This document discusses various land valuation techniques:
1. The sales comparison approach can be used to value land, considering highest and best use, physical characteristics, and legal factors. It is often the preferred method.
2. The allocation method estimates land value as a percentage of total property value, based on analysis of improved property and vacant lot sales.
3. The extraction method deducts depreciated improvement values from improved property sales to isolate the land value.
4. Direct capitalization of ground rent estimates market land rent and capitalizes it into an indication of land value using a land capitalization rate from comparable properties.
This document discusses various land valuation techniques:
1. The sales comparison approach can be used to value land, considering highest and best use, physical characteristics, and legal factors. It is often the preferred method.
2. The allocation method estimates land value as a percentage of total property value, based on analysis of improved property and vacant lot sales.
3. The extraction method deducts depreciated improvement values from improved property sales to isolate the land value.
4. Direct capitalization of ground rent estimates market land rent and capitalizes it into an indication of land value using a land capitalization rate from comparable properties.
This document discusses various land valuation techniques:
1. The sales comparison approach can be used to value land, considering highest and best use, physical characteristics, and legal factors. It is often the preferred method.
2. The allocation method estimates land value as a percentage of total property value, based on analysis of improved property and vacant lot sales.
3. The extraction method deducts depreciated improvement values from improved property sales to isolate the land value.
4. Direct capitalization of ground rent estimates market land rent and capitalizes it into an indication of land value using a land capitalization rate from comparable properties.
I. Lot values Raw land values Adjusted to reflect density Income capitalization: \ Direct capitalization of ground rent Land residual technique Yield capitalization for subdivision Sales comparison approach I. The use of the sales comparison approach on a land parcel is not significantly different from its use on an improved property. a. Property rights conveyed, financing terms, conditions of sale. expenditures immediately after purchase, and market conditions are all dealt with in the same way. b. Highest and best use, including timing of use. is an important consideration. c. Physical suitability of the parcel should be addressed. Examples include topography. availability of utilities, access. site prominence, size, and shape. d. Legal obstacles require consideration. Land use controls such as existing zoning. the likelihood of a change in zoning, and land subdivision regulations can come into play. Environmental concerns are becoming an increasingly important issue. The sales comparison approach is the most often used and preferred method to develop an opinion of land value. Advanced Sales Comparison and Cost Approaches Extraction . . A. 2. analysis 3-7 B. Allocation 1. 2. 3. 3. It can be useful in estimating land value in areas where land sales are scarce, but improved property sales are readily available. 4. It depends on the availability of land sales and corresponding improved property sales in other areas. Note. The next three examples show the classic allocation method for residential lot value as well as two extensions of it for raw land value and raw land value involving differing densities. 4. 3-8 This method is based on the premise that a constant relationship exists between the land value and the total property vaJue, for speciaJ types of real estate in certain locations. This premise must be supported before the method can be used. and It has its theoretical foundation in the principles of balance contribution. It can Advanced Sales Comparison and Cost Approaches Example 3.1. Allocation Method The subject property is improved with a single-family residence, and recently sold for $160,000. No vacant lots have sold in the subject property's neighborhood; however, vacant Jots have sold in three nearby neighborhoods in which improved properties also have sold. Estimate the value of the subject site. Advanced Sales Comparison and Cost Approaches 3-9 Suggested Solution 3.1. Allocation Method Analysis of sales indicates that 20.00% to 24.40% of the price is for the residential site value. Most weight was given to the sale in Neighborhood B because its total property price is most similar to the subject's. The probable value of the subject site is $160,000 x 21% = $33,600. Since market participants appear to round lot sale prices to the nearest $ 1,000, the value conclusion is rounded to $34,000. A reasonable argument can also be made for a conclusion of $35,000, but it would be inconsistent with the weighting of the neighborhoods to use any percentage greater than the simple average of the three ratios. 3-10 Advanced Sales Comparison and Cost AoDroache.r; C. Extraction I. 2. 3. 4. 3-]6 In this method, the unit prices for comparable land are extracted from improved sales by deducting the estimated value contribution of the improvements from the sale prices. The accuracy of this method often depends on the quality of the depreciation estimate. For that reason, it is generally used only for properties with new improvements that suffer from no obsolescence, or for properties where the improvements represent a small component of the total value. One application is the valuation of farm properties. This method has only rare application. Advanced Sales Com1JQ7'ison and Cost Annroache.'i Example 3.4. Extraction Method The highest and best use of a 1 DO-acre vacant ]and tract is a fann suitab]e for row crops and the raising of Hvestock. Research of market data revea]s only one vacant ]and sa]e and two improved sa]es. The three sa]es are as foHows: Sale A includes a rental tenant house that rents for $200 per month. Similar houses on one-acre lots are valued with a monthly gross rent multiplier of 100. Sale A is also improved with a livestock barn with a current cost of $10,000; it has an estimated effective age of 20 years and a useful life of 40 years. Sale C is improved with a livestock barn with a current cost of$12,000. The barn is estimated to have an effective age of 5 years and a useful life of 30 years. What is the subject land worth? Advanced Sales Comparison and Cost Approaches 3-17 Suggested Solution 3.4. Extraction Method The prices paid for the deducted from the sale The rental house included in Sale A is estimated at a contributory price of $200 per month rental rate times 100 GRM, or $20,000. The $10,000 (current cost) livestock barn is depreciated by 50% (20-year effective age/40-year economic life) to arrive at a deduction for this improvement of $5,000. The resulting estimated price paid for the land is divided by the total acreage less one acre allocated to the rental house. Sale C includes a barn with an estimated current cost $12,000. A depreciation charge of about 17% (5-year effective age/30-year economic life) is deducted to arrive at an estimated price contribution by this improvement of $10,000. The two sales requiring extraction indicate fairly similar unit prices and bracket the unit price of the one sale that involved vacant land only. Placing most emphasis on Sale B, which required no adjustment, a supportable answer is $700 per acre times 100 acres, or $70,000. 3-18 Advanced Sales Comparison and Cost Approaches improvements included in Sales A and C must be estimated and prices of the land as improved. D. Income capitalization Income capitalization is the fourth method of valuing land, with two subcategories. 1. Direct capitalization of ground rent Advanced Sales Comparison and Cost Approaches 3-19 The procedure is to estimate the market rental value of the land and then capitalize it into an indication of fee simple value using a market-derived land capitalization rate. 8. b. Capitalization rate comparables should have the same highest and best use as the subject. A capitalization rate derived from a downtown office building sale and applied to a parking lot ground lease will probably understate the parking lot's value because parking lots commonly are interim uses. Many appraisers confuse the valuation of land with the valuation of a leased fee in a grO\U1d lease situation. Ground lease valuation uses the subject's contract rent; land valuation using direct capitalization uses the subject's estimated market rent under its highest and best use. c. d. Comparable land capitalization rates for valuing land using direct capitalization may be hard to find and difficult to analyze. 1) Capitalization rates from sales of grO\U1d-]eased properties (leased fees) can be valid comparab]es if the comparable's land rent reflects market for the land's highest and best use and it is expected to track with market for the remaining term of the lease. Sales where the land rent is below market but will track proportionaJJy with market, and where the remaining term of the lease is so long that the buyer and seller did not place much weight on the potentia] reversion, can also be considered. 2) The existence and quality of escalation clauses in ground leases can have a significant effect on sale prices. It is important to compare the escalation clauses in the comparables to the expected upside in the subject's market rental estimate. If the comparables have flat leases, it may be necessary to apply the derived capitalization rates to a level- 2. "~20 ." . Adwmced Sales Comparison tmd Cost A. equivalent estimate of the subject property's market land rent. 3) Ground leases are often periodically revalued to "market." Some escalation clauses are so poorly written that they result in litigation at every revaluation period. A common problem is for the lease to be vague about the basis for the land revaluation. Is the land to be valued based on its existing use or its highest and best use? 4) Subordination clauses also have a significant effect on sale prices and therefore capitalization rates. Some lessors subordinate their interest in the land to a loan on the improvements, which increases the lessor's risk, decreasing the value of the leased fee interest. 5) Due to the problems with using leased fee capitalization rates in direct capitalization for valuing land, it may be necessary to rely on investor interviews, to perform a risk analysis of other investments, or to consider transactions in other cities to support the capitalization rate. This method has applications in inner-city valuation e. problems. Direct capitalization: land residual technique a. In the land residual technique, the net operating income attributable to the land is isolated and capitalized to produce an indication of the land's contribution to total proPerty value. b. To develop an opinion of the land value under its highest and best use as if vacant, the procedure for the land residual technique involves the following steps: 1) Hypothetically construct an optimum building on the land parcel (i.e., highest and best use in all respects, or "ideal" improvement). 2) Estimate the net operating income from the property as improved, using market rents and expenses. 3. Other land valuation issues ll. Excess vs. surplus land: Both tenDS refer to land that is part of an existing ownership, but is not needed to support the highest and best use of the property as improved. A. 1. . Surplus land is additional land that allows for future expansion of the existing improvements but cannot be developed separately and does not have a separate highest and best use. It is associated with an improved site that has not been developed to its maximum productivity according to its highest and best use as if vacant. 2. 3. Advanced Sales Comparison and Cost Approaches 3) Calculate the amount of income required to pay a proper return on the building, using a building capitalization rate extracted from market sales. 4) AlJocate remaining income (residual) to the land. 5) Capitalize residual income into land value using a market-derived land capitalization rate. c. The technique is very sensitive to estimates concerning the building. Slight errors in the net operating income translate into big swings in the land value. Yield capitalization: discmmted cash flow or subdivision analysis Land subdivisions are not covered in this course because they are covered elsewhere, particularly in Courses 510 and 550. a. b. Discounted cash flow can be used instead of or in addition to direct capitalization, to value land subject to a ground lease. Excess land, for an improved site, is land not needed to serve or support the existing improvements. For a vacant site or a site considered as if vacant, it is the land not needed to accommodate the site's primary highest and best use. Such land may be separated from the larger site and have its own highest and best use, or it may allow for future expansion of the existing or anticipated improvement. These concepts will be reviewed in the practice problems for Session 8. 3-21