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
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.
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