EXAMPLE 23 The Cost Approach A 12-year-old industrial property is being valued using the cost approach. The appraiser feels that it has an effective age of 15 years based on its current condition. For example, there are cracks in the foundation that are not feasible to repair incurable physical depreciation). That is, it would cost more to try to repair these problems than the value that would be created in the property. The appraiser believes that it has a 60-year remaining economic life (75-year total economic life). The building was constructed using a greater ceiling height than users require in the current market (super- adequacy). It would cost $27 million to reproduce (reproduction cost) the building with the same ceiling height but S25 million to construct a replacement property (replacement cost) with the same utility but a normal ceiling height. The higher ceiling results in increased heating and air-conditioning costs of $50,000 per year. A cap rate that would be used to value the property would be 10 percent. The building was designed to include a cafeteria that is no longer functional (functional obsolescence). This area can be converted to usable space at a conversion cost of $25,000, and it is believed that the value of the property would increase by at least this amount (curable functional obsolescence). The roof needs to be replaced at a cost of $250,000, and other necessary repairs amount to $50,000. The costs of these repairs will increase the value of the building by at least their $300,000 cost (curable physical depreciation) The road providing access to the property is a two-lane road, whereas newer industrial properties are accessible by four-lane roads. This has a negative impact on rents (locational obsolescence), which is estimated to reduce NOI by S100,000 per year. Based on comparable sales of vacant land, the land is estimated to be worth $5 million. Estimate the value using the cost approach