Consider an investment in which a developer plans to begin construction of a building one year if, at that point, rent levels make construction feasible and the building will cost $1 million to construct. There is a 50 percent chance that NOI will be $160,000 and a 50 percent chance that NOI will be $80,000. Using the traditional approach, similar to the "highest and best use" approach, what would be the land value of the property assuming a cap rate of 10 percent 12 percent discount rate and an NOI growth rate of 2 percent)?
A) $120,000
B) $200,000
C) $300,000
D) $833,333
E) $1,000,000

Question

Quizplus · Accepted Answer

The expected NOI is $120,000 (0.5 * $160,000 + 0.5 * $80,000). The value of the property using the cap rate is $1,200,000 ($120,000 / 0.10). Subtracting the construction cost of $1,000,000 gives a land value of $200,000.

Consider an Investment in Which a Developer Plans to Begin