Which item is normally treated as a site improvement rather than a building improvement?
Correct Answer
D) The paved driveway and the utility hookups
Why this is correct: Site improvements are enhancements to the land that make it ready for use, such as paving, grading, utilities, walks, and landscaping. They are typically included in the site value in the cost approach. Why the other choices are wrong: Kitchen cabinetry, the roof covering, and the heating plant are all building improvements, which are part of the structure and subject to depreciation. Exam tip: In the cost approach, site value includes the land and site improvements. Building improvements are part of the depreciated cost of the structure.
Why This Is the Correct Answer
Driveways and utility hookups are improvements to the land rather than parts of the structure, and are priced separately from the building in the cost approach.
Why the Other Options Are Wrong
Option A: The kitchen cabinetry inside the dwelling
Kitchen cabinetry is installed within the dwelling and is part of the building improvements.
Option B: The roof covering on the main structure
The roof covering is a component of the structure and part of the building improvements.
Option C: The heating plant serving the residence
The heating plant serves the dwelling and is integral to the building.
On the Land, Not in the Building
On the Land, Not in the Building. Driveway and hookups improve the site; cabinets and furnaces improve the house.
How to use: Keep site improvements out of land value. Counting them there and in cost new charges for them twice.
Exam Tip
Site improvements have shorter economic lives than the structure, so they are often depreciated separately in a breakdown analysis.
Common Mistakes to Avoid
- -Including site improvements in land value
- -Classifying building components as site improvements
- -Depreciating site improvements at the structure's rate
Concept Deep Dive
Analysis
Site improvements are the improvements to the land as distinct from the building on it: driveways, walks, patios, fencing, landscaping, retaining walls, and utility hookups bringing water, sewer, gas and power to the structure. Building improvements are the structure itself and everything integral to it — its roof, its cabinetry, its mechanical systems. The distinction has a specific job in the cost approach, where cost new is developed by pricing the building and the site improvements separately, since they have different unit costs and different economic lives. It also guards against a common double count: site improvements belong to the improvements side of the analysis, not to the land, so including them in land value while also pricing them in cost new charges for them twice. The distractors all name components of the building — cabinetry, roof covering and heating plant are each integral to the structure rather than improvements to the land.
Background Knowledge
Site improvements — driveways, walks, landscaping, fencing, retaining walls and utility connections — are improvements to the land, priced separately from building improvements in the cost approach and distinct from land value itself.
Real-World Application
An appraiser prices the dwelling and garage at their own rates, adds $19,000 of driveway, walks and landscaping as site improvements, and values the land as though vacant.
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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