4.4.3.5. Entrepreneurial Incentive and Entrepreneurial Profit. Current appraisal methodology recognizes entrepreneurial incentive—the amount an entrepreneur expects to receive from developing a real estate project—as an element of the cost approach to valuation.571 Similarly, entrepreneurial profit (also developer’s profit) is the amount actually received, reflecting the difference between the total cost of development and its market value after completion.572 Of course, not all developments live up to expectations: “It must be remembered that an entrepreneur is not guaranteed a profit.”573 

The Supreme Court has yet to address the propriety of entrepreneurial incentive or entrepreneurial profit in the cost approach to valuation in federal acquisitions.574 Still, rulings from one of the only federal courts to consider this issue are instructive: 

Because the [amount] due an entrepreneur or developer for assuming the risk of a development project and coordinating and managing the development is a real cost to constructing a replacement for the existing property, inclusion of entrepreneurial incentive may be necessary to ensure the accuracy of the cost approach valuation methodology. The goal of the cost approach is to estimate the market value of the property. Thus, consideration of entrepreneurial incentive comports with current law. 575 

If considered as a potential element of reproduction or replacement cost, entrepreneurial profit or entrepreneurial incentive must be “based on market research and data” and reflect the subject property’s highest and best use,576 and will “be scrutinized to ensure that [estimates] do not take into account any improper considerations.”577 It is impermissible to calculate entrepreneurial incentive (in whole or in part) as a percentage of land value or land cost because “the fair market value of the land already encapsulates the incentive necessary to entice an entrepreneur or developer to [acquire] the property.”578