A tract is proposed for subdivision into finished lots. Gross sellout of the lots is projected at $1,200,000. Non-land development, selling and holding costs total $650,000, and entrepreneurial incentive is $130,000. Ignoring cash-flow timing, what residual is available for the land?
Correct Answer
D) $420,000
Total deductions are $650,000 + $130,000 = $780,000, so the undiscounted residual is $1,200,000 − $780,000 = $420,000. Entrepreneurial incentive is deducted along with the other costs; leaving it out gives $1,200,000 − $650,000 = $550,000. Gross retail sellout is not raw land value. A complete subdivision analysis would additionally support feasibility, absorption and the timing and risk of its cash flows, while treating return components consistently.
Why This Is the Correct Answer
Option D is correct because total deductions are $650,000 + $130,000 = $780,000, and the undiscounted residual is $1,200,000 − $780,000 = $420,000. Development costs and developer incentive are subtracted from projected lot sales to estimate vacant land value. Because cash-flow timing is ignored, no further adjustment is needed.
Why the Other Options Are Wrong
Option A: $1,200,000
Option A, $1,200,000, is the gross finished-lot sellout. Retail lot sales are not raw land value; the residual is $1,200,000 − $780,000 = $420,000.
Option B: $780,000
Option B, $780,000, is the total of non-land costs and incentive ($650,000 + $130,000). The land receives the remainder: $1,200,000 − $780,000 = $420,000.
Option C: $550,000
Option C, $550,000, deducts the $650,000 of costs but leaves out the $130,000 entrepreneurial incentive: $1,200,000 − $650,000 = $550,000. The developer's incentive must also be deducted, giving $1,200,000 − $780,000 = $420,000.
Sellout minus costs equals land
Revenue from finished lots pays all costs and developer incentive first; whatever is left is the land's share.
How to use: Use this when a question gives gross sellout and separate cost and incentive figures.
Exam Tip
Look for wording such as undiscounted or ignoring timing, which signals a straight subtraction, and make sure the incentive is among the deductions.
Common Mistakes to Avoid
- -Treating gross sellout as land value
- -Leaving entrepreneurial incentive out of the deductions
- -Reporting total costs as the residual
Concept Deep Dive
Analysis
This question tests the undiscounted subdivision residual when gross sellout is given directly. Add the non-land costs and entrepreneurial incentive, then subtract that total from sellout to find the land residual. Timing is ignored, so no discounting step applies.
Background Knowledge
In the subdivision development method, the land value is a residual after all costs and developer incentive are deducted from projected lot sales. A complete analysis also supports feasibility and absorption and discounts the cash flows for timing and risk.
Real-World Application
A lender asks an appraiser to test whether a proposed land purchase price is supported. The appraiser projects lot sales, deducts development costs and developer incentive, and compares the residual with the contract price.
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