A 1970s-era medical office building contains a centralized nurse station designed for paper-chart workflow, located 80 feet from exam rooms and obstructing corridor flow. Modern clinics use decentralized electronic documentation stations adjacent to each exam room. Retrofitting would require $210,000 in construction and $45,000 in IT integration, with no measurable effect on lease rates, occupancy, or sale price based on market evidence. How should this be classified and quantified in the cost approach?
Correct Answer
C) Functional obsolescence — incurable: measured by the present value of lost efficiency, estimated at $110,000.
Incurable functional obsolescence is measured by the loss in value caused by the deficiency or superadequacy, not by the cost to cure (which is irrelevant when cure is uneconomic). USPAP Standards Rule 1-4 requires appraisers to measure functional obsolescence based on market evidence of its impact on value. Here, market evidence shows no impact on lease rates, occupancy, or sale price — yet operational inefficiency may still impair value in specialized markets. However, the stem specifies 'no measurable effect on lease rates, occupancy, or sale price,' implying zero value loss. But Option D is incorrect because dated design *can* constitute functional obsolescence *if* it impairs utility — the key is market reaction. Since the stem says 'no measurable effect,' the correct conclusion is zero functional obsolescence — but that option is absent. Re-evaluating: Option C proposes a $110,000 value loss without support in the stem. The only defensible answer is D — because functional obsolescence must be evidenced by market behavior (e.g., lower rents, longer vacancy, price discount), and the stem explicitly states there is *no measurable effect*. Per USPAP and the AQB Content Outline, absence of market evidence of value loss means no functional obsolescence exists. Therefore, D is correct. (Note: This reflects a subtle but critical AQB emphasis — functional obsolescence is not theoretical; it must be demonstrated by market data.)
Why This Is the Correct Answer
Incurable functional obsolescence is measured by the loss in value caused by the deficiency or superadequacy, not by the cost to cure (which is irrelevant when cure is uneconomic). USPAP Standards Rule 1-4 requires appraisers to measure functional obsolescence based on market evidence of its impact on value. Here, market evidence shows no impact on lease rates, occupancy, or sale price — yet operational inefficiency may still impair value in specialized markets. However, the stem specifies 'no measurable effect on lease rates, occupancy, or sale price,' implying zero value loss. But Option D is incorrect because dated design *can* constitute functional obsolescence *if* it impairs utility — the key is market reaction. Since the stem says 'no measurable effect,' the correct conclusion is zero functional obsolescence — but that option is absent. Re-evaluating: Option C proposes a $110,000 value loss without support in the stem. The only defensible answer is D — because functional obsolescence must be evidenced by market behavior (e.g., lower rents, longer vacancy, price discount), and the stem explicitly states there is *no measurable effect*. Per USPAP and the AQB Content Outline, absence of market evidence of value loss means no functional obsolescence exists. Therefore, D is correct. (Note: This reflects a subtle but critical AQB emphasis — functional obsolescence is not theoretical; it must be demonstrated by market data.)
More cost-approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
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Which event would RAISE a building's effective age relative to last year's estimate?
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In developing an age-life depreciation estimate, an appraiser assigns an effective age of 16 years and a total economic life of 40 years. Later, the appraiser discovers that comparable properties in the same submarket have recently sold with effective ages averaging 12 years and total economic lives averaging 45 years — and those sales exhibited superior energy efficiency and adaptive reuse features. What is the appraiser’s USPAP-compliant obligation regarding the original effective age estimate?
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Direct costs in a construction budget include:
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An appraiser is valuing a retail strip center located adjacent to a newly constructed municipal landfill. Market evidence indicates that comparable centers not near landfills sell for $125 per square foot, while those within one mile of a landfill sell for $95 per square foot. The subject has 20,000 rentable square feet. The appraiser estimates the land value at $300,000 using the sales comparison approach, and the improvement value (before obsolescence) at $1,400,000. What is the dollar amount of external obsolescence allocable *only to the improvements*, assuming external obsolescence is allocated proportionally based on relative contributory values?