A mill closure causes area rents to fall 8% and a verified loss of subject income. What evidence supports an income-based external-loss estimate?
Correct Answer
B) A supported attributable net-income forecast and compatible capitalization or discount treatment.
A verified external effect can be measured through supported net-income loss or a compatible gross-loss multiplier. An 8% gross rent drop alone does not establish identical NOI or value percentage changes. Analyze expenses, duration, risk and allocation rather than adding a percentage to cost new.
Why This Is the Correct Answer
Option B is correct because an income-based external-loss estimate needs a supported forecast of the net income loss attributable to the outside cause. That loss is then converted to value with a compatible capitalization rate, gross income multiplier or discount treatment. Both the income difference and the rate should be market supported.
Why the Other Options Are Wrong
Option A: An 8% addition to improvement cost new, applied directly to the replacement cost estimate.
Option A adds 8% to improvement cost new and applies it to the replacement cost estimate. External obsolescence is a loss, so adding to cost new moves in the wrong direction and does not measure the income effect.
Option C: An 8% physical-wear deduction applied to the land value and the site improvements.
Option C applies an 8% physical-wear deduction to land value and site improvements. A mill closure is an outside cause, not physical wear, and a gross rent percentage does not measure the attributable net income loss.
Option D: A longer remaining economic life for the building, reflecting the lower rents.
Option D gives the building a longer remaining economic life to reflect lower rents. Falling rents from an outside cause do not lengthen economic life, and this does not measure the income loss.
Lost income, capitalized
For an income-based external loss, measure the net income lost to the outside cause, then convert it to value with a market rate.
How to use: Use this when a question asks how income data measure external obsolescence.
Exam Tip
Watch for choices that apply a gross rent percentage directly to cost or value; net income and a supported rate are needed.
Common Mistakes to Avoid
- -Equating a gross rent decline with the same percentage value loss
- -Treating an external loss as physical deterioration
- -Using an unsupported capitalization rate
Concept Deep Dive
Analysis
This question tests how to measure external obsolescence using income evidence. A verified external loss can be measured by capitalizing or discounting the net income loss attributable to the outside cause, using market-supported rates. An 8% drop in area rents does not by itself translate into an 8% change in net income or value.
Background Knowledge
External obsolescence can be measured by capitalizing the annual income loss caused by the outside influence, using direct capitalization or a gross income multiplier. The rent difference and the rate should both be market supported. The total loss may need allocation between land and improvements.
Real-World Application
After a regional mill closes, rents at a rental duplex fall and vacancies rise. The appraiser estimates the net income loss attributable to the closure, capitalizes it at a market-derived rate, and allocates the resulting external loss between site and improvements.
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