Rethinking External Obsolescence
Estimating external obsolescence when using the cost approach for property appraisals has long been a major challenge. Professor Longhofer's article provides a straightforward way to properly account for external factors impacting a property's value.
Scott Sampson
5/19/20241 min read
Estimating external obsolescence when using the cost approach for property appraisals has long been a major challenge. Professor Longhofer's article, Land Values and External Obsolescence, provides a straightforward way to properly account for external factors impacting a property's value. He argues that "external obsolescence can only arise when the existing structure is not the site’s highest and best use." This concept should greatly simplify the appraisal analysis.
While the paper does not directly address industrial manufacturing plants, the principles discussed regarding external obsolescence and its relationship to highest and best use analysis would still apply. Here are some potential implications for appraising industrial manufacturing plants:
Determine if the existing manufacturing plant represents the highest and best use of the site, both in terms of property type (industrial use) and scale/size of the improvements. If it does, then external obsolescence should not be a factor.
However, if the highest and best use analysis indicates that a different property type (e.g. commercial, residential) or vastly different sized industrial facility would maximize site value, then external obsolescence of the existing plant may need to be considered.
Factors like changes in demand for the products produced, obsolescence of the manufacturing equipment/processes, locational influences, etc. could potentially impact highest and best use conclusions and external obsolescence estimates.
The magnitude of any external obsolescence should be tied to the difference between the land value at its highest and best use versus the land value with the existing suboptimal plant in place.
Appraisers would need to be careful about not double-counting external influences in both the land valuation and the obsolescence estimate for the plant itself.
So in essence, while not industrial-specific, carefully analyzing highest and best use and relating external obsolescence to the land value difference highlighted in this paper would be an important consideration in the cost approach for manufacturing facilities as well.