Which inputs must an appraiser reliably develop to apply the land residual technique?
Correct Answer
A) The improvement value, NOI and market rates for land and improvements
The appraiser must reliably estimate the improvement value and net operating income under highest and best use, and extract appropriate capitalization rates for both land and improvements from the market.
Why This Is the Correct Answer
Option A is correct because the land residual technique requires a reliable estimate of the improvement value and net operating income under highest and best use. It also requires appropriate market-extracted capitalization rates for both land and improvements, so income can be allocated to the building and the residual capitalized into land value.
Why the Other Options Are Wrong
Option B: Land sales from the same block, plus the assessor’s land-to-building ratio
Option B relies on land sales from the same block plus the assessor's land-to-building ratio. Land sales belong to direct sales comparison and an assessor's ratio is not necessarily market-supported, so neither supplies the NOI, improvement value and capitalization rates the land residual technique needs.
Option C: The original construction cost of the building, plus the owner’s financing terms
Option C uses the building's original construction cost plus the owner's financing terms. Historical cost does not measure current improvement value, and owner financing does not supply market capitalization rates or NOI.
Option D: Current listings of vacant land nearby, plus the subject’s latest tax assessment
Option D relies on current listings of vacant land nearby plus the subject's latest tax assessment. Listings and assessments are not the NOI, improvement value and capitalization rates the land residual technique requires.
Building first, land gets leftovers
Pay the building its share of income first; the leftover income, capitalized at the land rate, is the land value.
How to use: Use this to recall the order of steps and the inputs needed for the land residual technique.
Exam Tip
The land residual technique needs income-approach inputs: NOI, improvement value and separate capitalization rates for land and building.
Common Mistakes to Avoid
- -Using historical construction cost instead of current improvement value
- -Relying on assessment ratios instead of market-derived rates
- -Using a single overall rate instead of separate land and building rates
Concept Deep Dive
Analysis
This question tests the inputs required for the land residual technique. The technique starts with the property's net operating income, deducts the income needed to support the improvements, and capitalizes the remaining income into land value. That requires the improvement value, NOI, and capitalization rates for both land and improvements.
Background Knowledge
The land residual technique is an income-based method of estimating land value. It assumes the improvements represent highest and best use and that their value can be estimated reliably. Small errors in the inputs can produce large swings in the residual land value.
Real-World Application
An appraiser values the land under a proposed new office building where vacant land sales are scarce. Using the building's projected NOI, its estimated value and market-derived building and land rates, she capitalizes the residual income to indicate land value.
More Land/Site Questions
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An appraiser is extracting site value from a $600,000 cash sale. The seller's records show an original construction cost of $250,000 and a depreciated book value of $110,000. The appraiser estimates current replacement cost new at $400,000 and accrued depreciation from all causes at $100,000. What is the indicated site value?
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A comparable commercial site with 65 front feet sold for a cash-equivalent price of $585,000. Per standard appraisal guidance, sale price per front foot is a vacant-land unit of comparison when frontage is a primary value determinant. The subject site has 72 front feet and is otherwise similar. What indicated land value does the front-foot unit support before other adjustments?