Which cost approach element is often not included in standard appraisal report forms, and its omission might distort the cost approach conclusion?

• A. Site value
• B. Cost to cure
• C. A provision for entrepreneurial profit/incentive that would motivate a developer to add supply to the market
• D. A widely accepted depreciation factor

Answer: (C)

In the cost approach, value is generally derived from the cost to reproduce or replace the improvements plus the land value, minus depreciation. A key wrinkle is the entrepreneurial profit or incentive a developer would expect to earn to bring new supply to the market. This profit is a real development cost that can influence what developers will require to undertake new construction. Many standard appraisal report forms omit this item, treating development as merely a cost without profit. If you leave out the developer’s profit, the estimated replacement cost can be understated, which tends to distort the overall cost approach conclusion by not reflecting the market’s incentive to supply new units. The other elements—site value, cost to cure (if repairs are needed), and a depreciation factor—are typically included, so their omission is not the same source of distortion.