A reproduction-cost base includes a superadequate feature. What should its loss analysis consider?
Correct Answer
C) Supported excess cost/value contribution and any overlapping depreciation already deducted.
Under a replica basis, a feature’s reproduced cost may include an excess unsupported by its market contribution. Measure the supported loss relative to the chosen base and avoid counting physical loss or excess operating burdens twice. Original historical cost alone is not the current deduction.
Why This Is the Correct Answer
Option C is correct because a reproduced superadequate feature can cost more than it contributes, so the loss analysis considers the supported excess of cost over value contribution. It must also account for any depreciation already deducted on that feature so the loss is not counted twice.
Why the Other Options Are Wrong
Option A: One year’s added operating cost for the feature, treated as the whole loss in value.
Option A treats one year's added operating cost for the feature as the whole loss in value. A single year's expense does not measure the value effect of the feature, and it ignores the excess of cost over contribution.
Option B: The feature’s full untrended original installed cost, without regard to contribution.
Option B uses the feature's full untrended original installed cost without regard to contribution. Historical original cost is not a current measure of the loss, and the loss depends on how the feature's cost compares with its market contribution.
Option D: No deduction, since a reproduced feature adds value equal to its cost in this market.
Option D assumes no deduction because a reproduced feature adds value equal to its cost. A superadequacy by definition costs more than the market will pay for it, so cost does not equal contribution.
Cost Over Contribution
For a superadequacy, the loss lies in the gap between what the feature costs and what it adds, net of depreciation already charged.
How to use: Use this whenever a reproduction-cost estimate includes an overbuilt feature.
Exam Tip
Note whether the cost base is reproduction or replacement, because that changes how a superadequacy appears in the analysis.
Common Mistakes to Avoid
- -Assuming a feature's cost equals its contribution to value
- -Using historical original cost as the current loss
- -Deducting physical deterioration and excess cost on the same item twice
Concept Deep Dive
Analysis
This question tests how to treat a superadequacy when the cost base is reproduction cost, which replicates the feature. The loss relates to the excess of the feature's cost over its market contribution, measured relative to the chosen base. The analysis also avoids counting physical deterioration already charged against the same feature twice.
Background Knowledge
A superadequacy is a feature whose cost exceeds the value it adds in the market. Reproduction cost includes the excess cost of replicating it, while replacement cost may omit it. Contribution to value is measured by market evidence, so a feature may add less than it cost to build.
Real-World Application
An appraiser uses reproduction cost for a historic home with an elaborate custom ballroom that buyers pay little extra for. She measures the excess of its reproduced cost over its market contribution, taking care not to deduct physical wear on the ballroom a second time.
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A deficiency can be cured today at a cost of $22,000, and the cure would add $25,000 to value. The current cost new of the improvements already includes $14,000, at current prices, for installing the equivalent item in new construction. What deduction for the deficiency avoids counting that amount twice?
Next Question
An appraiser estimates the current cost new of the improvements at $520,000 and depreciation at 20% of that cost. A separate improvement loss of $28,000 does not overlap that depreciation. The site is valued at $140,000, which already reflects any site influences. What is the total indicated value by the cost approach?