A transitional site is used as a parking lot until redevelopment. The lot produces gross income of $40,000 a year and its operating expenses are $46,000. Does the interim use contribute to current property value?
Correct Answer
B) No, since its gross income does not exceed its operating expenses
An interim use contributes to current property value if the gross income from the use exceeds the operating expenses related to it. Here expenses exceed income by $6,000.
Why This Is the Correct Answer
Option B is correct because an interim use contributes to current property value only if the gross income from the use exceeds the operating expenses related to it. The parking lot earns $40,000 against $46,000 of expenses, a shortfall of $40,000 − $46,000 = −$6,000, so it adds no value.
Why the Other Options Are Wrong
Option A: Yes, since any income-producing use adds to current property value
Option A says yes because any income-producing use adds to current value. This ignores expenses; a use that earns $40,000 but costs $46,000 to operate loses $6,000 a year and does not contribute.
Option C: Yes, by $40,000 a year capitalized at the land capitalization rate
Option C capitalizes $40,000 a year at the land capitalization rate. That treats gross income as if it were net income; after the $46,000 of expenses there is no positive net income to capitalize.
Option D: No, since interim uses do not affect property value in transition
Option D says no because interim uses do not affect property value in transition. That overstates the rule: an interim use does contribute when its income exceeds its related expenses, which simply is not the case here.
Interim use must net positive
An interim use helps value only when income beats its own expenses. Negative net means no contribution.
How to use: Use this test whenever a question asks if a temporary use adds value to a site awaiting redevelopment.
Exam Tip
Subtract the expenses from the income before deciding; an answer that capitalizes gross income skips that step.
Common Mistakes to Avoid
- -Treating gross income as net income
- -Assuming any income-producing interim use adds value
- -Believing interim uses cannot affect value at all
Concept Deep Dive
Analysis
This question tests when an interim use adds to current value on a site awaiting redevelopment. The test compares the gross income from the interim use with the operating expenses related to it. Here expenses exceed income, so the interim use does not contribute.
Background Knowledge
A transitional site may carry a temporary use, such as parking, while the market matures for its ultimate highest and best use. The interim use contributes to current value when it produces income above its own operating expenses; otherwise it does not add value.
Real-World Application
An appraiser valuing a downtown lot slated for a future office tower finds it operating as surface parking. After reviewing the parking revenue and the related expenses such as attendants and insurance, she determines whether the parking adds anything to current value.
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The allocation method estimates land value as a market-supported land-to-total-property ratio applied to the subject’s supported overall value. Supported overall value is $1,650,000 and the supported land allocation ratio is 19%. What indicated land value by allocation results?