A subdivision's absorption is projected at 20 lots a year against a market absorbing 8. What should the appraiser do?
Correct Answer
B) Use the market rate and extend the sell-out period
Why this is correct: The absorption rate must be based on demonstrated market demand, not an optimistic projection. Using the supportable market rate (8 lots/year) extends the sell-out period, increasing carrying costs and risk, which reduces the present value of the land. Why the other choices are wrong: 'Accept the projection as the developer's business plan' is incorrect; the appraiser must independently verify market absorption. 'Average the two figures to produce a middle estimate' lacks analytical support and misrepresents market reality. 'Value the tract by allocation to avoid the question' is not a proper solution; the absorption rate is a critical input in development valuation. Exam tip: Always base absorption rates on objective market evidence, not proforma assumptions.
Why This Is the Correct Answer
Why this is correct: The absorption rate must be based on demonstrated market demand, not an optimistic projection. Using the supportable market rate (8 lots/year) extends the sell-out period, increasing carrying costs and risk, which reduces the present value of the land. Why the other choices are wrong: 'Accept the projection as the developer's business plan' is incorrect; the appraiser must independently verify market absorption. 'Average the two figures to produce a middle estimate' lacks analytical support and misrepresents market reality. 'Value the tract by allocation to avoid the question' is not a proper solution; the absorption rate is a critical input in development valuation. Exam tip: Always base absorption rates on objective market evidence, not proforma assumptions.
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How is entrepreneurial profit treated in the subdivision development method?
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In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
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