An industrial property sits beside a river historically used for barge traffic. A new federal regulation bans commercial navigation on the river, eliminating the subject’s water-access advantage. The appraiser estimates the property’s land value — using sales of comparable industrial sites *with water access* — at $1,200,000. The improvement’s replacement cost new is $3,800,000, with physical depreciation of $570,000 and functional obsolescence of $220,000. Market data indicate water-access sites sell for a 15% premium over non-water-access comparables. What is the appropriate treatment of the external obsolescence arising from the navigation ban?
Correct Answer
D) Deduct the 15% reduction from the land value, since the land value estimate was derived from water-access sales and thus overstates value in the new regulatory environment.
The land value estimate of $1,200,000 is based on sales of *comparable sites with water access* — but the subject no longer has functional water access due to the regulation. Per USPAP Standards Rule 1-4(b), the appraiser must reflect all relevant characteristics affecting value. Since the land value estimate fails to account for the loss of navigability, it is overstated. The appropriate correction is to adjust the land value downward to reflect the absence of water access — i.e., derive land value from non-water-access industrial land sales, or apply a market-supported discount (here, 15%) to the $1,200,000 estimate. External obsolescence is not assigned to improvements because the improvements’ utility wasn’t impaired by the ban — they were built for industrial use regardless of water access; the *land’s* attribute changed. Thus, the externality directly affects land value. Option D is correct. Option A is incorrect because applying 15% to land alone presumes the land value estimate is correct — but it isn’t. Option C misattributes the loss to improvements. Option B violates USPAP by allocating external obsolescence between land and improvements.
Why This Is the Correct Answer
The land value estimate of $1,200,000 is based on sales of *comparable sites with water access* — but the subject no longer has functional water access due to the regulation. Per USPAP Standards Rule 1-4(b), the appraiser must reflect all relevant characteristics affecting value. Since the land value estimate fails to account for the loss of navigability, it is overstated. The appropriate correction is to adjust the land value downward to reflect the absence of water access — i.e., derive land value from non-water-access industrial land sales, or apply a market-supported discount (here, 15%) to the $1,200,000 estimate. External obsolescence is not assigned to improvements because the improvements’ utility wasn’t impaired by the ban — they were built for industrial use regardless of water access; the *land’s* attribute changed. Thus, the externality directly affects land value. Option D is correct. Option A is incorrect because applying 15% to land alone presumes the land value estimate is correct — but it isn’t. Option C misattributes the loss to improvements. Option B violates USPAP by allocating external obsolescence between land and improvements.
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