Cost / Highest and Best Use Questions and Topics

Questions to Expect in the  Cost / Highest and Best Use  Module


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