Cost Approach Law and Legal Definition

Cost approach is a method of evaluating real property on the basis of the cost of building a new property with the same utility. While evaluating it is assumed that an informed buyer would not pay more that what would cost to build a property having the same usefulness. A cost approach of the valuation of property for tax purposes has two elements such as land value and the reproduction or replacement cost of the buildings and other improvements.

”The cost approach is particularly important when a lack of market activity limits the usefulness of the sales comparison approach and when the properties to be appraised -- e.g., single-family residences--are not amenable to valuation by the income capitalization approach. Because cost and market value are usually more closely related when properties are new, the cost approach is important in estimating the market value of new or relatively new construction. The approach is especially persuasive when land value is well supported and the improvements are new or suffer only minor depreciation and, therefore, approximate the highest and best use of the land as though vacant. The cost approach can also be applied to older properties given adequate data to measure depreciation.” [International Flavors & Fragrances, Inc. v. Union Beach Borough, 21 N.J. Tax 403 (N.J. Tax Ct. 2004)]