How is entrepreneurial profit treated in the subdivision development method?
Correct Answer
B) Deducted as a cost of undertaking the project
Why this is correct: In the subdivision development method, entrepreneurial profit is a deduction from gross revenue (along with direct and indirect costs) to arrive at the residual land value. It represents the developer's required return for risk and effort. Why the other choices are wrong: "Added to gross sales before any deductions" is wrong; it would inflate revenue. "Ignored, since profit is not an actual expense" is wrong; profit is a market-required incentive. "Applied only if the developer reports a loss" is wrong; profit is always deducted as a cost. Exam tip: Think of entrepreneurial profit as a necessary cost of development, deducted to find what a developer would pay for the raw land.
Why This Is the Correct Answer
Why this is correct: In the subdivision development method, entrepreneurial profit is a deduction from gross revenue (along with direct and indirect costs) to arrive at the residual land value. It represents the developer's required return for risk and effort. Why the other choices are wrong: "Added to gross sales before any deductions" is wrong; it would inflate revenue. "Ignored, since profit is not an actual expense" is wrong; profit is a market-required incentive. "Applied only if the developer reports a loss" is wrong; profit is always deducted as a cost. Exam tip: Think of entrepreneurial profit as a necessary cost of development, deducted to find what a developer would pay for the raw land.
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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?
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?
An appraiser is valuing undeveloped land intended for a 40-lot subdivision. Market data indicates strong demand, but the only nearby comparable subdivision sold out in 3 years with steady monthly absorption. The subject site is larger, topographically constrained, and lacks existing infrastructure. Which factor most critically affects the reliability of using the comparable’s absorption rate in the subject’s land residual analysis?
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Previous Question
A market study shows lot prices in a proposed subdivision are likely to soften during the sell-out. How should the appraiser handle this?
Next Question
An appraiser is valuing raw land for a proposed 48-lot residential subdivision using the land residual technique. Total projected gross lot sales are $12,000,000. Development costs (excluding land) total $3,200,000, and the developer’s required profit is 15% of gross sales. All cash flows occur at project completion in 24 months, and the appropriate discount rate for the residual land value is 8% per annum, compounded annually. What is the present value of the land?