Market data show that a sound warehouse has lost value because of insufficient internal clearance. The cost to cure and the resulting value benefit have not been analyzed. What can be concluded?
Correct Answer
D) Functional obsolescence is indicated; curability needs further economic evidence.
The supported clearance inadequacy is functional, but economic incurability requires full cure-cost and benefit evidence. Mere continued storage use also does not prove no loss; market reaction determines the effect.
Why This Is the Correct Answer
Option D is correct because low internal clearance is a design deficiency in the building, which is functional obsolescence. Whether it is curable depends on comparing the cost to cure with the value benefit, and that analysis has not been made, so curability needs further economic evidence.
Why the Other Options Are Wrong
Option A: Physical deterioration is shown by the low clearance.
Option A says the low clearance shows physical deterioration. The building is sound, and low clearance is a design limitation, not wear or decay.
Option B: The loss is external obsolescence, because logistics users’ preferences have changed.
Option B calls the loss external obsolescence because logistics users' preferences have changed. The deficiency is in the building's own design, so the loss is functional even though user preferences explain why the market penalizes it.
Option C: No loss is possible because goods can still be stored.
Option C says no loss is possible because goods can still be stored. Continued use does not prove there is no loss; market data show a value loss from the clearance.
Design Inside Means Functional
A shortfall in the building's own design is functional. Cost to cure versus value added decides whether it is curable.
How to use: Use this to separate the category of loss from the curability question.
Exam Tip
Do not label an item curable or incurable unless the question gives the cost and benefit needed to decide.
Common Mistakes to Avoid
- -Calling a design limitation physical deterioration
- -Classifying an in-building deficiency as external because market tastes changed
- -Assuming continued use means no loss in value
Concept Deep Dive
Analysis
This question tests classifying a design limitation and recognizing what evidence is needed to decide curability. Insufficient clearance in a sound warehouse is a utility problem in the improvement, which is functional. Without cure-cost and value-benefit data, curability cannot be determined.
Background Knowledge
Functional obsolescence is a loss in value from a deficiency or superadequacy in the improvement's design, layout or utility. The tests for curability of functional obsolescence are the same as for physical deterioration: an item is curable when the cost to correct it is equal to or less than the resulting benefit. Without those figures, the classification of curability remains open.
Real-World Application
An appraiser finds that a well-maintained older warehouse rents for less than newer buildings because its ceiling clearance is too low for modern racking. She classifies the loss as functional and gathers cost-to-raise-roof data before deciding curability.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
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A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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