How does holding cost enter the valuation of land bought for future development?
Correct Answer
C) It reduces what a buyer can pay for the land now
Why this is correct: Holding costs (property taxes, insurance, interest on capital) are ongoing expenses incurred while the land is held for future development. A rational investor will discount the price they are willing to pay today to account for these future cash outflows, reducing the present land value. Why the other choices are wrong: 'It is added to the land value as an improvement' is wrong; holding costs are expenses, not improvements. 'It is ignored, as it is a matter for the owner' is wrong; it's a fundamental investment consideration. 'It is recovered fully when the land is later sold' is wrong; recovery is not guaranteed and is factored into the initial price. Exam tip: In discounted cash flow or residual land analysis, holding costs are a deduction that reduces the present value of the land.
Why This Is the Correct Answer
Why this is correct: Holding costs (property taxes, insurance, interest on capital) are ongoing expenses incurred while the land is held for future development. A rational investor will discount the price they are willing to pay today to account for these future cash outflows, reducing the present land value. Why the other choices are wrong: 'It is added to the land value as an improvement' is wrong; holding costs are expenses, not improvements. 'It is ignored, as it is a matter for the owner' is wrong; it's a fundamental investment consideration. 'It is recovered fully when the land is later sold' is wrong; recovery is not guaranteed and is factored into the initial price. Exam tip: In discounted cash flow or residual land analysis, holding costs are a deduction that reduces the present value of the land.
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Under which condition is the land residual technique most applicable?
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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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