California Real Estate SalespersonProperty Valuation and Financial AnalysisHard
An appraiser is using the land residual technique to value a parcel of land. The building on the site is valued at $600,000 and building investments in this market command a 9% return. The property's total annual NOI is $80,000, and land in this market commands a 7% return. What is the indicated value of the land?
- A$444,444
- B$371,429
- C$285,714
- D$26,000
Show answer & explanationAnswer & explanation
Correct answer: B. $371,429
Income to building = $600,000 × 0.09 = $54,000. Residual income to land = $80,000 − $54,000 = $26,000. Land value = $26,000 ÷ 0.07 = $371,429 (rounded).
Why the other options are wrong
- A. Incorrect calculation, does not match the residual method.
- C. Incorrect division of residual income.
- D. This is the residual income to land, not the land value itself.
Land Residual Technique
A method to estimate land value by subtracting the income attributable to the building from total NOI, then capitalizing the remaining (residual) income at the land capitalization rate.
- Requires known building value and cap rate
- Residual income = Total NOI − Building income
- Land value = Residual income ÷ Land cap rate
Memory trick: Pay the building first, land gets what's left