Under which condition is the land residual technique most applicable?
Correct Answer
B) When building value and the cap rates are both known
Why this is correct: The land residual technique is most applicable when the building value and the building capitalization rate are known and supportable. The method calculates the income attributable to the building (building value multiplied by the building cap rate). This amount is subtracted from the total net operating income (NOI). The remaining income is attributed to the land and is capitalized using the land capitalization rate to estimate land value. Why the other choices are wrong: "When many vacant comparable sites have sold recently" describes the condition for the sales comparison approach. "When the parcel is encumbered by a long ground lease" is a condition for the ground rent capitalization method. "When a subdivision plat has already been approved" is more relevant to the subdivision development method. Exam tip: In residual techniques, any error in the known inputs (like building value) is absorbed into the residual component (land value).
Why This Is the Correct Answer
Why this is correct: The land residual technique is most applicable when the building value and the building capitalization rate are known and supportable. The method calculates the income attributable to the building (building value multiplied by the building cap rate). This amount is subtracted from the total net operating income (NOI). The remaining income is attributed to the land and is capitalized using the land capitalization rate to estimate land value. Why the other choices are wrong: "When many vacant comparable sites have sold recently" describes the condition for the sales comparison approach. "When the parcel is encumbered by a long ground lease" is a condition for the ground rent capitalization method. "When a subdivision plat has already been approved" is more relevant to the subdivision development method. Exam tip: In residual techniques, any error in the known inputs (like building value) is absorbed into the residual component (land value).
More land-or-site-valuation Questions
What is the appraiser's obligation when a site's legal description does not match its apparent physical boundaries?
Why can the same physical parcel carry different values in two assignments?
A site differs from land in that a site is best described as which of the following?
In a built-up area where no vacant land has sold for years, which approach to site value is the usual fallback?
How is entrepreneurial profit treated in the subdivision development method?
A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
An appraiser is valuing undeveloped land intended for a 40-lot subdivision. Market data indicates strong demand, but the only nearby comparable subdivision sold out in 3 years with steady monthly absorption. The subject site is larger, topographically constrained, and lacks existing infrastructure. Which factor most critically affects the reliability of using the comparable’s absorption rate in the subject’s land residual analysis?
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