Entrepreneurial Profit in the Cost Approach

[BRCJR]

How many handle EI correctly, I wonder.

Does it go as a line item before or after depreciation?

 

[CANative]

How many handle EI correctly, I wonder.

Does it go as a line item before or after depreciation?

I put it in the "other" line item as a separate cost. Depreciation is based on external factors (the market.)

 

[Joe Flacco]

In single family construction EI just depends on various factors. There are different scenarios. Like infill construction is not the same as national builder subdivision construction. Toll brothers might have a subdivision they are working on and they might go spec on a few units but you don't see those trade for more than the ones they get under contract before building. A infill developer/builder might own a lot and if a buyer buys the lot and then the buyer assume the risk then total cost would be less than if the developer went spec and then later sold to a buyer. Also Toll Brothers having a new home under contract before construction and then selling the lot / house package completed is not the same risk as a infill builder/developer going spec and then selling lot / house package completed.

What EI is kind of depends on a lot of stuff. You could have a project with unknown and requires a lot of extra work and time getting approvals and stuff and the EI for something like that would be a lot higher than a straight forward project. EI really depends on the project. It is project specific.

 

[BRCJR]

I put it in the "other" line item as a separate cost. Depreciation is based on external factors (the market.)

If you are determing a depreciated cost why wouldn't it be considered part of cost and included before any depreciation is calculated?

 

[Joe Flacco]

Of course it EI is before depreciation. EI is part of replacement cost new. Depreciation is subtracted from replacement cost new. I don't think Can is saying otherwise.

 

[CANative]

If you are determing a depreciated cost why wouldn't it be considered part of cost and included before any depreciation is calculated?

What Joe said. The "other" line is above the depreciation cells which can be used to calculate each form of depreciation.

 

[Terrel L. Shields]

Things do get built with no profit. It just means there is depreciation

Agri and owner occupied buildings are built to service the business not to profit the barn. I do not add EP to barns on farms. I do add EP if someone develops a small business park to sell to buyers. Walmart "vendor spaces" are notorious as money sinks due to too many built and sold to investors who have no idea what they are about to get into. Almost all sold for less than purchase price until recently as more demand is in market but that can turn on the fate of Wally Worlds fortunes.

can remember doing a cost approach for a commercial property only once in the last decade.

I cannot recall not doing the cost approach on improved property, commercial or otherwise. It is key to extracting contributory values of the comps as well. And since 90%+ of my commercial work involves either vacant land or owner occupied retail or industrial (if you can call a knife maker, cabinet maker, flower shop, or mechanics shop 'industrial') the EP lies in the BEV.

Does it go as a line item before or after depreciation

Before but is not captured until the first sale. For the developer the first sale captures 100% of the EP be it 0% or 20%.