While doing research for a property tax appeal on a warehouse/production facility a field visit was performed. The building is in an older industrial part of town and was built early in the last century. By looking at the exterior you can see that the improvements are old and suffer from physical deterioration. Undisclosed Functional Obsolescence was also discovered, which if taken into consideration by the tax assessors would lower the taxable value of the improvements further.
Functional obsolescence is a loss in value and it takes many forms. Outdated design, changes in technology, inadequacy, superadequacies, loss of utility, and related high operating costs are all forms of functional obsolescence. Many older buildings suffer from functional obsolescence due to changing styles and technologies. Older production facilities were often multi-story buildings which is virtually non-existent architectural design today.
Functional obsolescence applies to residential properties also. In most neighborhoods a house with two bedrooms is functionally inadequate. Similarly, in most neighborhoods an in-ground pool is a superadequacy, and the value it adds isn't nearly as high as the cost to install. Lack of central air conditioning is a functional inadequacy in the hot and humid South.
Functional obsolescence can be curable or incurable. The test of whether the obsolescence is curable is whether the value added by curing is greater than the cost to cure. The measure of depreciation due to functional obsolescence is calculated in different ways depending on the type of obsolescence. As one example, the depreciation due to a deficiency is the cost to cure the deficiency that is in excess of the cost to install/construct during construction of the building.
Functional obsolescence is often misunderstood and rarely recognized by the tax assessors. Functional obsolescence affects rents, expenses, net operating income, marketability, and value. The more you know about UFOs the greater the potential tax savings.
