Gross sellout of the finished lots in a planned subdivision is projected at $4,600,000. All non-land development, selling and holding costs total $2,500,000, and entrepreneurial incentive is $350,000. Ignoring the timing of cash flows, what amount remains for the land?
Correct Answer
D) $1,750,000
Total deductions are $2,500,000 + $350,000 = $2,850,000, so the undiscounted residual is $4,600,000 − $2,850,000 = $1,750,000. Gross retail sellout is not raw land value, and the entrepreneurial incentive must be deducted along with the costs. 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 development costs, including selling and holding costs, plus the incentive are subtracted from the projected gross lot sales to derive the value for the vacant land: $2,500,000 + $350,000 = $2,850,000, and $4,600,000 − $2,850,000 = $1,750,000. This result ignores timing; a fuller analysis would discount cash flows and support absorption and feasibility.
Why the Other Options Are Wrong
Option A: $4,600,000
Option A, $4,600,000, is the gross finished-lot sellout. Gross retail sellout is not raw land value because the costs and incentive needed to create and sell the lots must be deducted.
Option B: $2,850,000
Option B, $2,850,000, is the total of non-land costs and incentive ($2,500,000 + $350,000), not what remains for the land. The residual is $4,600,000 − $2,850,000 = $1,750,000.
Option C: $2,100,000
Option C, $2,100,000, deducts the costs but leaves out the entrepreneurial incentive: $4,600,000 − $2,500,000 = $2,100,000. The developer's incentive is also a deduction, so the residual is $4,600,000 − $2,500,000 − $350,000 = $1,750,000.
Sellout minus costs equals land
Land is what is left after the developer pays for everything else and earns a profit. Subtract all non-land costs and the incentive from gross sales.
How to use: Use this to set up any land residual or development method problem.
Exam Tip
List every deduction before subtracting; when costs and incentive are given separately, include both.
Common Mistakes to Avoid
- -Treating gross lot sellout as raw land value
- -Reporting total deductions as the land residual
- -Leaving out entrepreneurial incentive from the deductions
Concept Deep Dive
Analysis
This question tests the basic land residual logic of an undiscounted development analysis. The land residual equals gross finished-lot sellout minus all non-land costs and the entrepreneurial incentive. Because timing is ignored, no discounting is needed, but both deductions must be taken.
Background Knowledge
The subdivision development method values raw land by projecting the sales of finished lots and deducting the costs of development, sale, holding, and the developer's incentive. A complete analysis also considers absorption and the timing and risk of cash flows, usually through discounting.
Real-World Application
A developer asks an appraiser what a raw tract is worth for a planned lot subdivision. The appraiser projects total lot sales, deducts site work, fees, marketing, carrying costs and developer profit, and then refines the result with a discounted cash flow for the expected sell-out period.
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