Ground rent capitalization derives site value from which of the following?
Correct Answer
C) The rent the land itself earns under a lease
Why this is correct: Ground rent capitalization derives site value from the rent the land itself earns under a lease (the ground rent). This lease payment is a direct market indicator of the income the land can generate independently of any building. Capitalizing this annual ground rent at an appropriate market-derived rate yields an estimate of the land's value. Why the other choices are wrong: "The rent the completed building earns yearly" is the total property income, not just the land's portion. "The ratio of site value to total property value" describes the allocation method, not ground rent capitalization. "The residual left after paying building costs" describes the land residual technique within the cost or income approaches. Exam tip: This method is only applicable where genuine, market-based ground leases exist, which limits its use to specific markets.
Why This Is the Correct Answer
Why this is correct: Ground rent capitalization derives site value from the rent the land itself earns under a lease (the ground rent). This lease payment is a direct market indicator of the income the land can generate independently of any building. Capitalizing this annual ground rent at an appropriate market-derived rate yields an estimate of the land's value. Why the other choices are wrong: "The rent the completed building earns yearly" is the total property income, not just the land's portion. "The ratio of site value to total property value" describes the allocation method, not ground rent capitalization. "The residual left after paying building costs" describes the land residual technique within the cost or income approaches. Exam tip: This method is only applicable where genuine, market-based ground leases exist, which limits its use to specific markets.
More land-or-site-valuation Questions
Under which condition is the land residual technique most applicable?
What is the appraiser's obligation when a site's legal description does not match its apparent physical boundaries?
Why can the same physical parcel carry different values in two assignments?
A site differs from land in that a site is best described as which of the following?
In a built-up area where no vacant land has sold for years, which approach to site value is the usual fallback?
How is entrepreneurial profit treated in the subdivision development method?
A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
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