Certified Pennsylvania Evaluator Practice Exam

Which method is utilized to value land using the income approach?

1. Cost Approach

2. Sales Comparison Approach

3. Land Residual Technique

4. Direct Capitalization Method

The correct answer is: Land Residual Technique

The land residual technique is a method used in the income approach to value land based on the income it generates or could potentially generate. This technique focuses on determining the economic rent that land can produce and separates the value of the land from any improvements made on it. In using the land residual technique, the evaluator first estimates the potential income from the property, which is derived from rental income or other revenue streams. Next, the costs associated with operating and maintaining the property (such as expenses for any structures on the land) are deducted from this potential income to arrive at the net income attributable to the land itself. This net income is then capitalized to estimate the value of the land. This approach is particularly useful for properties with significant income potential, such as commercial real estate, where the land plays a pivotal role in generating revenue. By isolating the land's value from the improvements, this method provides a clear view of what the land contributes to the overall value of the property.