In the subdivision development method, which cost category covers streets, drainage and utility mains?
Correct Answer
A) Direct costs of developing the raw land
Streets, drainage and utility-main construction are direct physical development costs in this model. Carrying, marketing and entrepreneurial incentive are separate categories. Define categories consistently and include each relevant cost once; terminology can vary without changing the cash-flow economics.
Why This Is the Correct Answer
Option A is correct because streets, drainage and utility mains are physical construction work, involving labor and materials, needed to develop the raw land into lots. These are direct costs, separate from carrying costs, marketing and entrepreneurial incentive.
Why the Other Options Are Wrong
Option B: Indirect costs of carrying the investment
Option B is wrong because indirect costs of carrying the investment cover items such as property taxes and financing during development, not the physical construction of streets, drainage and utility mains.
Option C: The entrepreneurial incentive to develop
Option C is wrong because entrepreneurial incentive is the developer's expected return for taking on the project, not the cost of building streets, drainage and utility mains.
Option D: Marketing costs incurred in selling lots
Option D is wrong because marketing costs incurred in selling lots cover advertising and sales expenses, not the physical infrastructure of the subdivision.
Direct means dirt work
Direct costs are what you can see built on the ground, like streets, pipes and drains; indirect costs are paper and money items.
How to use: Use this to sort any listed cost into direct or indirect in a development problem.
Exam Tip
Physical construction items are direct costs; financing, taxes, fees and marketing are typically indirect.
Common Mistakes to Avoid
- -Classifying site infrastructure as an indirect cost
- -Counting entrepreneurial incentive as a construction cost
- -Including the same cost in two categories
Concept Deep Dive
Analysis
This question tests the cost categories used in the subdivision development method. Streets, drainage and utility mains are physical construction items that turn raw land into finished lots, so they are classified as direct development costs.
Background Knowledge
Total development cost includes direct costs (construction labor and materials, contractor overhead and profit) and indirect costs (professional fees, taxes and financing during construction, marketing), along with entrepreneurial profit or incentive. Terminology varies, but each cost should be included once and categorized consistently.
Real-World Application
An appraiser builds a subdivision cash flow and lists grading, paving, storm drains and water and sewer lines as direct costs. Engineering fees, construction loan interest and sales commissions go in separate categories, and developer incentive is deducted once.
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Previous Question
Market extraction from recent improved sales supports a typical land-to-total-price allocation ratio of 27% for properties competitive with the subject. The subject’s improved fee-simple sale price (or reconciled improved value used as the allocation base) is $1,125,000. Per the allocation method (land = allocation ratio × total improved price), what indicated land value results?
Next Question
Two contiguous parcels under different ownership are worth $175,000 and $225,000 if used separately. After assemblage under single ownership (standard appraisal guidance assemblage), the combined site supports a market value of $400,000 for the same utility intensity (no higher-utility assembled use is supported). What is the indicated plottage value (incremental value from assemblage)?