Market evidence shows a sound warehouse’s 12-foot clearance causes a utility-related price penalty for its competitive use. What loss category fits?
Correct Answer
D) Functional obsolescence.
The verified value loss from insufficient internal clearance is functional obsolescence. A 12-foot clearance alone would not establish obsolescence for every warehouse use; the relevant competitive market and actual utility determine the effect. Physical wear and outside influences are separate causes.
Why This Is the Correct Answer
Option D is correct because functional obsolescence is the loss in value caused by the design of the property itself. The warehouse is sound, so the penalty is not from wear, and the 12-foot clearance is an internal design feature that market evidence shows limits its competitive utility.
Why the Other Options Are Wrong
Option A: Physical deterioration.
Option A, physical deterioration, refers to wear and tear or decay. The warehouse is described as sound, and the penalty comes from its clearance height, not from physical wear.
Option B: External obsolescence.
Option B, external obsolescence, is loss from influences outside the property, such as market or locational conditions. The clearance height is part of the building's own design, so the cause is internal, not external.
Option C: Deferred maintenance.
Option C, deferred maintenance, describes repairs that have been put off, which is a form of physical deterioration. A low clearance is not a maintenance item and cannot be fixed by routine repairs.
Wear, Design, Outside
Physical is wear, functional is design, external is outside the lot lines. Ask where the problem lives: in the materials, in the plan, or beyond the property.
How to use: Use this three-way sort to classify any depreciation item.
Exam Tip
If the improvement is sound and the problem is a built-in design feature, think functional obsolescence. Check that the market evidence actually shows a loss.
Common Mistakes to Avoid
- -Calling a design limitation physical deterioration
- -Labeling an internal design feature as external obsolescence
- -Assuming a feature is obsolete without market evidence
Concept Deep Dive
Analysis
This question tests classification of depreciation by cause. A low ceiling clearance is a design characteristic of the building itself, and the market shows it reduces utility for the competitive use. Loss caused by the property's own design is functional obsolescence.
Background Knowledge
Depreciation is grouped into physical deterioration, functional obsolescence and external obsolescence. Functional obsolescence arises from design, layout or features of the improvement relative to market standards, and its effect depends on the relevant competitive market.
Real-World Application
An appraiser values a distribution warehouse in a market where tenants need taller clear heights for modern racking. Paired sales show older low-clearance buildings selling at a discount, so she measures that loss as functional obsolescence.
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