Which statement about site value in the cost approach is correct?
Correct Answer
D) It is estimated separately and not depreciated
Why this is correct: In the cost approach, land is considered non-depreciating. It is valued separately (typically via sales comparison of vacant land) and then added to the depreciated cost of the improvements. Land value is not subject to wear, functional inadequacy, or economic obsolescence in the same way buildings are. Why the other choices are wrong: Land is not depreciated. Land value is not included within the replacement cost figure; RCN is for improvements only. Site value is estimated for both vacant and improved properties; it's a necessary component of the cost approach for any property. Exam tip: The cost approach treats land and improvements separately: Land (market value) + Improvements (RCN - Depreciation).
Why This Is the Correct Answer
Why this is correct: In the cost approach, land is considered non-depreciating. It is valued separately (typically via sales comparison of vacant land) and then added to the depreciated cost of the improvements. Land value is not subject to wear, functional inadequacy, or economic obsolescence in the same way buildings are. Why the other choices are wrong: Land is not depreciated. Land value is not included within the replacement cost figure; RCN is for improvements only. Site value is estimated for both vacant and improved properties; it's a necessary component of the cost approach for any property. Exam tip: The cost approach treats land and improvements separately: Land (market value) + Improvements (RCN - Depreciation).
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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