A superadequacy under a reproduction cost basis is measured including:
Correct Answer
C) Its excess cost, less any contribution, adjusted for depreciation charged
Why this is correct: Under reproduction cost (an exact duplicate), the superadequate feature's full cost is included in the cost new. The deduction for functional obsolescence must therefore remove the excess cost (the amount not supported by market value), while also accounting for any physical depreciation already charged on that feature. Why the other choices are wrong: Only the annual cost of operating the feature is wrong; operating costs are considered but the primary measure is excess capital cost. Its full original installed cost with no further adjustment is wrong; this would overstate the obsolescence if the feature has some value or has depreciated. Nothing, since superadequacies add value is wrong; by definition, a superadequacy costs more than it contributes. Exam tip: Reproduction cost includes it, so you must deduct the excess; replacement cost excludes it from the start.
Why This Is the Correct Answer
Excess cost, less any contribution, adjusted for depreciation already charged is the complete formulation and it accounts for all three moving parts. Excess cost is the starting point because only the unsupported portion is obsolescence. Subtracting the contribution recognizes that most superadequacies are worth something, just not what they cost. Adjusting for depreciation already charged prevents double counting between the physical deterioration line and the functional obsolescence line, which is the error the careful wording is designed to prevent.
Why the Other Options Are Wrong
Option A: Only the annual cost of operating the feature
Excess operating cost is a real component of some functional obsolescence measurements, typically capitalized into a lump sum, but it is a supplement rather than the primary measure. The dominant element under a reproduction basis is the excess capital cost that was actually included in the cost new. Limiting the measurement to operating cost would leave most of the obsolescence undeducted.
Option B: Its full original installed cost with no further adjustment
Deducting full installed cost with no adjustment assumes the feature contributes nothing and has not depreciated, both of which are ordinarily false. A superadequate feature usually adds some value, and if it is years old it has physically deteriorated along with the rest of the building. Taking the full original figure overstates the obsolescence and understates the improvements.
Option D: Nothing, since superadequacies add value
Superadequacies do not add value in proportion to their cost, which is precisely what makes them a form of functional obsolescence. A ten-thousand-dollar commercial range in a modest kitchen may add two thousand dollars to value, leaving eight thousand of unsupported cost. Saying they add value confuses contributing something with contributing enough to justify the expenditure.
Reproduce and Deduct, Replace and Skip
Reproduction copies everything, including the mistakes, so you must deduct the mistake afterward. Replacement builds a sensible equivalent, so the mistake never appears. Which basis you chose determines whether there is anything to subtract.
How to use: Identify the cost basis before computing any superadequacy deduction. Under reproduction, work through excess cost, minus contribution, minus depreciation already charged. Under replacement, expect no deduction for the item at all.
Exam Tip
The double-counting trap is the point of these items. If physical deterioration was already charged against the superadequate component, that amount must be netted out of the functional obsolescence deduction.
Common Mistakes to Avoid
- -Deducting a superadequacy from a replacement cost estimate that never included it
- -Using full installed cost as the obsolescence figure
- -Double counting by charging both physical depreciation and full excess cost on the same component
Concept Deep Dive
Analysis
A superadequacy is a component that costs more than it contributes to value, and how it is handled in the cost approach depends entirely on which cost basis was used. Reproduction cost is the cost to construct an exact duplicate of the subject using the same materials, design, and standards, so it necessarily includes the superadequate feature at full cost. Replacement cost is the cost to construct a building of equivalent utility using current materials and design, so a rational modern builder would simply omit the superadequacy and it never enters the estimate. Under reproduction cost the appraiser must therefore deduct it as functional obsolescence, and the deduction is not the raw installed cost. It is the excess cost, meaning what was spent beyond what the market values, reduced by whatever the feature does contribute, and adjusted for physical depreciation already charged against that same component elsewhere in the analysis so the same dollars are not deducted twice. Any excess operating cost the feature imposes may add a further increment measured by capitalizing the annual excess.
Background Knowledge
You need the difference between reproduction cost and replacement cost and how each treats superadequacies, plus the categories of functional obsolescence: curable and incurable deficiency, and curable and incurable superadequacy. You should also know that excess operating cost is measured by capitalizing the annual excess, and that depreciation lines must not overlap.
Real-World Application
An appraiser using reproduction cost on a house with a $60,000 recording studio finds it contributes about $12,000 in this market and has already been charged 30 percent physical depreciation. She computes the excess, nets the contribution and the depreciation already taken, and reports the resulting functional obsolescence separately from the physical line.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
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