Why must the proceeds in the subdivision development method be discounted to present value?
Correct Answer
A) Lots sell over time, not all on the same date
Why this is correct: The proceeds in the subdivision development method must be discounted to present value because lots sell over time, not all on the same date. This sell-out period is called the absorption period. Money received in the future is worth less than money received today due to the time value of money and risk. Discounting converts future cash flows into their equivalent present value. Why the other choices are wrong: "Land is always worth less than the improvements" is a generalization, not the reason for discounting. "The method is prohibited without a discount rate" is not true; discounting is an integral part of the method's logic. "Discounting removes the need for a profit figure" is false; developer profit is still a required deduction. Exam tip: A longer absorption period increases risk and lowers the present value of the projected sales, thus lowering the indicated land value.
Why This Is the Correct Answer
Why this is correct: The proceeds in the subdivision development method must be discounted to present value because lots sell over time, not all on the same date. This sell-out period is called the absorption period. Money received in the future is worth less than money received today due to the time value of money and risk. Discounting converts future cash flows into their equivalent present value. Why the other choices are wrong: "Land is always worth less than the improvements" is a generalization, not the reason for discounting. "The method is prohibited without a discount rate" is not true; discounting is an integral part of the method's logic. "Discounting removes the need for a profit figure" is false; developer profit is still a required deduction. Exam tip: A longer absorption period increases risk and lowers the present value of the projected sales, thus lowering the indicated land value.
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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?
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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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