For the income land residual technique, what information about the building component must be credibly supported?
Correct Answer
A) Its value and appropriate income rate, compatible with the total NOI
The income land residual technique requires a credible building value and appropriate building income rate so building income can be deducted from compatible total NOI; the remainder is capitalized at a land rate. New improvements may make those estimates easier, but being new is not a universal prerequisite.
Why This Is the Correct Answer
Option A is correct because the building's income is computed as its value multiplied by an appropriate capitalization rate, and that amount is deducted from total NOI. If the building value or rate is unsupported or not compatible with the total NOI, the residual land income is unreliable. The remaining income is then capitalized at a land rate.
Why the Other Options Are Wrong
Option B: That its income contribution is zero for the analysis period
Option B, that the building's income contribution is zero for the analysis period, misstates the method. The technique deducts a positive income attributable to the building; it does not assume the building earns nothing.
Option C: That demolition must occur within a few years
Option C, that demolition must occur within a few years, is not an input to the technique. The method needs a building value and rate, not a demolition schedule.
Option D: That its historical construction cost equals its current contributory value
Option D, that historical construction cost equals current contributory value, is not required. The analysis needs a credible current building value, and historical cost does not establish that value.
Building out, land left
Take the building's share of income out of NOI; the income left over belongs to the land and is capitalized at the land rate.
How to use: Use this to recall which component must be known in the land residual technique: the building.
Exam Tip
In a land residual question, the known component is the building; in a building residual question, the known component is the land.
Common Mistakes to Avoid
- -Assuming the building's income is zero in a land residual analysis
- -Using historical construction cost as the current building value
- -Mixing up the land residual and building residual techniques
Concept Deep Dive
Analysis
This question tests the inputs needed for the income land residual technique. The method deducts the income attributable to the building from total net operating income and capitalizes the remainder as land income. That requires a supported building value and building rate that fit the total NOI.
Background Knowledge
In the income land residual technique, building income equals building value times a building capitalization rate. That amount is subtracted from net operating income, and the residual income is capitalized at a land rate to indicate land value. New improvements can make the building estimates easier to support, but newness is not a universal prerequisite.
Real-World Application
An appraiser analyzing a recently built office property has a well-supported building value from cost data and a market-derived building rate. The appraiser deducts building income from stabilized NOI and capitalizes the residual at a land rate to test the land value.
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Three competitive vacant land sales, on a cash-equivalent basis, indicate $40, $44, and $48 per SF. The subject site is 7,500 SF. Based on the mean unit price, what is the indicated land value?
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