When applying extraction, which depreciation must be reflected in the improvement estimate?
Correct Answer
D) All accrued depreciation from every cause present
Why this is correct: In extraction, the improvement contribution must reflect all accrued depreciation (physical, functional, and external) to accurately isolate land value. Omitting any type inflates the improvement value and understates land value. Why the other choices are wrong: "Physical deterioration only, as it can be observed" is wrong; functional and external obsolescence also affect value. "Physical and functional, but not external causes" is wrong; external obsolescence must be included if present. "Only the depreciation the owner has documented" is wrong; the appraiser must estimate all depreciation based on market evidence. Exam tip: For extraction, ensure your depreciation estimate includes all three types: physical, functional, and external.
Why This Is the Correct Answer
Why this is correct: In extraction, the improvement contribution must reflect all accrued depreciation (physical, functional, and external) to accurately isolate land value. Omitting any type inflates the improvement value and understates land value. Why the other choices are wrong: "Physical deterioration only, as it can be observed" is wrong; functional and external obsolescence also affect value. "Physical and functional, but not external causes" is wrong; external obsolescence must be included if present. "Only the depreciation the owner has documented" is wrong; the appraiser must estimate all depreciation based on market evidence. Exam tip: For extraction, ensure your depreciation estimate includes all three types: physical, functional, and external.
More land-or-site-valuation Questions
Under which condition is the land residual technique most applicable?
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?
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Previous Question
An appraiser is valuing raw land for a proposed 48-lot residential subdivision using the land residual technique. Total projected gross lot sales are $12,000,000. Development costs (excluding land) total $3,200,000, and the developer’s required profit is 15% of gross sales. All cash flows occur at project completion in 24 months, and the appropriate discount rate for the residual land value is 8% per annum, compounded annually. What is the present value of the land?
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A utility easement covers 20 percent of a site otherwise worth $300,000. The encumbered strip retains only 40 percent of its unencumbered value. What is the loss?