A utility easement covers 20 percent of a site otherwise worth $300,000. The encumbered strip retains only 40 percent of its unencumbered value. What is the loss?
Correct Answer
C) $36,000
Why this is correct: Unencumbered site value is $300,000. The affected strip is 20% of that, or $60,000. It retains 40% of its value, so loss = $60,000 × (1 - 0.40) = $36,000. Why the other choices are wrong: "$60,000" assumes the strip loses all value, which is incorrect. "$24,000" is 40% of $60,000, the retained value, not the loss. "$120,000" is 40% of total site value, a miscalculation. Exam tip: Calculate encumbrance loss as: (Affected % × Total Value) × (1 - Retained Value %).
Why This Is the Correct Answer
The affected strip is worth $60,000 unencumbered, and losing 60 percent of that value produces a $36,000 loss. The two-step structure of the computation, isolate the affected portion and then apply the loss percentage, is what the item is testing. Because the strip retains 40 percent, the loss is the complement rather than the whole. The remaining 80 percent of the site is unaffected in this simplified problem, though a real analysis would test whether the easement constrains the balance of the site.
Why the Other Options Are Wrong
Option A: $60,000
$60,000 is the full unencumbered value of the affected strip and treats the easement as extinguishing every ounce of value in it. That would be appropriate only for a total taking of that area, not for an easement leaving 40 percent of value intact. The figure is the input to the second step rather than the answer.
Option B: $24,000
$24,000 is 40 percent of $60,000, which is the value the strip retains rather than the value it lost. Selecting it means computing correctly and then reporting the wrong side of the complement. Reading the question for loss versus retained value prevents the error.
Option D: $120,000
$120,000 is 40 percent of the entire $300,000 site value, applying the retention percentage to the whole property rather than to the affected strip. It ignores that only 20 percent of the site is encumbered. The result also exceeds any plausible loss, since it is double the total value of the affected area.
Affected Area Times Lost Share
Two multiplications in order. First, total value times the affected percentage gives the value at risk. Second, that figure times the share lost gives the damage. Never apply the loss percentage to the whole site.
How to use: Compute the affected value first and write it down as an intermediate, then decide whether the question wants the loss or the retained value and take the correct side of the complement.
Exam Tip
Watch for the complement trap. When a problem states what is retained, the loss is one minus that figure, and the exam will offer the retained amount as a distractor.
Common Mistakes to Avoid
- -Applying the retention or loss percentage to the whole site rather than the affected portion
- -Reporting the retained value when the question asks for the loss
- -Assuming an easement extinguishes all value in the encumbered area
Concept Deep Dive
Analysis
An easement does not usually strip a strip of land of all value, because the owner typically retains rights that remain worth something: the surface may still be used for parking, landscaping, drainage, setback satisfaction, or open space, even though building over it is prohibited. Valuing the burden therefore proceeds in two steps. First, determine what portion of the site is affected and what that portion would be worth unencumbered, which here is 20 percent of $300,000, or $60,000. Second, apply the retention percentage the market supports, since the encumbered strip keeps 40 percent of its unencumbered value. The loss is the complement, 60 percent of $60,000, which is $36,000. The retention percentage is the analytically demanding part in practice, derived from paired sales of encumbered and unencumbered parcels or from the appraiser's judgment about what use remains. A related refinement is whether the easement's presence damages the value of the unencumbered remainder by constraining building placement, which would add to the loss.
Background Knowledge
You need the concept of a partial encumbrance and the two-step method of isolating the affected area and applying a market-supported loss or retention percentage. You should also know that easement burdens are derived from paired sales where possible, and that an easement may damage the unencumbered remainder by constraining building placement.
Real-World Application
An appraiser valuing a site crossed by a transmission line easement pairs sales of encumbered and clean lots in the same subdivision, concludes the encumbered area retains roughly 40 percent of its value because it still serves setback and parking needs, applies that finding, and checks whether the easement's location also constrains the buildable envelope.
More Land/Site Questions
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