A comparable sold for $395,000. Its site is valued at $105,000 and the cost new of its improvements was $340,000. What accrued depreciation does this sale indicate?
Correct Answer
A) $50,000
Why this is correct: the sale price less the site value is what buyers paid for the improvements, and depreciation is the shortfall against their cost new. Calculation: $395,000 - $105,000 = $290,000; $340,000 - $290,000 = $50,000. Why the other choices are wrong: $55,000 subtracts cost new from the whole sale price, leaving the site in; $105,000 is the site value; $290,000 is the depreciated contribution rather than the depreciation.
Why This Is the Correct Answer
Why this is correct: the sale price less the site value is what buyers paid for the improvements, and depreciation is the shortfall against their cost new. Calculation: $395,000 - $105,000 = $290,000; $340,000 - $290,000 = $50,000. Why the other choices are wrong: $55,000 subtracts cost new from the whole sale price, leaving the site in; $105,000 is the site value; $290,000 is the depreciated contribution rather than the depreciation.
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Previous Question
A 12,000-square-foot retail strip center was constructed in 2005 with four identical 3,000-sf tenant spaces, each featuring a dedicated 200-sf enclosed storage room. Market analysis reveals that today’s comparable centers allocate only 75 sf of storage per unit, and tenants consistently lease adjacent spaces or use off-site storage due to the excess on-site capacity. The appraiser estimates the incremental construction cost of the excess 125 sf per unit (500 sf total) was $8,500 at time of construction. Physical depreciation has reduced the building’s reproduction cost new by 22%. What is the most supportable measure of functional obsolescence caused by this superadequacy?
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Remaining economic life matters to a lender primarily because: