Certified Residential Appraiser Practice Exam

In which method is the Net Operating Income attributable to land capitalized?

1. Building Residual Technique

2. Gross Income Multiplier

3. Land Residual Technique

4. Direct Capitalization

The correct answer is: Land Residual Technique

The Net Operating Income attributable to land is capitalized using the Land Residual Technique. This approach specifically focuses on isolating the income generated from the land component of a property, distinguishing it from the income generated by improvements or structures on the land. In this technique, the appraiser calculates the total net operating income of the property and then deducts the portion of that income attributable to any improvements. What remains is the income that can be directly associated with the land itself. This remaining income is then subjected to capitalization to arrive at the value of the land. This method is particularly useful in scenarios where the land has significant value on its own, separate from any buildings or developments on it. It allows appraisers to determine land value in cases where property use and income generation are more closely tied to the land than to other improvements. In contrast, other methods like the Building Residual Technique primarily focus on the value generated by structures rather than the land itself, while the Direct Capitalization method applies a cap rate to overall property income without distinguishing between land and improvements. The Gross Income Multiplier method also does not differentiate between the contributions of land and buildings, making them less suitable for valuing land directly in regards to its income potential.