A valuer is assessing a 20-year-old industrial building for mortgage security purposes. The building has significant functional obsolescence due to low ceiling heights that don't meet current industry standards. How should this be addressed in the summation approach?
Correct Answer
C) Deduct both physical depreciation and functional obsolescence
In the summation approach, both physical depreciation (due to age and wear) and functional obsolescence (due to outdated design features like inadequate ceiling heights) must be deducted from replacement cost. This ensures the valuation reflects the building's reduced utility compared to modern standards.
Why This Is the Correct Answer
The building has two separate losses: wear from 20 years of age, and reduced utility because its ceilings no longer suit modern industrial users. The summation approach deducts both, physical depreciation and functional obsolescence, from replacement cost.
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A valuer is assessing a heritage-listed commercial building that cannot be demolished or significantly altered. The building generates $80,000 annual rent but similar unrestricted properties achieve $120,000. What type of obsolescence does this represent?