4.4.3. Cost Approach.Where appropriate, appraisers can employ the cost approach in valuing property with existing physical improvements.535 In this approach, the reproduction or replacement cost of the improvements, less appropriate depreciation, is added to the estimated market value of the land as if vacant to derive an indication of the market value of the property as a whole.536 It bears noting that the cost approach can yield an indication of market value, but “cost is not synonymous with market value. A fortiori, cost of land and cost of improvements taken separately and added are not to be equalized with fair market value.”537 Rather, the elements are considered under the cost approach in developing an opinion of the market value of the property as a whole.538 

While not inherently flawed, the cost approach has often been misused, leading a number of courts to identify the cost approach as “one of the least reliable indicia of market value” for the purpose of measuring just compensation.539 Indeed, as the Fifth Circuit observed, when improperly applied, “reproduction cost evidence, though perhaps making it easier to reach some solution, only ma[kes] the proper solution more difficult.”540 As a result, the cost approach is rarely acceptable as a stand-alone indication of value for federal acquisitions;541 instead, it is typically employed either to test the financial feasibility of a potential highest and best use542 or to “check” or test the reasonableness of estimates of value indicated by other approaches.543 Use of the cost approach may be appropriate in the valuation of properties with highly specialized improvements that have no known comparable sales in the area.544 Proper application of the cost approach for any purpose under these Standards requires an understanding of its underlying foundations in the context of determining just compensation, as well as the specific elements involved.545