When you hear the term “functional obsolescence,” you may think of CDs, rotary telephones, slide rules or even iPods. When it comes to real estate, functional obsolescence (sometimes known as external obsolescence or other names), it’s not that the property is obsolete so much as devalued due to something over which the property owner often has no control and generally is outside the boundaries of the property. It’s been defined as “the impairment of functional capacity of a property according to market tastes and standards.”
If you’re considering purchasing or investing in a piece of commercial real estate, it’s crucial to understand whether it has any “impairments” that decrease its value or will in the near future and whether there’s anything you can do about the issue. This doesn’t mean the property isn’t worth buying, but you need to be sure that you’re not paying more than it’s worth.
What kinds of things cause this obsolescence?
Examples of functional or external obsolescence include anything from a nearby airport or busy highway to an active (unresolved) neighbor dispute. The latter is often associated with residential real estate, but commercial properties are also affected by neighboring properties or buildings that have remained vacant for some time. These often become an eyesore or a breeding ground for criminal activity like drug deals.
Most functional obsolescence is considered “incurable” – meaning there’s nothing you can do about it if you purchase the property. Perhaps the most you can do is get to know local leaders and others with some power whom you can work with to bring about changes.
The issue of functional obsolescence is just one reason why it’s crucial to do your due diligence before buying a property. You don’t want to find out too late about deficits that could make leasing space there problematic. You certainly don’t want to pay more than the property is worth. Having experienced legal guidance is critical to making an informed decision.