A building suffers from functional obsolescence due to an outdated HVAC system.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
C) Deduct $60,000 for incurable functional obsolescence
Why this is correct: In the cost approach, obsolescence is 'incurable' when the cost to cure exceeds the value added. The deduction is the loss in value ($60,000), not the cost to cure ($85,000). Why the other choices are wrong: 'Deduct $85,000 for curable functional obsolescence' is wrong because the condition is incurable, and the deduction should be the loss in value. 'Deduct $25,000 for incurable functional obsolescence' incorrectly subtracts the value added from the cost to cure. 'No adjustment needed' is wrong because there is a demonstrated loss in value. Exam tip: For functional obsolescence, compare cost to cure vs. value added. If cost > value added, it's incurable and you deduct the loss in value.
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the depreciation deduction equals the loss in value to the property, which is $60,000 - the amount by which the outdated HVAC system reduces the property's market value.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
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.
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