Certified Residential Appraiser Practice Exam

Which technique is used to derive value for land in a subdivision development analysis?

1. Cash equivalency

2. Ground rent capitalization

3. Income capitalization

4. Comparative market analysis

The correct answer is: Ground rent capitalization

In the context of valuing land specifically for subdivision development analysis, ground rent capitalization is particularly relevant. This technique focuses on estimating the value of land based on the potential income it can generate from leasing or ground rents. It essentially entails assessing the future income streams derived from the land, reflecting its value in terms of expected returns, which is critical for developers and investors. This method is particularly applicable in scenarios where land is not yet developed, helping to determine its value in a way that incorporates its income-generating potential. It can illustrate the feasibility of a project's financial aspects by factoring in how much income can be produced, which is an essential step in the decision-making process for subdivision developments. Other valuation techniques, such as cash equivalency, income capitalization, or comparative market analysis, serve different purposes and may apply to different contexts or properties. Cash equivalency adjusts for market conditions but is not specific to land valuation in subdivision contexts. Income capitalization evaluates the overall income from a property rather than focusing solely on raw land. Comparative market analysis involves comparing similar properties to gauge value, which may not adequately reflect the unique aspects of undeveloped land intended for subdivision.