Market evidence isolates a warehouse-design deficiency causing value loss. Qualified analysis establishes that the only legally/physically feasible effective cure has total relevant cost $200,000 and restores $90,000 of value; no cheaper effective alternative or omitted benefit exists. Which stated classification follows?
Correct Answer
B) Economically incurable functional obsolescence under the stated comparison
The stipulated design deficiency causes a supported market loss. Under the stated complete evidence, the only feasible cure costs $200,000 while restoring $90,000 of value, and no cheaper effective cure exists. That supports economically incurable functional obsolescence in this exercise. Age, tilt-up construction or old equipment alone would not establish it.
Why This Is the Correct Answer
Option B is correct because the loss comes from a design deficiency, which is functional obsolescence, and curing it is not economically feasible. Functional obsolescence is curable if the cost to cure is equal to or less than the value added. Since $200,000 cost to cure is greater than $90,000 of value restored, the item is economically incurable.
Why the Other Options Are Wrong
Option A: Curable physical deterioration from wear, because the warehouse can be modified
Option A calls it curable physical deterioration from wear because the warehouse can be modified. The cause is a design deficiency, not wear, and physically being able to modify something does not make it economically curable when $200,000 buys back only $90,000.
Option C: External obsolescence caused by neighborhood market forces alone
Option C calls it external obsolescence from neighborhood market forces alone. The stem isolates a design deficiency in the building itself, which is functional, not a cause outside the property.
Option D: Incurable physical deterioration from age, because the design cannot change
Option D calls it incurable physical deterioration from age because the design cannot change. The problem is a design flaw rather than age-related wear, and the issue is that the cure is not economical, not that change is impossible.
Cure only if it pays
If the cost to cure is equal to or less than the value it adds, it is curable; if the cost is more, it is incurable.
How to use: Use this to classify any physical or functional item as curable or incurable.
Exam Tip
First identify the cause (wear, design or outside influence), then compare cost to cure with value added to decide curability.
Common Mistakes to Avoid
- -Classifying a design flaw as physical deterioration
- -Calling an item curable just because it is physically possible to fix
- -Labeling a building-specific deficiency as external obsolescence
Concept Deep Dive
Analysis
This question tests classifying depreciation by cause and curability. A design deficiency is functional obsolescence, and it is curable only if the cost to cure is equal to or less than the value added. Here the only feasible cure costs $200,000 and restores only $90,000, so it is economically incurable functional obsolescence.
Background Knowledge
Accrued depreciation is divided into physical deterioration, functional obsolescence and external obsolescence. Physical and functional items are classified as curable or incurable by comparing the cost to cure with the value added. External obsolescence arises from causes outside the property and is generally treated as incurable by the owner.
Real-World Application
An appraiser values a warehouse with low clear height that buyers penalize. Raising the roof would cost far more than the value it would restore, based on market data. The appraiser classifies the loss as incurable functional obsolescence in the cost approach.
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