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. See Income Approach.
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
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Income to land †$1,600
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Divided by required rate (10%) $16,000 Land value
