What happens to the indicated land value if the required developer profit is increased?
Correct Answer
D) It falls, since more is deducted from gross sales
Why this is correct: In a development residual method, land value is the residual after deducting all costs and profit from the projected gross sales revenue. The formula is: Land Value = Gross Revenue - (Development Costs + Marketing Costs + Profit). Increasing the required profit percentage increases the dollar amount of profit deducted, thereby reducing the residual land value. Why the other choices are wrong: 'It rises, since profit is added to the residual' is wrong; profit is deducted, not added. 'It is unaffected, as profit is not a deduction' is wrong; profit is a key deduction. 'It rises in proportion to the profit percentage' is wrong; the relationship is inverse. Exam tip: In any residual calculation, the subject (land, building, profit) is the 'leftover.' Increasing any other component shrinks the leftover.
Why This Is the Correct Answer
Why this is correct: In a development residual method, land value is the residual after deducting all costs and profit from the projected gross sales revenue. The formula is: Land Value = Gross Revenue - (Development Costs + Marketing Costs + Profit). Increasing the required profit percentage increases the dollar amount of profit deducted, thereby reducing the residual land value. Why the other choices are wrong: 'It rises, since profit is added to the residual' is wrong; profit is deducted, not added. 'It is unaffected, as profit is not a deduction' is wrong; profit is a key deduction. 'It rises in proportion to the profit percentage' is wrong; the relationship is inverse. Exam tip: In any residual calculation, the subject (land, building, profit) is the 'leftover.' Increasing any other component shrinks the leftover.
More Land/Site Questions
Under which condition is the land residual technique most applicable?
Why can the same physical parcel carry different values in two assignments?
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?
Why does a developer's required profit rise for a longer subdivision project?
How does holding cost enter the valuation of land bought for future development?
Excess land is best described as land that has which characteristic?
Plottage value arises in which of the following situations?
Which of the following is an off-site improvement rather than a site improvement?
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Previous Question
A property sold for $525,000. Improvements had a replacement cost new of $390,000 with 30 percent accrued depreciation. What land value does extraction indicate?
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Net operating income is $240,000 and the building, worth $1,500,000, is capitalized at 9 percent. Using a 7 percent land rate, what does the land residual technique indicate?