Entrepreneurial incentive is best supported by:
Correct Answer
A) Market evidence of what developers require to build
Why this is correct: Entrepreneurial incentive is the amount a developer expects to receive for the risk and effort of developing a property. Like all cost approach inputs, it must be supported by market evidence, such as developer interviews, feasibility studies, and comparable project data. Therefore A is correct. Why the other choices are wrong: B, the appraiser's customary percentage for all assignments, is an unsupported convention; a fixed percentage applied everywhere does not reflect the specific market. C, the actual profit the current owner realized, is not market support because the owner's profit may reflect unique circumstances or poor management. D, a figure published by the local building department, is not a market source; building departments do not publish entrepreneurial incentive data. Market evidence is the only defensible basis. Exam tip: On the cost approach, every input, including entrepreneurial incentive, must be market-derived. Ask yourself: 'What would a developer expect in this market?'
Why This Is the Correct Answer
Why this is correct: Entrepreneurial incentive is the amount a developer expects to receive for the risk and effort of developing a property. Like all cost approach inputs, it must be supported by market evidence, such as developer interviews, feasibility studies, and comparable project data. Therefore A is correct. Why the other choices are wrong: B, the appraiser's customary percentage for all assignments, is an unsupported convention; a fixed percentage applied everywhere does not reflect the specific market. C, the actual profit the current owner realized, is not market support because the owner's profit may reflect unique circumstances or poor management. D, a figure published by the local building department, is not a market source; building departments do not publish entrepreneurial incentive data. Market evidence is the only defensible basis. Exam tip: On the cost approach, every input, including entrepreneurial incentive, must be market-derived. Ask yourself: 'What would a developer expect in this market?'
More cost-approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A 45-year-old office building has undergone multiple high-quality renovations, including HVAC replacement, seismic retrofitting, and full interior modernization. Its functional layout remains competitive with new construction, and it occupies a stable, well-located corridor. The appraiser estimates its total economic life at 70 years. Which estimate of effective age is most supportable under USPAP and recognized cost approach methodology?
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
An appraiser is estimating accrued depreciation for a commercial office building using the age-life method. The building was constructed in 1992 and has a total economic life of 60 years. As of the appraisal date in 2024, the appraiser determines the property’s effective age is 36 years due to consistent maintenance, modernized systems, and favorable market perception. What is the percent of accrued depreciation indicated by the age-life method?
Which event would RAISE a building's effective age relative to last year's estimate?
Two identical houses were built the same year; one has been meticulously maintained, the other neglected. Their age-life analyses differ because:
Which statement is MOST consistent with USPAP Standards Rule 6 regarding the identification and treatment of external obsolescence in the cost approach?
A 40-year-old industrial warehouse has undergone no major renovations and suffers from outdated electrical systems, inefficient insulation, and obsolescent loading dock design. Market evidence indicates similar properties typically exhibit functional obsolescence reducing utility by 15% and external obsolescence reducing value by 10%. If the appraiser uses the age-life method with a total economic life of 50 years, how should effective age be adjusted to reflect these conditions?
In developing an age-life depreciation estimate, an appraiser assigns an effective age of 16 years and a total economic life of 40 years. Later, the appraiser discovers that comparable properties in the same submarket have recently sold with effective ages averaging 12 years and total economic lives averaging 45 years — and those sales exhibited superior energy efficiency and adaptive reuse features. What is the appraiser’s USPAP-compliant obligation regarding the original effective age estimate?
The age-life method expresses depreciation as:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Previous Question
An appraiser estimates the total economic life of a commercial office building to be 60 years. The building was constructed 12 years ago, but due to superior maintenance, modern HVAC upgrades, and recent interior renovations, its effective age is estimated at 7 years. What is the building’s remaining economic life?
Next Question
Market extraction of depreciation is limited by the fact that it: