1.5.3. Cost Approach. In the cost approach, the market value of the vacant land is added to the depreciated reproduction or replacement cost (contribution) of the improvements to arrive at an indication of the value of the property. The value of the land, vacant and subject to improvement, is generally developed by the sales comparison approach for land (see Section 1.5.1.1.). The estimate of the reproduction or replacement cost of the improvements is based on current local market cost of labor and materials for construction of improvements. All forms of depreciation are deducted from the cost new estimate, as discussed below. This approach to value is most useful in developing the value of a property in which the improvements are new (and actual costs are known) and there is no evidence of depreciation. The cost approach is also used as a check on the opinion of market value indicated by the sales comparison approach and for appraising highly improved properties with no known comparable sales. 

In the case of special-purpose properties66 that are not generally bought and sold, it is sometimes necessary to resort to reproduction cost new less depreciation for want of any more reliable method of determining market value. If it is necessary to resort to the cost approach, all forms of depreciation—physical deterioration, functional obsolescence, and external (or economic) obsolescence—must be accurately reflected and deducted from the reproduction or replacement cost before the value of the land and the contributory value of the improvements are added together to develop an indication of market value by the cost approach. Whenever the cost approach is utilized and it can be determined at what time and at what cost the improvements were erected, a trending up—or down, as appropriate—of such initial costs becomes an important part of the analysis.

66 Also referred to as special-use properties or limited-market properties.