Obsolescence: all you need to know
Obsolescence is defined as the state of being which occurs when an object, service, or practice is no longer wanted even though it may still be in good working order. Owners have varying levels of control over the degree to which their properties are affected by the concept of obsolescence, but all real estate is subject to it. This is the primary reason behind cost recovery deductions for real property. There are 3 types of obsolescence affecting real estate:
1. Functional Obsolescence refers to a decline in value due to its
i) architectural design,
ii) building style,
iii) size,
iv) outdated amenities,
v) local economic conditions
vi) and changing technology.
The reduction in usefulness or desirability is based on the presupposition that the feature cannot easily or cost-effectively be changed. One example would be a multi-story office building that does not have an elevator.
2. Economic Obsolescence refers to a decline in property due to external factors; meaning that the owner has little or no ability to change the factors that are negatively affecting the property. Examples of economic (sometimes called external) obsolescence can be
i) zoning changes,
ii) recession,
iii) adverse traffic pattern changes
iv) construction of public nuisance type properties and utilities, i.e. county jails, sewer treatment plants, etc. in close proximity to the property, etc.
3. Physical Obsolescence refers to a decline in property value due to gross mismanagement and physical neglect resulting from deferred maintenance. All real property is subject to physical deterioration over time but the degree to which a property actually deteriorates can be mitigated by the owner. Examples of physical obsolescence include
i) leaking roofs,
ii) old HVAC units,
iii) old/non-energy efficient windows, etc.
• Reproduction Cost/Replacement cost
• Reproduction Cost
•The estimated cost to construct, at current prices as of the effective appraisal date, a comparable substitute for the building being appraised, having same utility using modern materials and current standards, design, and layout, and quality of workmanship and embodying all the deficiencies, super adequacies, and obsolescence of the subject building.
•Replacement cost, which is the cost required to replace an existing asset with an equal or similar asset at today’s market price. In other words, you will pay to construct a wall that will not necessarily be made of same material, but will have the same function.
Reproduction cost is the actual cost of building an exact duplicate of something using the same materials which was used in the original construction.
