An appraiser is valuing acreage approved for a residential subdivision. Gross sellout of the finished lots is projected at $3,960,000, non-land development, selling and holding costs total $2,000,000, and entrepreneurial incentive is $400,000. Ignoring cash-flow timing, what residual is available for the land?
Correct Answer
D) $1,560,000
Total deductions are $2,000,000 + $400,000 = $2,400,000, so the undiscounted residual is $3,960,000 − $2,400,000 = $1,560,000. Entrepreneurial incentive is deducted along with the other costs; leaving it out gives $3,960,000 − $2,000,000 = $1,960,000. 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 $2,000,000 + $400,000 = $2,400,000, and the residual is $3,960,000 − $2,400,000 = $1,560,000. Gross retail sellout is not raw land value, so all costs and the developer's incentive must be removed to isolate the land's share.
Why the Other Options Are Wrong
Option A: $3,960,000
Option A, $3,960,000, is the gross finished-lot sellout itself. It deducts none of the $2,400,000 in nonland costs and incentive, so it overstates land value; the residual is $1,560,000.
Option B: $2,400,000
Option B, $2,400,000, is the total of nonland costs and incentive, not the land residual. Land receives what is left after those costs: $3,960,000 − $2,400,000 = $1,560,000.
Option C: $1,960,000
Option C, $1,960,000, deducts the $2,000,000 of costs but leaves out the $400,000 entrepreneurial incentive: $3,960,000 − $2,000,000 = $1,960,000. The incentive must also be deducted, giving $3,960,000 − $2,400,000 = $1,560,000.
Land gets the leftovers
In a residual model the land is paid last: everything else, including the developer's incentive, is deducted first, and whatever remains is the land's share.
How to use: Use this to avoid picking the gross sellout or the cost total as the land value.
Exam Tip
Before subtracting, confirm that entrepreneurial incentive is included in the deductions along with development, selling and holding costs.
Common Mistakes to Avoid
- -Treating gross finished-lot sales as raw land value
- -Leaving entrepreneurial incentive out of the deductions
- -Reporting the cost total as the land value
Concept Deep Dive
Analysis
This question tests the basic residual logic of an undiscounted land development analysis. Add the nonland costs and the entrepreneurial incentive, then subtract that total from gross sellout. The residual is the amount available to pay for the land.
Background Knowledge
In the development method, land value is the residual left after projected gross sales are reduced by all costs to develop and sell the lots and by the developer's required return. A complete analysis also supports feasibility and absorption and discounts the cash flows for timing and risk.
Real-World Application
A lender asks for an appraisal of acreage approved for a small subdivision. The appraiser projects total lot sales, totals all development, selling, holding and profit allowances, and subtracts them to see how much a developer could justify paying for the raw land before refining the analysis with discounting.
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