Two proposed uses of a 10-acre vacant site are legally permissible, physically possible, financially feasible, and have comparable timing and risk. An apartment complex would have a completed value of $15 million and require $12 million of all non-land development costs; a retail center would have a completed value of $18 million and require $16 million of all non-land development costs. The land costs $2 million. Which use produces the higher surplus after land cost?
Correct Answer
C) Apartment surplus $1 million; retail surplus $0
Apartment surplus = $15 million − $12 million − $2 million = $1 million. Retail surplus = $18 million − $16 million − $2 million = $0. Under the stated equal-timing, equal-risk assumptions, apartment surplus is higher.
Why This Is the Correct Answer
Option C is correct because apartment surplus is $15 million − $12 million − $2 million = $1 million, and retail surplus is $18 million − $16 million − $2 million = $0. Under the stated assumptions of equal timing and risk, the apartment use produces the higher surplus after land cost.
Why the Other Options Are Wrong
Option A: Apartment surplus $3 million; retail surplus $2 million
Option A shows apartment surplus of $3 million and retail surplus of $2 million. Those figures ignore the $2 million land cost ($15m − $12m = $3m; $18m − $16m = $2m). After land cost, apartment surplus is $1 million and retail surplus is $0.
Option B: Both alternatives have surplus $2 million
Option B says both alternatives have a surplus of $2 million. That does not follow from the facts: retail before land cost is $2 million, but apartment before land cost is $3 million. After the $2 million land cost, the surpluses are $1 million and $0.
Option D: Retail surplus $1 million; apartment surplus $0
Option D reverses the results, giving retail a $1 million surplus and apartment $0. The arithmetic shows retail at $18m − $16m − $2m = $0 and apartment at $15m − $12m − $2m = $1 million.
Value minus all costs
Surplus is what remains after you subtract all costs, including land, from completed value; the higher completed value does not by itself win.
How to use: Use this when comparing alternative uses by their profit or surplus.
Exam Tip
Subtract the land cost from both alternatives; a larger completed value can still produce a smaller surplus if costs are higher.
Common Mistakes to Avoid
- -Choosing the use with the highest completed value
- -Leaving the land cost out of the surplus calculation
- -Subtracting the land cost from only one alternative
Concept Deep Dive
Analysis
This question tests a financial feasibility comparison between two development options. For each use, subtract non-land development costs and the land cost from the completed value. The use with the larger surplus is favored under the stated equal-timing and equal-risk assumptions.
Background Knowledge
Highest and best use analysis requires a use to be legally permissible, physically possible, financially feasible and maximally productive. Comparing the surplus each use produces after costs is one way to judge maximal productivity among feasible alternatives. In practice, differences in timing and risk would also need to be considered.
Real-World Application
A developer asks an appraiser to evaluate a 10-acre site for either apartments or a retail center. Although the retail center would be worth more when complete, its higher costs leave no surplus after land, so the apartment use appears more productive under similar timing and risk.
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