Consider an investment in which a developer plans to begin construction,of a building that will cost $1,000,000,in one year if,at that point,rent levels make construction feasible.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,which is similar to the "highest and best use" approach,what will the land value of the property be at the completion of the construction,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

Question

Quizplus · Accepted Answer

The expected NOI is the average of the two possible outcomes: (0.5 * $160,000) + (0.5 * $80,000) = $120,000. The land value is calculated by capitalizing the expected NOI at the cap rate: $120,000 / 0.10 = $1,200,000. Subtract the construction cost of $1,000,000 to find the land value: $1,200,000 - $1,000,000 = $200,000.

Consider an Investment in Which a Developer Plans to Begin