What is the formula used to determine the Land cap rate?

The correct choice for determining the Land capitalization rate involves understanding its components clearly. The Land cap rate is commonly derived using the concept of net income and reflects the return expected from an investment in land.

The formula identified as the correct answer combines the discount rate, which represents the expected rate of return on an investment, with the Effective Tax Rate (ETR), which accounts for the impact of taxes on the investment's income. This approach recognizes that investors need to consider both the time value of money (through the discount rate) and the tax implications (ETR) when evaluating the profitability of land as an investment.

When calculating the cap rate in this context, it is essential to incorporate ETR because it adjusts the net operating income to reflect the actual cash flow available to the investor after taxes are taken into account. Therefore, the combination of the discount rate and the ETR provides a more accurate picture of the rate of return expected from the investment in land, making it the preferred formula for determining the Land cap rate.