An appraiser has isolated the annual excess operating cost of a superadequate system and has forecast those costs over a finite period. How can this recurring cost be measured?
Correct Answer
A) Discount the excess costs at their forecast times, with cure and overlap checked separately.
A supported forecast of excess operating cost can be discounted over the supported remaining period using a compatible discount rate. Do not substitute a gross bill, area share or unsupported reproduction subtraction. Also analyze cure economics and overlap; an excess-cost component is not automatically the full superadequacy loss.
Why This Is the Correct Answer
Option A is correct because a forecast set of cash flows is discounted at a compatible yield or discount rate in DCF analysis. Here the excess operating costs are forecast over a finite period, so discounting them at their forecast times measures the present value of that recurring burden. Checking cure and overlap separately keeps the component from being treated as the whole superadequacy loss or double counted.
Why the Other Options Are Wrong
Option B: Subtract the whole original system cost from the building, without regard to its contributory value.
Option B subtracts the whole original system cost from the building without regard to its contributory value. That ignores whether the system adds some value and does not measure the recurring excess operating cost being asked about.
Option C: Deduct 8% of building area as proof of value loss.
Option C deducts 8% of building area as proof of value loss. A share of building area is not a measure of excess operating cost and has no supported link to the loss in this analysis.
Option D: Declare the system incurable because it is large.
Option D declares the system incurable because it is large. Size alone does not determine curability, and labeling it incurable does not measure the recurring excess-cost component.
Discount the extra bills
A superadequate system's extra yearly costs are a stream of future bills. Bring that stream back to today with a supported discount rate.
How to use: Use this when a question asks how to measure recurring excess costs over a finite period.
Exam Tip
Match the measurement tool to the evidence given; a finite forecast plus a discount rate points to discounting.
Common Mistakes to Avoid
- -Deducting the full original cost of a superadequate item
- -Calling a component incurable based only on its size
- -Ignoring overlap between superadequacy and other deductions
Concept Deep Dive
Analysis
This question tests measurement of a recurring excess operating-cost component of a superadequacy. When an analysis supplies a supported finite forecast and a compatible discount rate, the excess costs can be discounted at their forecast times to a present value. Cure economics and possible overlap with other deductions must still be checked separately.
Background Knowledge
A superadequacy is a component whose capacity or quality exceeds market requirements. Its loss can include the extra cost of ownership less any added value it provides. Recurring excess costs can be converted to a present value through discounting when forecasts and rates are supported.
Real-World Application
A small office building has a heating and cooling system far larger than tenants need, raising annual operating costs. The appraiser forecasts the excess costs over the system's remaining life, discounts them at a market-supported rate, and then checks whether replacing the system would be economically feasible.
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?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
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?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Income Approach
8.2% of exam
Previous Question
An appraiser measures external obsolescence as a percentage of improvement cost remaining after physical and functional deductions. Why is that percentage applied after those deductions?
Next Question
A 2,500-sf house has a current cost new of $180 per square foot. Total depreciation of the improvements is estimated at 22% of cost new, and the site is valued at $170,000. What value does the cost approach indicate?