Commercial Real Estate Appraisal Cost Approach

The cost approach was historically prepared as aEntrepreneurial profit is the amount of
part of most commercial real estate appraisals.compensation necessary to induce someone to
However, the compunction to include the costorganize the site, investors, debt, architecture,
approach (when it was not relevant) hasconstruction and leasing necessary to plan and
dissipated over the last 20 years.build a property. The appropriate amount of
The principle of substitution is the technical basisentrepreneurial profit depends on factors such as
for employing the cost approach. According to thecompetition, the difficulty of the project, market
principal of substitution, a prudent buyer would notconditions and the wisdom of the developers plan.
pay more than the cost to build a like property. InIn some cases external or functional obsolescence
other words one would not spend $2,000,000 toprohibit entrepreneurial profit.
purchase a new apartment complex if they couldFollowing is a summary of the cost approach:
build it for 1,500,000.Market Value of Land
The cost approach value is the sum of the+ Replacement cost new of improvements
market value of the land, depreciated- All forms of depreciation
replacement cost and entrepreneurial effort. Land+ Entrepreneurial Profit
is typically Valued using the sales comparison= Market Value via the Cost Approach
approach. The replacement cost is the cost toBusiness Personal Property Valuation
build a building of the same quality and functionalFeasibility Studies
utility as the subject property. (Reproduction costReal Estate Consulting
is the cost to build an exact duplicate. ThisTo obtain more information on O’Connor &
approach is used occasionally for old buildings builtAssociates cost approach analysis services, call us
using materials and or types of craftsmanship notat 713-686-9955.
currently used.)The appraisal division of O’Connor &
External obsolescence occurs when circumstancesAssociates is a national provider of investment
outside the subject property's boundariesreal estate appraisal services including commercial
negatively impact its value. For example, an officereal estate appraisals, tenant representative
building in New York would suffer from externalbrokers, private bond activitybusiness valuation,
obsolescence if Manhattan office occupancy fellgift tax valuations, insurance valuation, highest and
from 93% to 75%. A mansion built next to abest use analysis, feasibility studies, condemnation
slaughter-house is another example of externalappraisals, due diligence, residential appraisals and
obsolescence.investment hypotheses.