For a vacant site, an office use would be worth $2,400,000 when complete and cost $1,950,000 to produce, including entrepreneurial incentive. A retail use would be worth $1,800,000 and cost $1,450,000. Which use and land value does this test support?
Correct Answer
C) Office, $450,000
Land value for a use can be estimated as total property value less the full cost of producing the improvements: office $2,400,000 − $1,950,000 = $450,000; retail $1,800,000 − $1,450,000 = $350,000. The office use gives the higher land value.
Why This Is the Correct Answer
Option C is correct because the office residual is $2,400,000 − $1,950,000 = $450,000, while the retail residual is $1,800,000 − $1,450,000 = $350,000. The office use yields the higher land value, so the test supports office with a land value of $450,000. Total property value less full production cost indicates land value for a given use.
Why the Other Options Are Wrong
Option A: Office, $2,400,000
Option A, office at $2,400,000, names the right use but reports its total completed property value, not land value. Subtracting the $1,950,000 production cost gives a land value of $450,000.
Option B: Retail, $350,000
Option B, retail at $350,000, is the correct residual for retail ($1,800,000 − $1,450,000), but it is lower than the office residual of $450,000. The higher land value supports office, not retail.
Option D: Retail, $1,800,000
Option D, retail at $1,800,000, reports retail's total completed value rather than land value and picks the use with the lower residual. Retail land value is only $350,000, below office's $450,000.
Highest leftover wins
For each use, value when built minus full cost to build leaves the land's share. The use leaving the biggest land share wins.
How to use: Use this when comparing alternative uses for a vacant site.
Exam Tip
Compare residual land values, not completed property values; the use with the larger completed value is not necessarily the winner.
Common Mistakes to Avoid
- -Reporting total completed value as land value
- -Choosing a use by completed value rather than land residual
- -Leaving entrepreneurial incentive out of production cost
Concept Deep Dive
Analysis
This question tests estimating land value for alternative uses as part of a highest and best use analysis. For each use, subtract the full cost of producing the improvements, including entrepreneurial incentive, from the completed value. The use producing the higher residual land value is supported.
Background Knowledge
In testing highest and best use of land as though vacant, the appraiser compares the land values resulting from alternative legally permissible, physically possible and financially feasible uses. One technique estimates land value for each use as total property value minus the full cost of producing the improvements. The use with the highest land value is maximally productive.
Real-World Application
A developer asks an appraiser to value a corner site that could hold an office building or a retail center. The appraiser estimates each project's completed value and full development cost, then compares the land residuals to identify the supported use.
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Previous Question
Land value may be indicated by extraction (residual): improved sale price minus depreciated improvement cost (RCNLD). Separately, allocation applies a market-supported land-to-total-value ratio to the improved sale. An improved sale closed at $1,450,000. Supported RCNLD of the improvements is $1,050,000. A market land-allocation ratio of 24% is also supported. Which statement correctly contrasts the two land indications?
Next Question
A comparable vacant site sold for $690,000. Unlike the comparable, the subject site is near a metal foundry, which makes it inferior. Paired land sales show a proximity stigma discount of $140,000. No other adjustments apply. What is the indicated value of the subject site?