We often appraise new or nearly new commercial buildings. In many of these cases, the cost approach is the most relevant method and entrepreneurial incentive is an important element of this technique.
But what is entrepreneurial incentive?
Basically, it’s the incentive an investor has for coordinating the construction of a new project. The theory is that few investors would accept less than an amount necessary to account for the trouble they spent coordinating the construction of a new building. For example, suppose we paid $1,000,000 for land upon which we subsequently constructed multifamily units that cost $3,000,000. Would it make sense to sell the property for $4,000,000?
We would expect to receive more than we had invested in the property. The amount we would expect to receive in excess of our $4,000,000 is considered to be entrepreneurial incentive, usually expressed as a percentage of the cost of the project.