A sound building has supported market loss from insufficient ceiling clearance, but no cure analysis. What follows?
Correct Answer
D) Functional obsolescence; curability is still to be analyzed.
A supported price penalty for insufficient clearance is functional; its curability still requires supported full costs and benefits. Leasing the space does not by itself establish no utility loss.
Why This Is the Correct Answer
Option D is correct because a supported market penalty caused by insufficient ceiling clearance is a design deficiency, which is functional obsolescence. Since no cure analysis has been done, curability remains open: it is curable only if the cost to correct it is equal to or less than the resulting value gain.
Why the Other Options Are Wrong
Option A: No loss is possible if any tenant is willing to lease it.
Option A claims no loss is possible if any tenant will lease the space. Leasing alone does not show the absence of a utility loss, since a deficient building can lease at a lower rent or to fewer users.
Option B: Physical deterioration, shown by the ceiling height.
Option B calls the loss physical deterioration. The building is sound, and low ceiling height is a design shortcoming rather than wear and tear.
Option C: External obsolescence, shown by changing tenant preferences.
Option C calls it external obsolescence from changing tenant preferences. External obsolescence comes from conditions outside the property, while inadequate ceiling clearance is a feature of the building itself.
Design flaw means functional
Worn out is physical, poorly designed is functional, and outside forces are external.
How to use: Use this to sort a stated loss into the right depreciation category.
Exam Tip
Classify the loss by its cause first, then decide curability only from cost-to-cure versus benefit evidence.
Common Mistakes to Avoid
- -Calling a design deficiency physical deterioration
- -Treating a building-specific flaw as external obsolescence
- -Assuming that a leased building has no functional loss
Concept Deep Dive
Analysis
This question tests classification of depreciation. A design deficiency such as insufficient ceiling clearance in a sound building is a loss in utility from the improvement itself, which is functional obsolescence. Whether it is curable depends on comparing the cost to cure with the value benefit.
Background Knowledge
Functional obsolescence is loss in value from a deficiency or superadequacy in the improvement's design or layout. It is curable when the cost to cure is equal to or less than the value gained, and the curability tests are the same as for physical deterioration.
Real-World Application
A house is in good repair, but its finished basement has low ceiling height that lowers its price compared with newer homes. The appraiser classifies the loss as functional and compares the cost of lowering the floor with the value gain to judge curability.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
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A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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Previous Question
An appraiser estimates the current cost new of a 2,400-sf building at $205 per square foot. The effective age is 16 years and the total economic life is 64 years. Using straight-line age-life depreciation with no salvage value, and with no other losses, what is the depreciated cost of the improvements, excluding any site value?
Next Question
The cost new of the improvements is $310,000. The dwelling has an actual age of 15 years, an estimated effective age of 12 years and a total economic life of 60 years. What is the depreciation by the straight-line age-life method?