Land Residual Technique [3139]

The NOI is $45,000; the building value is $225,000; the interest rate for the building is 11.875%; and the recapture rate is 4%.  Using the land residual technique, calculate the value of the property?

How to work a residual problem.

Using the template above where I=Income, R=Rate, and V=Value down the left side and B=Building, L=Land, and T=Total across the top.  This is easy to remember because “IRV loves BLT sandwiches.

Plug in the values you know.

1.     $225,000 is the value of the building.

2.     11.875% is the interest (and by default the cap rate of the land).

3.     15.875% is the cap rate of the building (Interest rate plus the recapture rate).

4.     $45,000 is the total income of the project.

Calculate the rest of the values.

1.     Building income = Building cap rate x building value.

2.     Land income = Total income – building income.

3.     Land value = Land income ÷ Land cap rate.

4.     Total Value (the answer) = Building value + Land value