A 12,000-square-foot retail strip center was constructed in 2005 with four identical 3,000-sf tenant spaces, each featuring a dedicated 200-sf enclosed storage room. Market analysis reveals that today’s comparable centers allocate only 75 sf of storage per unit, and tenants consistently lease adjacent spaces or use off-site storage due to the excess on-site capacity. The appraiser estimates the incremental construction cost of the excess 125 sf per unit (500 sf total) was $8,500 at time of construction. Physical depreciation has reduced the building’s reproduction cost new by 22%. What is the most supportable measure of functional obsolescence caused by this superadequacy?
Correct Answer
C) $0, because the excess storage does not impair utility or marketability and may provide flexibility.
Functional obsolescence requires evidence of actual market resistance or economic loss—not merely deviation from current norms. USPAP Standards Rule 1-4(b) requires that functional obsolescence be supported by market data showing diminished desirability or value. Here, tenants are leasing the spaces despite excess storage and even using off-site alternatives, indicating no adverse market reaction; the feature provides flexibility rather than detriment. Thus, no functional obsolescence exists. Option A is incorrect because original cost alone does not establish obsolescence; option B erroneously applies physical depreciation to a non-value-impairing feature; option D presumes lost income without evidence—no vacancy or rent discount is cited. AO-6 reinforces that absence of market evidence negates quantification.
Why This Is the Correct Answer
There is no reported rent discount, no vacancy penalty and no evidence of buyer resistance tied to the storage rooms; the tenants lease the units as built. Without demonstrated economic loss there is no obsolescence to quantify, so the supportable measure is zero. The flexibility of extra storage may even be neutral to mildly positive, which is the opposite of a value penalty. Any deduction here would be an unsupported adjustment.
Why the Other Options Are Wrong
Option A: $8,500, because superadequacy is always measured at original cost.
Original cost of the excess component is at most a starting point in the breakdown method, never a standalone conclusion, and it is certainly not 'always' the measure. Even when a superadequacy is real, the calculation removes depreciation already charged and adds any excess ownership cost, and it is still capped by what the market actually loses. The absolute word 'always' is the tell that this option is wrong.
Option B: $6,630, calculated as $8,500 × (1 − 0.22), reflecting physical depreciation applied to the superadequate component.
Applying the 22 percent physical depreciation factor to $8,500 produces a tidy number and no meaning. It presumes the obsolescence exists, then depreciates it, which double-counts against a component that has not been shown to reduce value at all. Mechanically combining a cost figure with a depreciation percentage is exactly the trap this question sets.
Option D: The present value of lost rental income attributable to the underutilized space, capitalized at the market rate.
Capitalizing lost rental income is the correct technique for an incurable superadequacy that genuinely depresses income, but it requires an actual rent loss to capitalize. The stem reports no rent discount, no concessions and no vacancy attributable to the storage rooms, so the income stream to capitalize is zero. Presuming a loss and then discounting it is speculation, not measurement.
Excess Without Penalty Is Free
Extra storage, extra parking, an oversized foundation: none of it costs value unless someone can point to the rent, the price or the days on market that suffered. Ask 'who paid for this excess and how much did they lose?' If the answer is nobody and nothing, the deduction is zero.
How to use: Scan superadequacy stems for a rent differential, a vacancy figure or a paired sale. If none appears, the answer is almost certainly zero, and every dollar figure in the option list is decoration.
Exam Tip
Distrust any answer choice containing the word 'always'; on measurement questions it is nearly always the wrong choice.
Common Mistakes to Avoid
- -Deducting the construction cost of an excess component with no evidence of value loss
- -Applying a physical depreciation percentage to a functional obsolescence figure
- -Capitalizing a rent loss that the fact pattern never establishes
Concept Deep Dive
Analysis
A superadequacy is a component that exceeds what the market requires, and it is one form of functional obsolescence. But the same rule that governs deficiencies governs excess: the appraiser must show the market actually penalizes the feature before deducting anything. The stem supplies a tempting cost figure for the excess square footage and a physical depreciation percentage, inviting a mechanical calculation. It also supplies the fact that undermines the calculation, namely that tenants continue to lease these spaces and no rent discount or vacancy problem is reported. Excess capacity that costs the owner nothing in rent and nothing meaningful in carrying cost is not measurable obsolescence.
Background Knowledge
You need to understand superadequacy as excess capacity or quality beyond market requirements, and that it is measured by the value the market withholds, often through capitalized rent loss or excess operating cost, rather than by construction cost alone. You also need to recognize that physical depreciation percentages apply to physical components, not to a hypothetical obsolescence figure.
Real-World Application
An appraiser valuing a strip center notes that each suite has more back-of-house storage than newer competitors, then checks asking rents and lease-up times at both and finds no spread, so the workfile documents the superadequacy and records no deduction.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
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