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Abstract
External obsolescence is perhaps one of the most challenging aspects of implementing the cost approach in appraisal. Loss due to external obsolescence is driven by factors outside the property, and it can be difficult to distinguish between external obsolescence of the improvements and a reduction in value of the land. In other words, external obsolescence is prone to double counting. The purpose of this article is to provide guidance as to when such value loss is attributable to the land and when it is attributable to the structure. The discussion demonstrates that external obsolescence can only arise when the existing structure is not the site's highest and best use. As a result, external factors that affect the property's value are attributable to the land if the current use is the property's highest and best use and are attributable to external obsolescence of the building otherwise.
Introduction
Estimating the external obsolescence of a structure is a challenging aspect of implementing the cost approach in appraisal. Because external obsolescence is driven by factors outside the property, it is difficult to distinguish between external obsolescence of the improvements and reductions in value of the land. If the appraiser is not careful, it would be easy to inadvertently double count these outside influences, with their effects showing up both in the land value estimate and the estimated value of the improvements.
This article shows that external obsolescence arises only when the existing structure is not the site's highest and best use. As a result, external factors that affect the property's value are attributable to the land when the current use is optimal and to the external obsolescence of the building otherwise. By paying careful attention to the highest and best use of the site, the appraiser can more accurately allocate the impact of external factors to the land and building value estimates.
This has several important implications for practicing appraisers. First, it provides the analyst with a simple and theoretically rigorous test for determining whether external obsolescence should be applied in the cost approach. A key consideration is whether the current use-in terms of both property type and scale-is the property's highest and best use. If the answer is "yes," then no external obsolescence of the structure...