In the land residual technique, income attributable to the land is found by:
Correct Answer
A) Deducting the income attributable to the improvements from NOI
Deduct the income required by the building from the property’s compatible stabilized NOI. Income to land = total NOI − building value × building capitalization rate. Capitalizing that remainder at a supported land rate indicates land value. Dividing NOI by area is an income unit measure, not this residual calculation.
Why This Is the Correct Answer
Option A is correct because, in the land residual technique, income attributable to the improvements (building value × building capitalization rate) is deducted from the property's NOI. The residual income belongs to the land and may be converted to land value with a land capitalization rate.
Why the Other Options Are Wrong
Option B: Dividing total NOI by the number of acres in the site
Option B divides total NOI by the number of acres in the site. That yields an income-per-acre unit measure, not the land's share of income after the building's required return is deducted.
Option C: Multiplying the building's value by the land capitalization rate
Option C multiplies the building's value by the land capitalization rate. The building's required income uses the building capitalization rate, and that figure is then deducted from NOI rather than treated as land income.
Option D: Subtracting the site's property taxes from gross income
Option D subtracts the site's property taxes from gross income. Property taxes are one operating expense; this step neither produces NOI nor removes the income required by the building.
Building takes its share first
In the land residual technique, the building gets paid first (building value × building rate). The land gets what is left over.
How to use: Use this to remember which income is deducted and which is left for the land.
Exam Tip
Pair each value with its own rate: building value with the building rate, residual land income with the land rate.
Common Mistakes to Avoid
- -Using the land rate to compute the building's required income
- -Starting from gross income instead of NOI
- -Confusing an income-per-acre measure with residual land income
Concept Deep Dive
Analysis
This question tests the land residual technique in the income approach. The building's required income, found by multiplying building value by the building capitalization rate, is deducted from net operating income. The remaining income is attributed to the land and can be capitalized at a land rate.
Background Knowledge
Residual techniques split a property's income between land and building. In the land residual technique, building value is known or estimated, its required income is deducted from NOI, and the remainder is capitalized to indicate land value.
Real-World Application
An appraiser values the land under a new apartment building where the building's value can be estimated reliably from cost. She deducts the building's required return from the stabilized NOI and capitalizes the remaining income at a market land rate.
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Vacant land may be valued by a multi-comparable mean unit price ($/acre) applied to the subject’s acreage. Three similar vacant sales: Comp A $840,000 for 8.0 acres; Comp B $1,080,000 for 10.0 acres; Comp C $714,000 for 7.0 acres. Subject is 6.4 acres (no other adjustments). What indicated land value by mean $/acre results?