All but which would be considered in the cost approach appraisal method?

All but which would be considered in the cost approach appraisal method?

• A. Operating expenses
• B. Replacement cost
• C. Land value
• D. Depreciation

Answer: (A)

In the cost approach, value is determined from the cost to replace or reproduce the building, plus the land value, with depreciation deducted to reflect wear and aging. Replacement cost or reproduction cost estimates tell you what it would cost to construct a similar structure today, and land value adds the value of the site itself. Depreciation adjusts for physical deterioration, functional obsolescence, or economic obsolescence of the improvements. Operating expenses, on the other hand, are costs of owning and operating the property and are not used to calculate the replacement or reproduction cost or to adjust for depreciation in the cost approach. They belong to considerations more relevant to the income approach, where net operating income and capitalization are used to estimate value. So the item not included in the cost approach calculation is operating expenses. The other elements—replacement cost, land value, and depreciation—are included.

In the cost approach, value is determined from the cost to replace or reproduce the building, plus the land value, with depreciation deducted to reflect wear and aging. Replacement cost or reproduction cost estimates tell you what it would cost to construct a similar structure today, and land value adds the value of the site itself. Depreciation adjusts for physical deterioration, functional obsolescence, or economic obsolescence of the improvements.

Operating expenses, on the other hand, are costs of owning and operating the property and are not used to calculate the replacement or reproduction cost or to adjust for depreciation in the cost approach. They belong to considerations more relevant to the income approach, where net operating income and capitalization are used to estimate value.

So the item not included in the cost approach calculation is operating expenses. The other elements—replacement cost, land value, and depreciation—are included.