Under which condition is the land residual technique most applicable?
Correct Answer
B) When compatible NOI, building value and both component rates are supported
Income land residual requires compatible supported total NOI, building value, building income rate and land capitalization rate. Building income is deducted from total NOI and the remaining land income is capitalized. Neither ground-lease existence nor subdivision approval alone provides those inputs.
Why This Is the Correct Answer
Option B is correct because the land residual technique requires a compatible NOI, a supported building value and supported building and land capitalization rates. Building income is deducted from total NOI and the remaining land income is capitalized at the land rate. When these inputs are supported, the technique is most applicable.
Why the Other Options Are Wrong
Option A: When vacant land sales exist, with or without income evidence
Option A says the technique applies when vacant land sales exist, with or without income evidence. The land residual is an income method and cannot work without income evidence; vacant land sales support sales comparison instead.
Option C: Whenever a ground lease exists on the site, even without support for the rates
Option C says it applies whenever a ground lease exists, even without support for the rates. A ground lease alone does not supply supported rates, and ground rent is capitalized directly rather than through a land residual.
Option D: Whenever a subdivision plat is approved, even without NOI
Option D says it applies whenever a subdivision plat is approved, even without NOI. Plat approval does not provide net operating income, which the technique requires.
Four inputs: NOI, building, two rates
Land residual needs NOI, building value, a building rate and a land rate, all compatible with each other.
How to use: Use this checklist to judge whether a land residual analysis is supportable.
Exam Tip
Choices with phrases like even without support or with or without income evidence describe conditions that undercut an income technique.
Common Mistakes to Avoid
- -Running a land residual without supported capitalization rates
- -Confusing ground rent capitalization with the land residual technique
- -Assuming any land event, such as plat approval, supplies the needed income data
Concept Deep Dive
Analysis
This question tests the data requirements of the income land residual technique. The method needs a supported net operating income, a building value, and market-derived capitalization rates for both building and land. Without those compatible inputs, the residual land income cannot be reliably isolated and capitalized.
Background Knowledge
The land residual technique requires an estimate of building value under highest and best use, an estimate of annual net operating income under highest and best use, and market-derived capitalization rates for land and building. It is often considered where vacant land sales are scarce and the improvements are relatively new or reliably valued. Its reliability depends on how well each input is supported.
Real-World Application
An appraiser valuing land under a newly built apartment property has reliable rent data, a well-supported construction cost and market-derived rates. With these inputs, a land residual analysis is a reasonable cross-check on scarce land sales.
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A hotel’s income includes room revenue, a restaurant business and a brand franchise. Why is a land residual analysis of the whole enterprise’s income not appropriate?
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Three recent vacant-land sales of similar highest-and-best-use acreage closed at: Comp A $960,000 for 8.0 acres; Comp B $1,100,000 for 10.0 acres; Comp C $1,040,000 for 8.0 acres. The subject is 7.5 acres in the same competitive market (no other adjustments). Per standard appraisal guidance sales comparison for land, what indicated land value by mean $/acre × subject acres results?