By: Mark Lansing
If you own property that is assessed by the cost approach, you likely found out that the only obsolescence deducted was physical depreciation. Yet, it is fundamental that to reach market value by the cost approach, the assessor must also consider and deduct for quantifiable functional and economic obsolescence. Unfortunately, the taxpayer often must apply to the assessor to even be considered for either functional or economic obsolescence.
There are two types of functional obsolescence – superadequacies and excess operating costs. Super adequacies are measured by the difference between the cost of reproduction and the cost of a modern and economic replacement facility for the subject property. For excess operating costs, functional obsolescence is quantified by the present value of the identified excess operating costs that exist at the property resulting from, for example, either modern or efficient design of the facility. Some assessors believe that if they start with replacement cost of a modern facility, they have accounted for all functional obsolescence. That is not correct. Even starting with the cost of the model facility accounts only for super adequacies (and if the wrong replacement facility is chosen, it fails to fully capture the super adequacies). In addition to the super adequacies, the difference in operating costs between a modern facility and the subject property must also be accounted for.
Issues may arise when only the real property assessment is at issue and whether a process layout problem exists, but it’s not clear whether it is caused by the building. When both the real and personal property are at issue those issues are less significant.
Functional obsolescence often occurs when a technological or market change renders a process, and often the building designed to accommodate that process, obsolete. Coal fired power plants are an example of this. It also occurs when a manufacturing facility is constructed in stages over many years. Good engineering decisions based on what was already there, are not inconsistent with the conclusion that if one were replacing the entire facility, the design would be very different. Many commercial and industrial facilities that have been built in stages have inadequate insulation, different clear heights, different floor levels, and obstructions caused by exterior walls that are now interior walls, and a number and multiple types of HVAC units, when one would have worked. Interestingly, the people who use the building and who are in the business of making it work on a daily basis, often do not focus on the differences between the facility they use and a model replacement. When we have those conversations, many items of obsolescence can be identified and the then brought to the attention of the assessors.
Bottom line, if the taxpayer does not accurately identify and quantify the functional obsolescence, its property will continue to be over valued by the assessor/appraiser.
If you have any questions, please contact Mark Lansing in our Washington D.C. office at (202) 466-5964.