Determining the value of complex, special purpose facilities can present a formidable challenge to appraisers. Because special purpose facilities may be one-of-a-kind, there is often no option of comparison to other facilities for market value determination. For this reason, the cost approach has been the historic standard for the appraisal of complex properties. Unfortunately, because the cost approach does not always consider all forms of obsolescence, it often leads to inflated estimates of fair market value.

The first step in the cost approach is to determine the Replacement Cost New (RCN) for the facility. When performing a cost approach appraisal, you must keep changing technology in mind. The natural evolution of technological process and improvements in materials over time often renders yesterday’s technology obsolete in terms of capital costs. This concept figures how much it would cost to replace the current facility with one that duplicates the utility of the existing facility using current technology and materials at current prices.

Once RCN is calculated, the next step is to quantify depreciation. Depreciation is defined as the loss in value from all causes, and its estimation is one of the most subjective areas of the cost approach. All there forms of depreciation should be taken into account: physical deterioration, functional obsolescence, and external obsolescence. Under the appraisal principle of substitution, an informed and willing buyer would pay no more for a facility than the cost to build or acquire a facility with equal utility.