Every USPAP- and CUSPAP-compliant appraisal of an income-producing property considers three approaches to value: the income approach, which derives value from the income the property produces; the sales comparison approach, which derives value from what comparable properties have recently sold for; and the cost approach, which derives value from what it would cost to reproduce the improvements at current prices, minus accrued depreciation, plus land value. The reconciliation process, governed by USPAP Standards Rule 1-6 and CUSPAP Valuation Standard §6.5, requires the appraiser to weight and correlate the approaches based on the reliability of the data underlying each method and the relevance of each method to the property type and market.
Reconciliation is not averaging: a cost approach result with weak land sale support and heavy depreciation estimation should receive minimal weight even if the income and sales approaches bracket tightly.
The income approach is the primary valuation method for stabilized, investment-grade commercial properties. Direct capitalization (stabilized NOI divided by a market-derived cap rate) is the most common method where the property is at or near stabilized occupancy and cash flows are relatively level.
The DCF method is preferred under USPAP and CUSPAP when cash flows are irregular over the holding period: a property in lease-up, a multi-tenant asset with near-term lease expirations, or a development project where revenues ramp as construction completes. Both methods require a market NOI estimate (derived from a contract rent and market rent reconciliation, vacancy and credit loss allowances, and controllable and non-controllable expense estimates) and either a market cap rate derived from comparable sales or a discount rate derived from comparable investment yields.
The sales comparison approach adjusts the price per square foot, per unit, or per key from comparable sales to account for differences between each comparable and the subject. Adjustment factors include time (market conditions since the sale date), location (submarket quality, access, visibility), physical characteristics (age, condition, size, building efficiency), and economic characteristics (occupancy level, lease terms, WALT).
The approach is most reliable for commodity property types (apartment buildings, gas stations, quick-service restaurant buildings) where frequent, relatively homogeneous comparable transactions allow the appraiser to develop adjustment grids from market data. For special-purpose assets (data centres, hospitals, cold storage), the approach may be limited by the scarcity of directly comparable sales.
The cost approach estimates the value of the land as if vacant (supported by comparable land sales or land residual analysis) and adds the depreciated replacement cost of the improvements. Depreciation comprises three components: physical deterioration (wear and tear from age and use, curable or incurable), functional obsolescence (loss in value from design deficiencies or super-adequacies relative to current market standards), and external obsolescence (loss in value from conditions external to the property: market oversupply, neighbourhood decline, or proximity to a disamenity).
The cost approach carries the most weight for new construction (where physical depreciation is minimal), for special-purpose properties with limited income history and no comparable sales, and for insurance replacement cost assessments. For established income-producing assets in active markets, the cost approach typically serves as a ceiling check rather than a primary indicator; a property will not trade above its replacement cost for an extended period, as the market will deliver new competitive supply.