Do your Replacement Cost results include Entrepreneurial Profit?

Q. Do your Replacement Cost results include Entrepreneurial Profit? 

A. Our Replacement Cost results include Contractor's Profit but do not include Entrepreneurial Profit (or Incentive). Entrepreneurial Profit refers to the potential incentive necessary to develop raw land. If a market has building sites available, there is often a disparity between the cost of constructing a substitute (including the cost of the site) and the value of a new house on a similar site. If the market value exceeds the cost of constructing a substitute, the difference is Entrepreneurial Profit or the incentive to go through the process of developing the property.

As part of developing the Cost Approach to value, we are estimating the structure's Replacement Cost New (RCN) and not assuming any profit (or loss) the developer might incur. For new construction, if there appears to be Entrepreneurial Profit (or if cost exceeds value due to some form of depreciation), those factors should be accounted for (by the appraiser) in the Cost Approach analysis. Therefore, (RCN) should not include Entrepreneurial Profit, or it would assume something that might not prove to be accurate and give the user a result that may not be credible. Additionally, if the improvements were to be destroyed, Entrepreneurial Profit would not be necessary to rebuild them, as a party with an interest in the property (e.g., the property owner, lender, or insurance company) already has the incentive to rebuild the structure.