Oregon Administrative Rules
Chapter 150 - DEPARTMENT OF REVENUE
Division 308 - ASSESSMENT OF PROPERTY FOR TAXATION
Section 150-308-0280 - Measuring Functional Obsolescence in Industrial Property
Universal Citation: OR Admin Rules 150-308-0280
Current through Register Vol. 63, No. 9, September 1, 2024
(1) The procedure for estimating functional obsolescence for industrial property in the reproduction cost approach is as follows:
(a)
The total functional obsolescence equals:
(A)
The physically depreciated reproduction cost of the property with a deficiency
requiring a substitution or modernization, or a superadequacy, less
(B) The physically depreciated cost of the
replacement property with a deficiency requiring a substitution or
modernization, or a superadequacy, plus
(C) The cost to cure or the value of the loss
(if less).
(b) For an
industrial property with a deficiency requiring an addition follow the same
steps as listed in subsection (1)(a), except step (A) equals zero.
(c) The result of (1)(a) equals the total
functional obsolescence deduction in the reproduction cost approach
attributable to the property with a deficiency or superadequacy.
(d) In specific situations, the procedure in
subsection (1) can be simplified:
(A) For
curable functional obsolescence caused by a deficiency requiring a substitution
or modernization, or a superadequacy, functional obsolescence equals the
physically depreciated reproduction cost of the property with a deficiency or
superadequacy plus the excess cost to cure.
(B) For curable functional obsolescence
caused by a deficiency requiring an addition, functional obsolescence equals
the excess cost to cure.
(e) For purposes of measuring functional
obsolescence, the property with a deficiency or superadequacy in subsection (1)
of this rule can be the entire subject property or one or more portions of the
property that are being analyzed for the existence of functional obsolescence.
If the entire property has multiple deficiencies or superadequacies, multiple
applications of the procedure in subsection (1) of this rule may be required to
measure the total functional obsolescence.
(f) Some methods of measuring depreciation
may capture more than just physical depreciation. The depreciation measured may
include elements of functional and external obsolescence.
(A) If in subsection (1)(a)(A) an age-life
method is used to estimate the total depreciation of the property with a
deficiency or superadequacy, no additional functional obsolescence should be
deducted from the depreciated reproduction cost of the individual assets.
(B) If in subsection (1)(a)(A) the
selling price of used equipment is used to estimate the depreciation of the
property with a deficiency or superadequacy, no additional functional
obsolescence should be deducted from the depreciated reproduction cost of the
individual assets.
(C) In
situations where all functional obsolescence of individual assets is fully
captured by the depreciation method used, there may be additional functional
obsolescence due to the assemblage of the individual assets into the layout of
the property. Functional obsolescence due to layout can be accurately measured
using the procedures described in subsection (1) of this rule. However, care
must be taken to avoid double counting the functional obsolescence.
(2) The deduction for functional obsolescence in the replacement cost approach equals the cost to cure or the value of the loss (if less).
(a)
When using the procedure in subsection (1)(a) of this rule to estimate the
deduction for functional obsolescence in the replacement cost approach, steps
(A) and (B) must equal zero ($0).
(b) When using consistent estimates of
reproduction and replacement cost new, physical depreciation, and functional
and external obsolescence, the market value indicator from replacement cost
approach must equal the market value indicator from the reproduction cost
approach. (see example 3)
(3) Definitions:
(a) The reproduction cost approach is an
appraisal method for estimating market value of the subject property. The
formula for this method is:
Market Value equals the Reproduction Cost New less physical depreciation less functional obsolescence less external obsolescence.
(A) The reproduction cost new is the cost to
construct a new replica of the subject property as of the appraisal date using
the same materials, design, layout, quality of workmanship and embodying the
deficiencies and superadequacies of the subject property.
(B) The appraisal approach where the
appraiser estimates the depreciation based on the selling prices of used
equipment is a reproduction cost approach when the used prices utilized in the
appraisal are for pieces of equipment that are replicas of the subject
equipment. The formula for this method is: Market Value equals the Reproduction
Cost New less the depreciation from used equipment prices less the functional
and external obsolescence not captured in the used equipment prices.
(C) The appraisal approach where the
appraiser estimates the depreciation using an age-life method is a reproduction
cost approach when the starting point is the reproduction cost new. The formula
for this method is: Market Value equals the Reproduction Cost New less the
depreciation from an age-life analysis less the functional and external
obsolescence not captured in the age-life analysis.
(b) The replacement cost approach is an
appraisal method for estimating the market value of the subject property as of
the appraisal date. The formula for this method is:
Market Value equals the Replacement Cost New less physical depreciation less the cost to cure (or the value of the loss, if less) less external obsolescence. The replacement cost new is the cost, as of the appraisal date, to construct a property having equivalent utility to the subject property but built with the most cost-effective materials, design, and layout. The most cost effective materials, design, and layout is that combination of investment (cash out-flows) and the present value of anticipated after tax net income (cash in-flows) that produces the highest net present value.
(c) Functional
Obsolescence is a loss in market value of a subject property when there is a
reasonable feasibility of a typical prospective purchaser acquiring, without
undue delay, a replacement property possessing an equivalent utility but is
more cost-effective in terms of design, materials, or equipment. Functional
obsolescence exists only by a comparison between the subject and the
replacement property. There is no loss in value due to functional obsolescence
unless the physically depreciated reproduction cost of the subject property
minus the physically depreciated replacement cost of the replacement property
plus the cost to cure (or value of the loss, if less) is greater than zero.
(A) Functional obsolescence due to a
deficiency requiring a substitution or modernization is caused by an asset
present in the subject property that is substandard compared to the replacement
property.
(B) Functional
obsolescence due to a deficiency requiring an addition is caused by a component
that is missing from the subject property that is present in the replacement
property
(C) Functional
obsolescence due to a superadequacy is caused by an asset present in the
subject property that is not present in the replacement property and does not
contribute to value an amount equal to its cost.
(d) The physically depreciated reproduction
cost of the property with a deficiency or superadequacy is the cost, as of the
appraisal date, to construct a new replica of that property using the same
materials, design, layout, quality of workmanship and embodying the
deficiencies and superadequacies of that property less the amount of physical
depreciation due to physical deterioration associated with wear and tear, the
impact of the elements, and aging.
(e) The physically depreciated cost of the
replacement property is the cost, as of the appraisal date, to construct a new
property with the equivalent utility to the property with the deficiency or
superadequacy using the most cost effective materials, design, and layout less
the appropriate physical depreciation.
(A)
For curable functional obsolescence, the appropriate percent of physical
depreciation for the replacement property in subsection (1)(a)(B) is equal to
the percent of physical depreciation of the replacement property included in
the cost to cure in subsection (1)(a)(C) and (3)(h)(A). For example, if curable
functional obsolescence is cured by purchasing and installing a new machine,
the replacement property is also new (zero depreciation). (See example 3)
However, if curable functional obsolescence is cured by purchasing and
installing a used machine that is 70% physically depreciated, the replacement
property also must be 70% depreciated. (See example 4)
(B) For incurable functional obsolescence,
the appropriate percentage of physical depreciation for the replacement
property in subsection (1)(a)(B) is the same percentage of physical
depreciation as the percentage of physical depreciation of the property with a
deficiency or superadequacy, as it exists in the uncured condition.
(f) Functional obsolescence is
incurable if the cost to cure is greater than the value of the loss.
(g) Functional obsolescence is curable if the
cost to cure is less than the value of the loss.
(A) To be considered curable, it must be
physically possible, legally permissible, and financially feasible to cure the
functional obsolescence.
(B) If
curing functional obsolescence is required to allow the existing assets to
continue to function at their highest and best use and the requirements of
subsection (3)(g)(A) are met, the obsolescence is curable even if the cost to
cure is greater than the value of the loss. (See Example 6)
(h) The cost to cure equals the
net cash out-flow anticipated to be necessary to eliminate the deficiency or
superadequacy. This equals:
(A) The
physically depreciated replacement cost of the replacement property, plus
(B) The retrofitting cost
associated with installing the replacement property in the subject property,
plus
(C) The cost to remove the
property with a deficiency or superadequacy; less
(D) The salvage value of the property with a
deficiency or superadequacy.
(i) The excess cost to cure recognizes that
installing an asset in an existing property may cost more than installing the
same asset when a property is constructed new on the appraisal date. The excess
cost to cure equals:
(A) The retrofitting
cost associated with installing the replacement property in the subject
property; plus
(B) The cost to
remove the property with a deficiency or superadequacy; less
(C) The salvage value of the property with a
deficiency or superadequacy.
(j) Retrofitting cost is the cost as of the
appraisal date to install an asset in the subject property less the cost as of
the appraisal date to install the same asset as part of new construction.
(k) The value of the loss equals
the present value of the after-tax loss in anticipated income from the
continuing operation of the property with a deficiency or superadequacy
compared to the projected operation of the replacement property. For industrial
plants, this loss in income is often the result of excess operating costs due
to inefficiencies in the subject plant compared to the subject property when
cured of the functional obsolescence. The present value includes factors for
the time period that the plant will continue to incur the loss in income and an
appropriate discount rate. See OAR 150-308-0250 for the appropriate method of
calculating the discount rate.
(4) Examples (Assume zero external obsolescence for all examples):
(a) Example
1: An example of incurable functional obsolescence due to a deficiency
requiring a substitution or modernization. [Example not included, see ED.
Note.]
(b) Example 2. An example of
incurable functional obsolescence due to a superadequacy. [Example not
included, see ED. Note.]
(c)
Example 3: An example of curable functional obsolescence due to a deficiency
requiring and addition. [Example not included, see ED. Note.]
(d) Example 4: An example of curable
functional obsolescence due to a deficiency requiring a substitution. [Example
not included, see ED. Note.]
(e)
Example 5: An example of a deficiency in the subject plant that does not
indicate the presence of functional obsolescence. [Example not included, see
ED. Note.]
(f) Example 6: An
example of curable functional obsolescence due to a deficiency requiring an
addition. [Example not included, see ED. Note.]
Examples referenced are not included in rule text. Click here for PDF copy of examples.
Stat. Auth.: ORS 305.100
Stats. Implemented: ORS 308.205
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