An appraiser knows the site value and needs the building's contribution. Under the building residual technique, income attributable to the building is found by:
Correct Answer
B) Deducting land income from NOI, then capitalizing the remainder
Why this is correct: In the building residual technique, the known land value is capitalized at a land capitalization rate to estimate the income attributable to the land. This land income is subtracted from the total Net Operating Income (NOI). The remaining income is attributed to the building and is capitalized at a building capitalization rate to estimate building value. Why the other choices are wrong: "Dividing the total NOI by the building's full replacement cost new" is not a standard residual technique. "Multiplying land value by the building rate" incorrectly applies the building rate to land value. "Subtracting depreciation from gross income" is part of the income approach but not specific to the building residual technique. Exam tip: Residual techniques allocate NOI. Building residual: 1) Income to Land = Land Value * R_L. 2) Income to Building = NOI - Income to Land. 3) Building Value = Income to Building / R_B.
Why This Is the Correct Answer
Why this is correct: In the building residual technique, the known land value is capitalized at a land capitalization rate to estimate the income attributable to the land. This land income is subtracted from the total Net Operating Income (NOI). The remaining income is attributed to the building and is capitalized at a building capitalization rate to estimate building value. Why the other choices are wrong: "Dividing the total NOI by the building's full replacement cost new" is not a standard residual technique. "Multiplying land value by the building rate" incorrectly applies the building rate to land value. "Subtracting depreciation from gross income" is part of the income approach but not specific to the building residual technique. Exam tip: Residual techniques allocate NOI. Building residual: 1) Income to Land = Land Value * R_L. 2) Income to Building = NOI - Income to Land. 3) Building Value = Income to Building / R_B.
More income-approach Questions
In a percentage lease, rent is commonly structured as:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Previous Question
When an appraiser is reconciling two market-derived vacancy rates for a retail property—one based on a survey of competing properties and one based on the subject's historical performance—the appraiser's final selection for use in the income approach should be primarily based on:
Next Question
The effective gross income multiplier differs from an overall rate in that the EGIM: