A quick solution to the Building/Land Residual Techniques

[Tetsuo Hosaka]

As a newbie, I have a hard time remembering the processes of the Building/ Land residual techniques. But now I use a 3x3 table to solve very easily. Please correct me if I am wrong.

The table is like this:
(Building Value)(Building Portion of NOI)(Capitalization Rate)
(Land Value)(Land portion of NOI)(Interest Rate)
(Property Value)(Total NOI)(Recapture rate)

An example is from my textbook.
“ The property under appraisal is a 25-year-old apartment building producing an NOI of $50,000 a year, compute the value of the property, assuming a remaining economic life of 40 years for the building, a 10.5% interest rate, and land value estimated at $100,000.”

(Building Value)(Building Portion of NOI)(Capitalization Rate)
($100,000)(Land portion of NOI)(10.5%)
(Property Value)($50,000)(2.5%)

Now you can solve:
1.Capitalization Rate: 10.5% + 2.5%=13.0%
2.Land portion of NOI: $100,000x10.5%=$10,500

(Building Value)(Building Portion of NOI)(13.0%)
($100,000)($10,500)(10.5%)
(Property Value)($50,000)(2.5%)

Then you can now calculate:
1.Building portion of NOI: $50,000-$10,500=$39,500
2.Building Value: $39,500/13.0%=$303,846

Finally add the building value and the land value:
$303,846+$100,000=$403,846

The answer is like this:
($303,846)($39,500)(13.0%)
($100,000)($10,500)(10.5%)
($403,846)($50,000)(2.5%)

Easy???

 

[Suzanne K Hansen]

Works for me.

Most of the appraisers on this forum haven't seen a land residual I'll bet since they took the exam. As a trainee, I just took it and I had developed a similar tabular method.

How is your traineeship going so far.

I liked the link you sent me. The traineeship for the county must have been filled as it was no longer listed.

Thanks for the thought though,

Suzanne