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Need Help w/ Land Residual Technique Test Question

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Andy Nugen

Thread Starter
Freshman Member
Joined
Jul 6, 2006
Professional Status
Appraiser Trainee
State
California
Can anyone please help with how to logically find the appropriate answer in solving the test question below? Thank you and much appreciated.

In order to evaluate a vacant commercial site, an appraiser decides to use the land residual technique. Here is the information the appraiser gathered:
Cost new of a proper building - $250,000; Estimated net income before recapture - $32,800 per year; interest rate - 8.5%; Estimated remaining economic life of building - 40 years

What is the approximate estimated value of the land using this technique?

(a) $31,000
(b) $47,000
(c) $48,182
(d) $62,353
 

Terrel L. Shields

Elite Member
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Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Lemme take a stab at it...haven't done this in a while

8.5% is the int rate
1/40 (years) = straight line recapture of 2.5% per year

2.5% + 8.5% = 11%

The building costs $250,000, so multiply x 11% = $27,500.

subtract that from $32,800 and you get $5,300 (the recapture part) which can be attributed to the land.

5,300 I(ncome) ÷ 11% R(ate) = $48,181.818 V (alue) or say, answer C?

Anyone come up with something different?
 

Paul Isolda

Senior Member
Joined
May 20, 2004
Professional Status
Certified Residential Appraiser
State
Connecticut
Recapture does not apply to land. You were good up to Income divided by rate. Use 8.5% 5300/.085=62,353.
 

Andy Nugen

Thread Starter
Freshman Member
Joined
Jul 6, 2006
Professional Status
Appraiser Trainee
State
California
Thank you all for your help. It makes perfect sense now. Awesome!
 
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