An industrial property is located in a municipality that has just approved a new landfill 0.6 miles from the site. Appraisals of similar properties show a 12% decline in market value attributable to the landfill. The subject’s total market value (land plus improvements) is $2,250,000, with a land-to-value ratio of 25%. The appraiser has confirmed that the land value estimate is derived from sales of similarly located vacant parcels *that do not reflect the landfill’s impact*. Under USPAP, how should the external obsolescence be allocated between land and improvements?
Correct Answer
C) Entirely to the improvements, because external obsolescence affects the utility of the improvements, not the land’s inherent value
USPAP Standards Rule 1-4(b) states that external obsolescence is a form of depreciation that affects the improvements and is caused by factors outside the property boundaries. The Appraisal of Real Estate (15th ed., Ch. 22) clarifies that even when an external factor (e.g., a landfill) appears to affect location, the resulting loss in utility or marketability falls on the improvements — land value, being based on highest and best use of vacant land, is not reduced by external obsolescence unless the land itself is rendered unsuitable for its highest and best use. Here, the land value estimate is confirmed from vacant land sales *not reflecting the landfill*, confirming land retains its contributory value. Thus, the full 12% loss ($270,000) is assigned to the improvements only. Allocation proportionally (B) is a common error but violates USPAP and the Cost Approach logic.
Why This Is the Correct Answer
USPAP Standards Rule 1-4(b) states that external obsolescence is a form of depreciation that affects the improvements and is caused by factors outside the property boundaries. The Appraisal of Real Estate (15th ed., Ch. 22) clarifies that even when an external factor (e.g., a landfill) appears to affect location, the resulting loss in utility or marketability falls on the improvements — land value, being based on highest and best use of vacant land, is not reduced by external obsolescence unless the land itself is rendered unsuitable for its highest and best use. Here, the land value estimate is confirmed from vacant land sales *not reflecting the landfill*, confirming land retains its contributory value. Thus, the full 12% loss ($270,000) is assigned to the improvements only. Allocation proportionally (B) is a common error but violates USPAP and the Cost Approach logic.
More cost-approach Questions
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