Stabilized NOI for the subject property is $210,000. The building's replacement cost new less depreciation (RCNLD) is $1,650,000, the building capitalization rate is 8.0%, and the land capitalization rate is 6.5%. Using the land residual technique, what is the indicated land value?
Correct Answer
B) $1,200,000
Building income = $1,650,000 × 0.08 = $132,000; land income = $210,000 − $132,000 = $78,000; land value = $78,000/0.065 = $1,200,000. The indicated value is $1,200,000. This is the result under the stated inputs, not a universal market ratio or an approval of a proposed development. Common errors: capitalizing all of the NOI as land income gives $3,230,769; allocating building income at the land rate gives $1,580,769; capitalizing land income at the building rate gives $975,000.
Why This Is the Correct Answer
Option B is correct because building income is $1,650,000 × 0.08 = $132,000, leaving land income of $210,000 − $132,000 = $78,000. Capitalizing at the land rate gives $78,000 / 0.065 = $1,200,000. Each component's income is paired with its own rate.
Why the Other Options Are Wrong
Option A: $975,000
Option A, $975,000, capitalizes land income at the building rate: ($210,000 − $132,000) / 0.08 = $78,000 / 0.08. Land income must use the 6.5% land rate, giving $1,200,000.
Option C: $1,580,769
Option C, $1,580,769, allocates building income at the land rate: ($210,000 − $1,650,000 × 0.065) / 0.065 = $102,750 / 0.065. Building income must use the 8% building rate ($132,000), leaving $78,000 and a value of $1,200,000.
Option D: $3,230,769
Option D, $3,230,769, capitalizes all of the NOI as land income: $210,000 / 0.065. The building requires $132,000 of the NOI, so only $78,000 is land income, giving $1,200,000.
Known part first, residual last
Compute the known component's income with its own rate, subtract from NOI, then capitalize the leftover with the unknown component's rate.
How to use: Use this to keep building and land rates straight in residual problems.
Exam Tip
Label each rate with its component before calculating; a common trap swaps the 8% and 6.5% rates.
Common Mistakes to Avoid
- -Capitalizing total NOI at the land rate
- -Computing building income with the land rate
- -Dividing land income by the building rate
Concept Deep Dive
Analysis
This question tests the land residual technique with a building valued at RCNLD. Building income is the building rate times RCNLD, land income is NOI minus building income, and land value is land income divided by the land rate. Matching each rate to its component is the key.
Background Knowledge
The land residual technique deducts the income attributable to the building, found by multiplying building value by the building capitalization rate, from total net income. The residual income is capitalized at the land rate to indicate land value. It relies on reliable building value and compatible rates.
Real-World Application
An appraiser values the land under a recently completed retail building with documented costs. Deducting the income needed to support the building from stabilized NOI leaves the land's income, which is capitalized at a market-derived land rate.
More Land/Site Questions
How should an appraiser account for a site's access to public sewer compared with competing sites that require septic systems?
Which fact, if supported by competitive-market evidence, most directly supports a unit-price premium for an otherwise comparable site?
A rectangular site's frontage is doubled while its depth is halved, keeping area constant. What is the likely value effect in a retail district?
A downtown site's zoning height limit is reduced from six stories to three. Buyers in this market had been paying for six-story development potential. What effect on land value is most supportable?
A zoning change increases permitted density from four to eight units per acre. What is the likely effect on site value?
Using the allocation method, market evidence supports a typical land-to-total-property-value ratio of 28% for similar improved properties in the subject’s location. An improved comparable sold for $825,000. What land (site) contribution is indicated by applying that ratio?
An appraiser is valuing a vacant site near a landfill. A similar vacant site that is not affected by the landfill sold for $480,000. Paired land sales indicate that proximity to the landfill lowers site prices by $70,000. No other adjustments apply. What is the indicated value of the subject site?
An appraiser is extracting site value from a $600,000 cash sale. The seller's records show an original construction cost of $250,000 and a depreciated book value of $110,000. The appraiser estimates current replacement cost new at $400,000 and accrued depreciation from all causes at $100,000. What is the indicated site value?
Three parcels assembled under single ownership (standard appraisal guidance assemblage) support separate as-is values of $290,000, $340,000, and $250,000. After assemblage for a higher-utility use, the combined site is valued at $1,050,000. Assemblage costs (demolition, legal, holding, and related) total $55,000. What is the indicated net plottage (plottage increment after assemblage costs)?
A comparable commercial site with 65 front feet sold for a cash-equivalent price of $585,000. Per standard appraisal guidance, sale price per front foot is a vacant-land unit of comparison when frontage is a primary value determinant. The subject site has 72 front feet and is otherwise similar. What indicated land value does the front-foot unit support before other adjustments?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
Three parcels assembled under single ownership (standard appraisal guidance assemblage) support separate as-is values of $290,000, $340,000, and $250,000. After assemblage for a higher-utility use, the combined site is valued at $1,050,000. Assemblage costs (demolition, legal, holding, and related) total $55,000. What is the indicated net plottage (plottage increment after assemblage costs)?
Next Question
The subject is a vacant site near an animal rendering plant. A comparable vacant site that is not near a rendering plant sold for $640,000. Market data from paired land sales indicate a discount of $120,000 for rendering plant proximity. No other adjustments apply. What is the indicated land value of the subject?