Land is worth $300,000 at a 6% land rate; the whole property earns $102,000 NOI. Under the building residual technique with an 8% building rate, the building value is:
Correct Answer
D) $1,050,000 after the land's claim
Why this is correct: Using the building residual technique: 1) Calculate land income: $300,000 land value × 6% land rate = $18,000. 2) Subtract land income from total NOI: $102,000 - $18,000 = $84,000 building income. 3) Capitalize building income at the 8% building rate: $84,000 ÷ 0.08 = $1,050,000 building value. Why the other choices are wrong: $700,000 remaining before the site share is a miscalculation. $1,275,000 on the whole income incorrectly capitalizes the entire NOI at 8%. $840,000 at a blended rate uses an incorrect blended rate. Exam tip: In residual techniques, allocate income to each component first, then capitalize.
Why This Is the Correct Answer
Why this is correct: Using the building residual technique: 1) Calculate land income: $300,000 land value × 6% land rate = $18,000. 2) Subtract land income from total NOI: $102,000 - $18,000 = $84,000 building income. 3) Capitalize building income at the 8% building rate: $84,000 ÷ 0.08 = $1,050,000 building value. Why the other choices are wrong: $700,000 remaining before the site share is a miscalculation. $1,275,000 on the whole income incorrectly capitalizes the entire NOI at 8%. $840,000 at a blended rate uses an incorrect blended rate. Exam tip: In residual techniques, allocate income to each component first, then capitalize.
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