A supported whole-property external loss is $28,000. Independent allocation evidence expressly assigns 70% of the LOSS to improvements and 30% to site. What improvement loss results? Do not infer the allocation solely from a land/value ratio.
Correct Answer
B) $19,600
28000×0.70 = 19600. Common errors: applying the 30% site share instead of the 70% improvement share gives $8,400; assigning the whole loss to the improvements gives $28,000; dividing by 0.70 instead of multiplying gives $40,000.
Why This Is the Correct Answer
Option B is correct because the supported allocation assigns 70% of the $28,000 loss to the improvements. $28,000 x 0.70 = $19,600. The remaining 30% ($8,400) belongs to the site, which is typically reflected in site value.
Why the Other Options Are Wrong
Option A: $8,400
Option A, $8,400, is $28,000 x 0.30, which applies the 30% site share instead of the 70% improvement share. The improvement loss is $28,000 x 0.70 = $19,600.
Option C: $28,000
Option C, $28,000, assigns the whole-property loss to the improvements and ignores the 30% site share. The improvement portion is $28,000 x 0.70 = $19,600.
Option D: $40,000
Option D, $40,000, comes from $28,000 / 0.70, which divides by the share instead of multiplying. That result is larger than the whole loss, which cannot be right; the correct figure is $28,000 x 0.70 = $19,600.
Part of the loss, multiply
To find a share of a total loss, multiply by the percentage. The improvement share cannot be larger than the whole loss.
How to use: Use this sanity check whenever a question splits a loss into site and improvement shares.
Exam Tip
Check that your answer is smaller than the total loss when taking a share of it. Make sure you use the share for the component the question asks about.
Common Mistakes to Avoid
- -Using the site share instead of the improvement share
- -Deducting the entire property loss from the improvements
- -Dividing by the allocation percentage instead of multiplying
Concept Deep Dive
Analysis
This question tests allocating a measured external loss between improvements and site. The whole-property loss is $28,000, and independent evidence assigns 70% of the loss to improvements. Multiply the loss by the improvement share.
Background Knowledge
External obsolescence often affects both land and buildings. In the cost approach, site value should already reflect the site's share of the loss, so only the improvements' share is deducted as depreciation. The split between site and improvements needs its own market support.
Real-World Application
An appraiser finds that a nearby highway expansion reduces a property's value by a measured amount. Market evidence shows most of the loss affects the building's usefulness, so the appraiser deducts that share as external obsolescence and relies on site value to reflect the rest.
More Cost Approach Questions
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