Site improvements cost $40,000 to install but add only $25,000 to what buyers will pay. What is the $25,000 called?
Correct Answer
C) The contributory value of the improvements
The $25,000 is the supported contribution of the site work to total market value. Cost and value contribution are different measures. The $15,000 gap alone does not prove which combination of deterioration, obsolescence, market conditions or cost assumptions caused it.
Why This Is the Correct Answer
Option C is correct because the $25,000 is what the site work adds to total market value, which is its contributory value. Cost and value contribution are separate measures, so an improvement can contribute less than it cost. The $15,000 gap by itself does not show which causes produced it.
Why the Other Options Are Wrong
Option A: The reproduction cost of the improvements
Option A, reproduction cost, is the cost to build an exact replica of the improvements. The $25,000 measures what buyers pay, not a cost estimate, and the stated installation cost is $40,000.
Option B: The entrepreneurial profit on the project
Option B, entrepreneurial profit, is the market-derived reward a developer expects for a project. The $25,000 is the value added by the site work, not a developer's profit.
Option D: The accrued depreciation on the site work
Option D, accrued depreciation, would describe a loss from cost, not the value added. The $25,000 is the contribution itself, and the $15,000 gap alone does not prove that depreciation caused the difference.
Cost Is Spent, Contribution Is Paid
Cost is what the owner spent; contributory value is what buyers will pay for it. The two often differ.
How to use: Use this to separate cost figures from value figures in a question.
Exam Tip
When a question contrasts what something cost with what buyers will pay, the buyer figure is the contributory value.
Common Mistakes to Avoid
- -Assuming improvements are worth what they cost
- -Labeling the value added as reproduction cost
- -Assuming any gap between cost and value proves physical deterioration
Concept Deep Dive
Analysis
This question tests the difference between cost and value contribution. The site improvements cost $40,000 but buyers pay only $25,000 more because of them. The amount an improvement adds to market value is its contributory value.
Background Knowledge
Contributory value is the amount an item adds to the value of the whole property, which can differ from its cost. The principle of contribution holds that an improvement's value depends on how much it adds to the whole rather than what it cost. Contributory value is often estimated from depreciated cost but is ultimately a market measure.
Real-World Application
An owner spends heavily on decorative landscaping and paving on a commercial lot. When appraised, market evidence shows buyers pay only part of that cost for the improvements, so the appraiser reports their contributory value rather than their cost.
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Previous Question
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Next Question
A 24-lot residential subdivision tract is being valued as raw land. The finished lots are expected to sell at retail for $95,000 each, a total of $2,280,000. All remaining development costs (infrastructure, holding, marketing, and entrepreneurial incentive) are estimated at $1,050,000; this covers all required nonland costs and incentive without overlap, and timing is not considered. Separately, a recent bulk acreage sale of a comparable unimproved tract indicates $980,000. Which pairing correctly contrasts the subdivision development (developer's residual) indication with the bulk-sale indication?