All amounts in a land residual analysis are on one consistent present-value basis. Gross proceeds are $1,500,000; nonland development costs are $650,000; entrepreneurial incentive is $150,000; and all remaining timing and holding deductions are $200,000. These categories do not overlap. What amount remains for land?
Correct Answer
A) $500,000
Residual = $1,500,000 − $650,000 − $150,000 − $200,000 = $500,000. The indicated result is $500,000. Common errors: leaving out the incentive and timing deductions gives $850,000; leaving out the timing/holding deductions gives $700,000; leaving out the incentive gives $650,000.
Why This Is the Correct Answer
Option A is correct because the land residual equals gross proceeds less all non-overlapping deductions: $1,500,000 - $650,000 - $150,000 - $200,000 = $500,000. Total development costs, incentive and timing deductions all come off before the land residual. The common present-value basis removes the need for further discounting.
Why the Other Options Are Wrong
Option B: $650,000
Option B, $650,000, leaves out the incentive: $1,500,000 - $650,000 - $200,000 = $650,000. The $150,000 incentive must also be deducted, giving $500,000.
Option C: $700,000
Option C, $700,000, leaves out the timing and holding deductions: $1,500,000 - $650,000 - $150,000 = $700,000. Subtracting the $200,000 as well gives $500,000.
Option D: $850,000
Option D, $850,000, deducts only the nonland development costs: $1,500,000 - $650,000 = $850,000. The incentive and timing deductions must also come off, giving $500,000.
Each cost off the top
Start with gross proceeds and subtract each non-overlapping deduction; what remains goes to the land.
How to use: Use this phrase to check that you subtracted each listed deduction.
Exam Tip
Count the deductions listed and confirm you subtracted each one exactly once.
Common Mistakes to Avoid
- -Omitting developer incentive
- -Omitting holding or timing costs
- -Double counting overlapping cost categories
Concept Deep Dive
Analysis
This question tests a land residual or development calculation. All amounts are on one present-value basis and do not overlap, so each deduction is subtracted from gross proceeds. Including each category gives the amount left for land.
Background Knowledge
In the subdivision development or land residual method, total development costs are subtracted from projected gross sales to derive land value. A complete analysis includes developer incentive and accounts for the time value of money. Categories must not overlap to avoid double counting.
Real-World Application
An appraiser values raw acreage for a planned subdivision. After projecting lot sale proceeds, the appraiser subtracts site development costs, developer incentive and holding costs to estimate what a developer could pay for the land.
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