Solving problem with Land AND Building Cap Rates

[RobD211111]

Hello,

Given the below, kindly let me know how to solve for the value when given BOTH cap rates. I'm familiar with the IRV/BLT land/building residual approach, but it doesn't wwork with this example (below)

Thanks
Rob

EXAMPLE:

A new building representing the highest and best use of its site can be constructed at a total cost,
including entrepreneurial incentive, of $12,000,000. The building capitalization rate is 11% and
the land capitalization rate is 7%. The property will generate a net operating income of
$1,500,000. What is the indicated value of the site?
Answer Choices:
A. $6,750,000
B. $1,636,000
C. $2,571,000
D. $4,667,000

I incorrectly chose D when the answer was C

 

[Ken B]

The problem can't be solved with the info given.

However, if C is the answer and value is $12MM, then the NOI is $1.2172MM, not $1.5MM.

The biggest clue that the problem can't be solved with the info given is that the overall rate indicated by the reported NOI and value is 12.5%, which is impossible given the rates indicated for the land and building components.

 

[CG1940]

Building Cost x Building Cap Rate = Building Income
$12,000,000 x 11% = $1,320,000

Total Income - Building Income = Land Income
$1,500,000 - $1,320,000 = $180,000

Land Income / Land Cap = Land Value
$180,000 / 7% = $2,571,429

 

[Ken B]

Doh! It helps to carefully read the problem...nevermind!

 

[RobD211111]

That was very helpful - thanks! As per the other post, I agree - i was looking at PROPERTY as opposed to site.

Really appreciate the help.
Rob

 

[Ken B]

Rather than trying to remember a formula, solve these problems in tabular format like this -


.......... Income......../........Rate ........=.......Value

Building
Land
Total


Fill in what you know; solve for what you don't. You can set up something similar for mortgage and equity problems.