Net operating income is $240,000 and the building, worth $1,500,000, is capitalized at 9 percent. Using a 7 percent land rate, what does the land residual technique indicate?
Correct Answer
C) $1,500,000
Why this is correct: The land residual technique allocates net operating income (NOI) between building and land. Building income = $1,500,000 × 9% = $135,000. Land income = NOI - building income = $240,000 - $135,000 = $105,000. Land value = land income ÷ land cap rate = $105,000 ÷ -0.07 = $1,500,000. Why the other choices are wrong: "$1,200,000" results from miscalculation. "$1,350,000" might come from misapplying rates. "$1,750,000" overestimates by not correctly subtracting building income. Exam tip: Land residual: subtract building income (value × rate) from NOI, then divide remainder by land cap rate.
Why This Is the Correct Answer
Why this is correct: The land residual technique allocates net operating income (NOI) between building and land. Building income = $1,500,000 × 9% = $135,000. Land income = NOI - building income = $240,000 - $135,000 = $105,000. Land value = land income ÷ land cap rate = $105,000 ÷ -0.07 = $1,500,000. Why the other choices are wrong: "$1,200,000" results from miscalculation. "$1,350,000" might come from misapplying rates. "$1,750,000" overestimates by not correctly subtracting building income. Exam tip: Land residual: subtract building income (value × rate) from NOI, then divide remainder by land cap rate.
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