IACP Cost Approach & Depreciation Analysis 1 — Questions and Answers
Question 1: In the cost approach to appraisal, what does 'reproduction cost' refer to?
- The cost to build a functionally equivalent substitute structure using modern materials
- The cost to construct an exact replica of the subject improvement using the same materials and methods (Correct answer)
- The depreciated value of the existing structure as of the appraisal date
- The cost of land plus all site improvements at today's prices
Correct answer: The cost to construct an exact replica of the subject improvement using the same materials and methods
Reproduction cost is the cost to create an exact duplicate of the subject structure using the same materials, design, and construction methods as the original.
Question 2: Which type of depreciation arises from deficiencies or superadequacies within the property itself that reduce its value?
- External obsolescence
- Physical deterioration
- Functional obsolescence (Correct answer)
- Economic obsolescence
Correct answer: Functional obsolescence
Functional obsolescence results from internal property deficiencies (inadequate floor plan, outdated systems) or superadequacies (over-improvements) that reduce market value.
Question 3: An appraiser estimates a building's effective age at 15 years and its total economic life at 60 years. Using the age-life method, what is the accrued depreciation percentage?
- 20%
- 25% (Correct answer)
- 15%
- 30%
Correct answer: 25%
Accrued depreciation using the age-life method = Effective Age ÷ Total Economic Life = 15 ÷ 60 = 25%.
Question 4: Which cost estimating method uses published cost-per-square-foot data to estimate the replacement cost of improvements?
- Quantity survey method
- Unit-in-place method
- Comparative unit method (Correct answer)
- Index method
Correct answer: Comparative unit method
The comparative unit method (also called the square foot method) applies a cost per unit of area derived from comparable buildings to estimate total replacement cost.
Question 5: External (economic) obsolescence differs from functional obsolescence primarily because it is:
- Always curable and can be corrected at reasonable cost
- Caused by factors outside the property such as neighborhood decline or zoning changes (Correct answer)
- Related only to physical wear and tear of structural components
- Applicable solely to commercial and industrial properties
Correct answer: Caused by factors outside the property such as neighborhood decline or zoning changes
External obsolescence stems from forces outside the property boundaries — such as adverse neighborhood trends, proximity to nuisances, or unfavorable market conditions — making it typically incurable.
Question 6: In the cost approach, 'site value' is estimated as if the land were:
- Improved with existing structures at their current condition
- Vacant and available for its highest and best use (Correct answer)
- Purchased at its original acquisition price adjusted for inflation
- Encumbered by all existing easements and restrictions
Correct answer: Vacant and available for its highest and best use
The site is valued as though it were vacant and available to be put to its highest and best use, separate from any existing improvements.
Question 7: Which of the following best describes 'physical deterioration' that is considered curable?
- Foundation settling that requires complete demolition and reconstruction
- Deferred maintenance items like peeling paint that are cost-effective to repair (Correct answer)
- Long-term structural damage that exceeds the building's remaining economic life
- Neighborhood blight affecting the property's market appeal
Correct answer: Deferred maintenance items like peeling paint that are cost-effective to repair
Curable physical deterioration consists of deferred maintenance items where the cost to cure is less than or equal to the value added by the repair, making correction economically justified.
IACP Cost Approach & Depreciation Analysis 1
In the cost approach to appraisal, what does 'reproduction cost' refer to?