The improvements have a cost new of $540,000 and total depreciation from other causes of $75,000. In addition, an external influence causes an annual net income loss of $3,200, which is allocated entirely to the improvements and is not already counted in the other depreciation. The appropriate capitalization rate for this loss is 8%. The site value, which already reflects any site influence, is $105,000. What value does the cost approach indicate?
Correct Answer
A) $530,000
540000−75000−3200÷0.08+105000 = 530000. Common errors: leaving out the capitalized external loss gives $570,000; deducting the annual $3,200 loss instead of its capitalized value gives $566,800; leaving out the other $75,000 improvement loss gives $605,000.
Why This Is the Correct Answer
Option A is correct because the external loss is $3,200 / 0.08 = $40,000, and $540,000 - $75,000 - $40,000 + $105,000 = $530,000. The site already reflects any site influence, so no extra site adjustment is made.
Why the Other Options Are Wrong
Option B: $566,800
Option B, $566,800, is $540,000 - $75,000 - $3,200 + $105,000, which deducts the annual $3,200 loss instead of its capitalized value. Capitalizing gives $40,000 and a total of $530,000.
Option C: $570,000
Option C, $570,000, is $540,000 - $75,000 + $105,000, which leaves out the capitalized external loss of $40,000. Deducting it gives $530,000.
Option D: $605,000
Option D, $605,000, is $540,000 - $40,000 + $105,000, which leaves out the other $75,000 improvement loss. Deducting it gives $530,000.
Capitalize, then subtract once
Turn the annual loss into a value loss by dividing by the rate, then deduct it with the other losses only one time.
How to use: Use this when a cost approach includes an income-based external loss.
Exam Tip
Deduct the capitalized value of an income loss, not the annual amount, and check that it is not already in the site value.
Common Mistakes to Avoid
- -Deducting an annual loss without capitalizing it
- -Leaving out one of the depreciation pieces
- -Counting the same external loss in both land and improvements
Concept Deep Dive
Analysis
This question tests combining several depreciation pieces without double counting. The improvement-only external loss is capitalized, then deducted along with the other improvement loss before adding the site value.
Background Knowledge
External obsolescence can be measured by capitalizing a supported income loss and allocating it between land and improvements. Total depreciation is the sum of individual estimates, and the site value should not already include the same loss.
Real-World Application
A property near a new industrial use suffers a supported net income loss. The appraiser capitalizes the part allocated to the building, deducts it with physical and functional depreciation, and adds a land value that already reflects the location.
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?
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