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).