An appraiser in California is using the cost approach for a property in Sacramento and must account for entrepreneurial profit (also called developer's profit). A local developer confirms that typical profit margins in the Sacramento market are 15-20% of total development costs. How should the appraiser handle entrepreneurial profit?
Correct Answer
B) Add entrepreneurial profit as a separate line item to the replacement cost new, reflecting the profit a developer would require to undertake the project
Entrepreneurial profit (or developer's profit) is a recognized component of the cost approach. It represents the return a developer would require to undertake a construction project, above and beyond the direct and indirect construction costs. Under USPAP and California appraisal practice, it should be added to the direct and indirect costs to arrive at the full replacement cost new.
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In the cost approach formula used by California appraisers, land value is treated differently from improvement value. Why does land NOT depreciate in the cost approach?
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A California appraiser is using the cost approach and determines that a home's swimming pool cost $60,000 to build. However, paired sales analysis in the local California market shows that pools add only $30,000 to property values. In the cost approach, how should the appraiser handle this situation?