Entrepreneurial incentive is best supported by:
Correct Answer
A) Market evidence of what developers require to build
Entrepreneurial incentive is the market-supported anticipated reward for development risk and effort. Developer interviews, feasibility and project evidence may help. Actual realized profit can be evidence but is not automatically the expected market incentive; neither a universal percentage nor a building-department label independently establishes it.
Why This Is the Correct Answer
Option A is correct because entrepreneurial incentive is a market-supported anticipated reward for development risk and effort. Evidence of what developers require to build, such as developer interviews, feasibility studies and project data, measures that market expectation. Full economic cost includes market-supportable entrepreneurial profit along with direct and indirect costs.
Why the Other Options Are Wrong
Option B: The appraiser's customary percentage for all assignments
Option B relies on the appraiser's customary percentage for all assignments. A single habitual percentage is not market evidence and does not reflect differences in property type, risk or market conditions.
Option C: The actual profit the current owner realized
Option C relies on the actual profit the current owner realized. Realized profit can be one piece of evidence, but it is not automatically the incentive the market expects, since one project's result may be higher or lower than what developers typically require.
Option D: A figure published by the local building department
Option D relies on a figure published by the local building department. A building-department figure does not independently establish what developers in the market require as a reward for risk and effort.
Ask the market's developers
Incentive is what developers in the market need to take on a project. If the evidence does not come from that market requirement, it is weaker support.
How to use: Use this when choosing between market-based and habit-based sources for any cost approach input.
Exam Tip
Choices that rely on a fixed customary figure or an outside label rarely beat a choice grounded in market evidence for a cost approach input.
Common Mistakes to Avoid
- -Applying the same incentive percentage to every assignment
- -Treating one owner's realized profit as the market incentive
- -Leaving entrepreneurial incentive out of full cost new
Concept Deep Dive
Analysis
This question tests what evidence supports entrepreneurial incentive in the cost approach. Entrepreneurial incentive is the market-supported anticipated reward a developer requires for the risk and effort of a project. The best support therefore comes from market evidence of what developers require, not from habit, one owner's result or an agency label.
Background Knowledge
Entrepreneurial incentive, or entrepreneurial profit when realized, is part of the full cost to create an improvement in the cost approach. It compensates the developer for coordinating the project and bearing risk. Appraisers support it with market evidence such as developer surveys and comparable project analysis.
Real-World Application
Appraising a new subdivision home, an appraiser interviews local builders and reviews recent project budgets to learn the profit margin they require. That market evidence supports the entrepreneurial incentive added to direct and indirect costs.
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