Cost / Highest and Best Use Questions and Topics

1. An apartment building lacks the kind of standard amenity package found in typical buildings (workout equipment, sauna, etc.). As a result NOI is estimated to be about $30,000 less than it would be if the amenities were constructed. The building has unused, and otherwise un-rentable, space that could accommodate such construction at a reproduction cost of $400,000, but only $300,000 if included in new construction today. Property cap rates are 8%. What is the amount of Functional Obsolescence?

A. $0

B. $25,000

C. $75,000 (correct answer)

D. $100,000

2. What is the equilibrium rent (rounded to $10,000) for the following property given:

Replacement cost + profit = $10,000,000

Land Value = $1,000,000

Cap rate = 10%

Depreciation (physical and functional) = 30%

OER = 40%

Equilibrium Vacancy Rate = 5%

A. $1,230,000

B. $1,340,000

C. $1,350,000

D. $1,400,000 (correct answer)

3. Estimate the amount of incurable long-lived physical depreciation given the following information:

1. Current replacement cost of B = $940,000

1b. No items of curable physical depreciation

2. Incurable short lived physical depreciation: use $40,000 current cost with useful life of 20 years

3. Age of the Building = 10 years (now used in calc)

4. Effective age = 10 years (no curable items to be fixed)

5. Remaining economic life =40 years

A. $184,000

B. $188,000

C. $180,000 (correct answer)

D. $230,000