Which statement describes the core characteristic of the cost approach in CRE valuation?

• A. It estimates value based on replacement cost less depreciation.
• B. It uses NOI divided by cap rate.
• C. It relies solely on comparable sales data.
• D. It uses the property's current rents to forecast cash flows.

Answer: (A)

The essential idea is that the cost approach determines value from what it would cost to replace the property with a similar utility today, and then adjust for depreciation. The core step is estimating the replacement (or reproduction) cost and subtracting depreciation for physical wear, functional obsolescence, and external obsolescence. In practice you would add the land value to that result to arrive at total value, but the central mechanism is replacement cost less depreciation. This approach is most applicable when market evidence is limited or for unique properties, and it differs from the income approach (which uses NOI and a cap rate) and the sales comparison approach (which relies on comparable sales).