Ground rent capitalization derives site value from which of the following?
Correct Answer
C) Supported net ground income capitalized at a compatible land rate
Ground-rent capitalization uses supported net income attributable to the land, with a rate appropriate for that income and the interest being valued. Gross contract rent alone is not automatically market rent or net income; actual lease term, expenses and reversion may require further analysis.
Why This Is the Correct Answer
Option C is correct because ground rent capitalization takes the estimated market rent for the land, less owner expenses, and capitalizes it at a market-derived land capitalization rate. The income must be attributable to the land, and the rate must suit that income and the interest being valued.
Why the Other Options Are Wrong
Option A: Total rent of the completed building without separating expenses
Option A uses total rent of the completed building without separating expenses. That is gross building income, not net income attributable to the land, so it does not fit ground rent capitalization.
Option B: A land-to-total value ratio multiplied by the sale price
Option B, a land-to-total value ratio multiplied by the sale price, describes the allocation method. It does not capitalize ground income.
Option D: The gross lot sellout before any development costs
Option D, the gross lot sellout before any development costs, is a starting figure in subdivision development analysis. It is not capitalized ground income and overstates land value if used alone.
Land income, land rate
Ground rent capitalization pairs net land income with a land capitalization rate, keeping both inputs about the land.
How to use: Use this to identify ground rent capitalization among land valuation methods.
Exam Tip
Match each land method to its inputs: ratios for allocation, lot sellout for subdivision development, and net land income with a land rate for ground rent capitalization.
Common Mistakes to Avoid
- -Capitalizing gross building rent instead of net land income
- -Confusing ground rent capitalization with the allocation method
- -Assuming contract ground rent equals market rent
Concept Deep Dive
Analysis
This question tests what ground rent capitalization is based on. The method capitalizes supported net income attributable to the land using a compatible land capitalization rate. The other options describe different methods or use inappropriate inputs.
Background Knowledge
Ground rent capitalization is one of several land valuation methods, along with sales comparison, allocation, extraction, land residual and subdivision development. It is most useful where land is commonly leased and ground rent data are available. Contract rent may differ from market rent, and lease terms and reversion can require further analysis.
Real-World Application
In a downtown area where many parcels are under long-term ground leases, an appraiser studies market ground rents and expenses. She capitalizes the subject's net ground income at a land rate derived from comparable leased-fee land sales.
More Land/Site Questions
How should an appraiser account for a site's access to public sewer compared with competing sites that require septic systems?
Which fact, if supported by competitive-market evidence, most directly supports a unit-price premium for an otherwise comparable site?
A rectangular site's frontage is doubled while its depth is halved, keeping area constant. What is the likely value effect in a retail district?
A downtown site's zoning height limit is reduced from six stories to three. Buyers in this market had been paying for six-story development potential. What effect on land value is most supportable?
A zoning change increases permitted density from four to eight units per acre. What is the likely effect on site value?
Using the allocation method, market evidence supports a typical land-to-total-property-value ratio of 28% for similar improved properties in the subject’s location. An improved comparable sold for $825,000. What land (site) contribution is indicated by applying that ratio?
An appraiser is valuing a vacant site near a landfill. A similar vacant site that is not affected by the landfill sold for $480,000. Paired land sales indicate that proximity to the landfill lowers site prices by $70,000. No other adjustments apply. What is the indicated value of the subject site?
An appraiser is extracting site value from a $600,000 cash sale. The seller's records show an original construction cost of $250,000 and a depreciated book value of $110,000. The appraiser estimates current replacement cost new at $400,000 and accrued depreciation from all causes at $100,000. What is the indicated site value?
Three parcels assembled under single ownership (standard appraisal guidance assemblage) support separate as-is values of $290,000, $340,000, and $250,000. After assemblage for a higher-utility use, the combined site is valued at $1,050,000. Assemblage costs (demolition, legal, holding, and related) total $55,000. What is the indicated net plottage (plottage increment after assemblage costs)?
A comparable commercial site with 65 front feet sold for a cash-equivalent price of $585,000. Per standard appraisal guidance, sale price per front foot is a vacant-land unit of comparison when frontage is a primary value determinant. The subject site has 72 front feet and is otherwise similar. What indicated land value does the front-foot unit support before other adjustments?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
A comparable vacant site sold for $900,000. Unlike the comparable, the subject site is near a cement manufacturing plant, which makes it inferior. Paired land sales show a proximity stigma discount of $150,000. No other adjustments apply. What is the indicated value of the subject site?
Next Question
Which inputs must an appraiser reliably develop to apply the land residual technique?