For a numerical gross-income comparison only, a 10-acre site can be devoted entirely to retail, office or residential use. Retail yields $50,000 per acre annually; office yields $40,000 per acre; residential allows four units per acre at $8,000 per unit annually. Which alternative has the highest total annual gross income? Do not infer highest and best use from gross income alone.
Correct Answer
B) Retail, $500,000
Retail gross income = 10 acres × $50,000 = $500,000 annually. Office = 10 × $40,000 = $400,000. Residential = 10 acres × 4 units/acre × $8,000/unit = $320,000. Retail has the highest stated gross income. This does not establish feasibility or highest and best use, which also requires costs, timing, risk, legal/physical constraints and value analysis.
Why This Is the Correct Answer
Option B is correct because retail produces 10 acres × $50,000 = $500,000 annually, which exceeds office at 10 × $40,000 = $400,000 and residential at 10 × 4 units × $8,000 = $320,000. Retail therefore has the highest stated gross income.
Why the Other Options Are Wrong
Option A: Residential, $320,000
Option A, Residential at $320,000, is wrong because, although the arithmetic (10 acres × 4 units × $8,000) is correct, $320,000 is the lowest of the three totals, not the highest.
Option C: All yield equal income
Option C is wrong because the three uses do not yield equal income: retail produces $500,000, office $400,000 and residential $320,000.
Option D: Office, $400,000
Option D, Office at $400,000, is wrong because, although 10 × $40,000 = $400,000 is correct, it is lower than retail's $500,000.
Gross is not best
The use with the biggest gross income is not necessarily the highest and best use; costs, risk and legal limits still matter.
How to use: Use this reminder whenever a question gives income figures for alternative uses.
Exam Tip
Convert each use to the same basis (total annual income for the whole site) before comparing, and watch for per-unit versus per-acre figures.
Common Mistakes to Avoid
- -Forgetting to multiply residential income by units per acre
- -Treating the highest gross income as highest and best use
- -Comparing per-acre and total figures inconsistently
Concept Deep Dive
Analysis
This question tests careful gross-income arithmetic across alternative uses. Each use is converted to a total annual figure for the full 10 acres, and the totals are compared. The question deliberately limits the comparison to gross income and does not ask for highest and best use.
Background Knowledge
Gross income is only one input in highest and best use analysis. A use must also be legally permissible, physically possible and financially feasible, and the maximally productive use is the one producing the highest land value after accounting for costs, risk and timing. Comparing gross income alone does not establish highest and best use.
Real-World Application
A landowner asks why an appraiser did not conclude retail is the best use simply because retail rents are highest. The appraiser explains that construction costs, vacancy, expenses and demand for each use must be analyzed to find which produces the highest land value.
More Land/Site Questions
Market analysis confirms that seller financing at 3%, versus a 6% market rate, increased a comparable sale price. What adjustment removes that financing premium?
At the same effective date, reliable value indications support $800,000 for continued use of a property as improved and $500,000 for its cleared site. Immediate demolition costs $100,000. These are the only feasible alternatives, with no other costs or timing differences. Which alternative has the higher net value?
Other relevant conditions equal, growth in the number of households with effective purchasing power in a market tends to have which effect?
In a lakefront market, paired sales show that direct water frontage has the largest price effect of any feature. Which approach to comparable selection best follows from this evidence?
Which circumstance can cause highest and best use as improved to differ from highest and best use as though vacant?
A small group of buyers in a market looks for specialized features that are uncommon in the broader housing supply. What term describes this group?
A neighborhood analysis should include all of the following EXCEPT:
A site legally permits at most 40 units and can physically support 50. Supported comparable analyses find 30 and 40 units financially feasible, with 40 units producing the highest net land value after costs, timing and required return. Which use is maximally productive among these alternatives?
Market evidence isolates a subject value loss from off-site landfill odors. Which listed cause is an external-obsolescence influence?
Which proposed use cannot pass the legal-permissibility screen without evidence that the necessary permission is reasonably probable?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
What can support time adjustments in a declining submarket?
Next Question
A comparable sold at a cash-equivalent price of $300,000 exactly 8 months before the effective date. Market prices have increased at a simple, non-compounded rate of 6% per year. No other adjustments apply. What is the dollar time adjustment?