A subdivision residual model solves for today’s raw-land value from projected lot sales, with development costs, selling and holding costs, and entrepreneurial incentive modeled consistently as separate deductions. Which listed item is the unknown being solved for rather than a nonland deduction?
Correct Answer
C) The purchase price paid for the raw acreage
In this residual setup the unknown is raw-land value. Deduct nonland development, sales and holding costs and the modeled entrepreneurial incentive, then account for timing consistently. Deducting the very land value being solved for would be circular. Avoid counting the same return twice.
Why This Is the Correct Answer
Option C is correct because the purchase price of the raw acreage is the land value the model is solving for. Deducting it as a cost would be circular, since the model's answer would depend on itself. The other options are nonland deductions taken from gross lot sales before discounting.
Why the Other Options Are Wrong
Option A: Developer profit and entrepreneurial incentive
Option A, developer profit and entrepreneurial incentive, is a deduction in the model. It represents the return the developer expects and is subtracted from gross lot sales along with direct and indirect costs.
Option B: Costs of streets, utilities and other site work
Option B, costs of streets, utilities and other site work, are direct development costs. They are deducted from projected lot sales because they are spent to create finished lots, not part of raw land value.
Option D: Marketing, sales commissions and holding costs
Option D, marketing, sales commissions and holding costs, are indirect and carrying costs of selling the lots. They are deducted from gross sales in the model rather than being the unknown.
Land is the leftover
Lot sales minus everything it takes to build and sell the lots, discounted for time, leaves the raw land. The leftover cannot be one of the costs you subtracted.
How to use: Use this to spot which item is the answer rather than an input in residual problems.
Exam Tip
In any residual question, identify the unknown first; any option naming that unknown cannot be a deduction.
Common Mistakes to Avoid
- -Deducting the land purchase price in the land value model
- -Omitting entrepreneurial incentive from the deductions
- -Counting developer profit twice, in the costs and the discount rate
Concept Deep Dive
Analysis
This question tests the structure of the subdivision development method. Projected lot sales are reduced by development costs, selling and holding costs, and entrepreneurial incentive, and the net proceeds are discounted to indicate raw land value. The raw land value is the output, so it cannot also be a deduction.
Background Knowledge
In the subdivision development method, all direct and indirect costs and entrepreneurial incentive are deducted from the anticipated gross sales of finished lots. The net proceeds are discounted over the development and absorption period at a market-derived rate to indicate raw land value. The method is sensitive to assumptions about absorption, costs and discount rate.
Real-World Application
An appraiser values 40 acres proposed for a residential subdivision. The appraiser projects lot prices and absorption, subtracts site work, marketing, holding costs and developer incentive, and discounts the net proceeds to estimate what the raw acreage is worth today.
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Previous Question
Under the land residual technique, stabilized NOI is $210,000. The building is worth $1,800,000 and is capitalized at 8%. The land capitalization rate is 6%. What is the indicated land value?
Next Question
Vacant land may be valued by a multi-comparable median unit price ($/SF of site) applied to the subject’s site area. Five similar vacant comps support unit prices of $34, $36, $38, $40, and $43 per square foot. Subject contains 15,000 SF. What indicated land value by median $/SF results?