External obsolescence

External obsolescence
Primary topic
Related topics
Methods and techniques

External obsolescence is "a temporary or permanent impairment of the utility or salability of an improvement or property due to negative influences outside the property [1]." It is "a loss in value caused by negative externalities that is almost always incurable[2]." What is more, the guide claims that it may be imposed by economic or locational factors. It can be permanent or temporary. "Appraisers typically employ external obsolescence in a business enterprise. That operates as a special-purpose property, such that a shift in industry assets could cause the company to incur a reduction in revenue, profit margin, or return on investment metrics[3].

Types of properties[edit]

External obsolescence performs when the landlord cannot earn a market-based rate return from investment. There are three types of industrial properties classifications[4] :

  • general-purpose - are used in many different projects such as warehausing, distribution or light manufacturing. This type of property doesn't need any special adaptation and building attributes for its functional purpose.
  • single-purpose - it is a type of property, that is designed specially for specific use. It can not be adopted to any other that current uses.
  • special-purpose - properties that are customized for a particular industrial process or function. It has the highest value as originally intended.

What may cause external obsolescence[edit]

External obsolesence may be caused by environmental problem such as a deteriorationg neighbourhood, a location that is not suitable for everyone (for example when property is located near the airport, or close to railroad, commercial district). It can be also caused by ecconomic recession that creates a sluggish market. In general, external obsolescence results in depreciation of the property's value. It may also make the land less valueable.

It is used to describe all factors which negatively influence property value. It can include problems with transportation infrastructure (traffic jams), regulatory hurdles (e.g. regarding environmental protection), lack of competent workforce, depletion of mineral resources, growing competition nearby (e.g. important issue in hotel industry)

"To prove external obsolescence, a party can demonstrate the effect of negative externalities on value through direct comparison with other properties with and without external obsolescence, based on the availability of data for that type of analysis. An alternative “is the capitalization of income lost due to the effect of the externality"[5]. However, there are no rules over the standard in proving this matter. " More specifically, jurisdictions disagree whether taxpayers should have to prove the actual harm of external obsolescence on that subject property. The Eurofresh and Minnesota Energy cases demonstrate this disagreement"[6].

Author: Filip Fikas

Footnotes[edit]

  1. Appraising Residential Properties (2013), "Appraisal Institute 2013a", 576, za: M. J. Wildes, (2017) Minnesota’s Rejection of Heightened Standard for External Obsolescence Is Proper Interpretation of The Appraisal of Real Estate
  2. Derbes (1997). "Application Journal of Property Tax Assessment & Administration" • Volume 15, Issue 1 73
  3. Guardian Energy (2015), LLC v. County of Waseca https://mn.gov/tax-court-stat/published%20orders/2017/Guardian%20Energy%20v%20Waseca%20Co%2005-16-16.pdf
  4. Derbes (1997). "Application Journal of Property Tax Assessment & Administration" • Volume 15, Issue 1 73
  5. Appraising Residential Properties (2013), Appraisal Institute 2013a, 576, za: M. J. Wildes (2017), Minnesota’s Rejection of Heightened Standard for External Obsolescence Is Proper Interpretation of The Appraisal of Real Estate
  6. M. J. Wildes, (2017), Minnesota’s Rejection of Heightened Standard for External Obsolescence Is Proper Interpretation of The Appraisal of Real Estate

References[edit]