone are direct evidence of market value.
Real-World Application
An apartment building has an older laundry room layout. Rents and vacancy match similar buildings with modern layouts, so the appraiser makes no functional deduction for the owner's planned expansion.
More Cost Approach Questions
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Previous Question
The improvements have a cost new of $540,000 and total depreciation from other causes of $75,000. In addition, an external influence causes an annual net income loss of $3,200, which is allocated entirely to the improvements and is not already counted in the other depreciation. The appropriate capitalization rate for this loss is 8%. The site value, which already reflects any site influence, is $105,000. What value does the cost approach indicate?
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The improvements on a property have a total economic life of 60 years and an effective age of 24 years. How much remaining economic life do they have?