A building suffers from functional obsolescence due to an outdated HVAC system. The cost to cure is $85,000, but the value added would only be $60,000. How should this be treated in the cost approach?
Correct Answer
B) Deduct $60,000 for incurable functional obsolescence
When cost to cure exceeds value added, the obsolescence is incurable. The depreciation is measured by the loss in value, which is $60,000, not the cost to cure.
Why This Is the Correct Answer
Option B correctly identifies this as incurable functional obsolescence because the $85,000 cost to cure exceeds the $60,000 value that would be added. Since it's economically unfeasible to cure, the obsolescence is incurable. For incurable obsolescence, the depreciation deduction equals the loss in value to the property, which is $60,000 - the amount by which the outdated HVAC system reduces the property's market value. The cost to cure ($85,000) is irrelevant for the depreciation calculation when the obsolescence is incurable.
Why the Other Options Are Wrong
Option A: Deduct $85,000 for curable functional obsolescence
This incorrectly treats the obsolescence as curable and uses the cost to cure ($85,000) as the depreciation amount. Since the cost exceeds the value added, this obsolescence is incurable, not curable, and the depreciation should be measured by value loss, not cost to cure.
Option C: Deduct $25,000 for incurable functional obsolescence
This incorrectly calculates the depreciation as the difference between cost to cure and value added ($85,000 - $60,000 = $25,000). For incurable functional obsolescence, the depreciation equals the full loss in value ($60,000), not the difference between cost and value.
Option D: No adjustment needed
This ignores the functional obsolescence entirely, which would result in an overvaluation of the property. The outdated HVAC system clearly reduces the property's value and must be accounted for in the cost approach.
The CURE Test
CURE = Cost Under Reasonable Economics. If cost to cure > value added, it's NOT reasonable economics, so it's incurable. For incurable, use 'Value Loss' not 'Cost Loss' - remember 'VL not CL for incurable'
How to use: When you see cost to cure vs. value added, immediately apply the CURE test. If cost > value, think 'incurable' and use the value loss amount. If cost ≤ value, think 'curable' and use the cost to cure amount.
Exam Tip
Always compare cost to cure with value added first to determine curability, then remember: curable = deduct cost to cure, incurable = deduct value loss (the smaller number when cost > value).
Common Mistakes to Avoid
- -Using cost to cure for incurable obsolescence instead of value loss
- -Calculating depreciation as the difference between cost and value for incurable items
- -Failing to perform the economic feasibility test to determine curability
Concept Deep Dive
Analysis
This question tests the critical distinction between curable and incurable functional obsolescence in the cost approach to valuation. Functional obsolescence occurs when a building component is outdated or inadequate by current standards, reducing the property's value. The key determinant of whether obsolescence is curable or incurable is the economic feasibility test: if the cost to cure exceeds the value that would be added by the improvement, the obsolescence is considered incurable. When obsolescence is incurable, the depreciation adjustment equals the loss in value (what the market recognizes), not the hypothetical cost to fix the problem.
Background Knowledge
In the cost approach, functional obsolescence is depreciation caused by outdated design, materials, or systems that reduce a property's desirability and value. The economic feasibility test determines curability: if cost to cure ≤ value added, it's curable; if cost to cure > value added, it's incurable. For curable obsolescence, deduct the cost to cure; for incurable obsolescence, deduct the loss in value.
Real-World Application
An appraiser evaluating a 1980s office building finds the HVAC system is outdated. Replacing it would cost $85,000 but only add $60,000 in value due to the building's age and location. The appraiser treats this as $60,000 incurable functional obsolescence, recognizing that no rational owner would spend $85,000 to gain only $60,000 in value.
More Math & Stats Questions
What is the area of a triangular lot with a base of 120 feet and a height of 80 feet?
An irregular lot has the following measurements: Side A = 100', Side B = 150', Side C = 120', Side D = 180'. If the lot can be divided into two rectangles (100' × 150' and 120' × 30'), what is the total area?
A property has a potential gross income of $180,000, vacancy and collection loss of 7%, and operating expenses of $65,000. What is the NOI?
A property generates $120,000 in net operating income and is valued at $1,500,000. What is the capitalization rate?
A building has potential gross income of $180,000, vacancy and collection loss of 8%, and operating expenses of $54,000. What is the net operating income?
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
USPAP (Ethics & Standards)
15% of exam
Report Writing & Compliance
10% of exam