Dictionary of Real Estate Terms: land residual technique
land residual technique
in appraisal, a method of estimating the value of land when given the Net Operating Income (NOI) and value of improvements. Used for feasibility analysis and highest and best use.
Example: A property generates $10,000 net operating income ($15,000 rent less $5,000 operating expenses). The improvements cost $70,000 to construct and claim a 12% rate of return (10% interest plus 2% depreciation), which is $8,400. The remaining $1,600 income is capitalized at a 10% rate (divided by .10) to result in a $16,000 land value using the land residual technique. See Table 29.
| TABLE 29 | |
| LAND RESIDUAL TECHNIQUE | |
| Property NOI | $10,000 |
| Income to improvement | - 8,400 |
| Income to land | $1,600 |
| Divided by required rate (10%) | $16,000 Land value |
