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  #1  
Old 10-12-2010, 07:28 PM
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CANative CANative is online now
 
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Default Can "transitional" property revert back?

Working on a retrospective value of a 102 acre piece of multi-zone property. It's in the central valley of California, very rural and mostly agricultural. It sold at a very high sale price near the end of 2007. The theory for it's high sale price is that it is considered "transitional" property, i.e. HBU changing in anticipation of more intensive uses due to it's proximity to s small cluster town that was rapidly developing at the time and it's location with state highway frontage.

Well, that's all done because the market crashed a few months after the purchase and nothing has happened to the property and nothing is probably going to happen for years to come. It can still be used for agricultural uses (row crops, field and seed, orchards, grapes, etc.).

Is this property no longer "transitional" property?
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Old 10-12-2010, 07:41 PM
nstanbru nstanbru is offline
 
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IMO, if the HBU hasn't changed, ag use could still be considered an interim use. The difficult part is determining when and if the market (under current HBU, if the same) is going to rebound. If you do a thorough HBU analysis, and find that another use besides ag is not feasible, then you no longer have an interim/transitional scenario.
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Old 10-12-2010, 07:53 PM
Denis DeSaix Denis DeSaix is offline
 
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Quote:
Originally Posted by CANative View Post
The theory for it's high sale price is that it is considered "transitional" property, i.e. HBU changing in anticipation of more intensive uses due to it's proximity to s small cluster town that was rapidly developing at the time and it's location with state highway frontage.

Well, that's all done because the market crashed a few months after the purchase and nothing has happened to the property and nothing is probably going to happen for years to come. It can still be used for agricultural uses (row crops, field and seed, orchards, grapes, etc.).

Is this property no longer "transitional" property?
I'd say it is no longer "transitional" in that the transition potential no longer has a market-value premium.

If a property is anticipated as having a positive change in use in a forecastable manner, then there are three potential buyers for the property:
A. The buyer who is interested in its use as-is. This is the current user.
B. The buyer who is interested in paying a premium above the current user with the hope of earning a reward in excess of that premium when the use changes. This buyer is speculating because he is paying more for the property than its current use can support under the anticipation that a future use will be more valuable.
C. The buyer who is interested in the future use. This is the future user.

"C" typically won't buy until the use has changed or is almost a certainty.
"A" will hypothetically buy only at a price that reflects its current use, not the anticipated one (otherwise "A" becomes a speculator as well).
"B" will only buy when there is sufficient belief that the anticipated change is likely, but not certain (otherwise he gets crowded out by "C", who is willing to pay full price for the new use).

For "B" to purchase the property, he has to outspend "A". Ergo, the price premium and the reason these properties are worth more to speculators than they are to users.

When the market conditions change, and the anticipation of use change is no longer reasonable, then "B" drops out of the market.
That leaves "A" the likely buyer.

So, I think that a "transitional use" can go backwards (back to the lower-value/current use) rather than forward (to the higher-value/anticipated use) if market conditions change.

Sounds like a good argument for at least a 40% tax reduction!
  #4  
Old 10-12-2010, 07:59 PM
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Id say not to mix one time period with another .. if this is retrospective the highest and best use was transitional as of that date. What the highest and best use is as of some later date should not really play into the retrospective analysis ...
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Old 10-12-2010, 08:15 PM
Walter Kirk Walter Kirk is offline
 
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Yes the use can change but why do you care? If you are doing a retrospective report you should only be concerned about market conditions as of the date of valuation. Of course your client may want an explanation of why the property is worth less now if he's been on the planet Zollo for the past couple of years.
  #6  
Old 10-12-2010, 10:31 PM
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Terrel L. Shields Terrel L. Shields is offline
 
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Hindsight is 20/20. Yes, I saw a lot of speculative properties selling for $10,000 plus per acre in our region. That has deflated to well under 50% of that. Since I cannot see the future, except the past future.... I have changed my tune on these. Yes, they have reverted back to agricultural from SPECULATIVE INVESTMENT. A true COMMERCIAL investment property would likely be or be on the cusp of development even in a down market... i.e.- it is foreseeable that it will develop.

OTOH, even during that "boom", there were speculators buying property that was speculative only. There was virtually no chance at that time those properties would develop and the ones that did (inappropriately) have been spectacular disasters. I can name FOUR such "Greenfield" subdivisions within 2.5 miles of me that have bankrupted 3 people and the fourth had to sell his $1.3 million home and acreage (about 120 acres) which he had spent nearly 30 years tending and customizing.

The future? It is unlikely within the next 20 years that most of those same parcels will be established as residential....OTOH, I can assume the entire county will be paved eventually...not in my lifetime but perhaps another 100 years...in that sense even the panhandle of Oklahoma is "in transition"...eventually we'll look like China or India... packed shoulder to shoulder.
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Old 10-13-2010, 11:29 AM
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Thanks for all the thoughtful responses.

Purchased in Oct. '07 for $3mm ($30k per acre). Land sales at that time were $8k to $15k per acre. Higher range for properties used as orchards or vineyards. Buyer/owner is a "power owner" of ag properties throughout the region. Didn't go through a broker, paid cash. Date of value would be 01/01/08. Can't argue for a decline in value but could make an argue for a "base year" appeal (Prop 13 basically says sale price is presumed to be market value unless a preponderance of the data can show otherwise - it takes a lot to successfully argue a base year value. I have been successful several times.)

For the 2008 value it is an argument over which comps to use - ag land sales or "transitional land" sales. Ag sales are not that difficult to come by (have to use public records and vet them one at a time because this type of transaction does not get listed in a multiple listing service and rarely comes up on sources such as LoopNet and CoStar. Finding "transitional land" sales is problematical because you have to know what's in the mind of the buyer and seller, the proximity to the "path of progress", the market at the time, the potential for map approvals, etc., etc. They're pretty rare and they are spread out through the entire San Joaquin Valley. Most are in very close proximity to the little cluster cities along Highways 5 and 99.

In any case, the main reason I asked is because even if there is nothing that can be done for the 2008 value I will eventually be working on the values for 2009 and 2010.

Hence my question about reversion back to ag uses going forward. The run up in development in this agricultural area was just not sustainable. It's too far from major population centers. So nothing really changed and it's not likely to change for decades.

So, in other words: In 2009 is there a decline in value of "transitional land" or is the value based on an agricultural HBU (this type of land has not declined).
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Last edited by CANative : 10-13-2010 at 11:37 AM.
  #8  
Old 10-13-2010, 12:32 PM
Denis DeSaix Denis DeSaix is offline
 
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Quote:
Originally Posted by CANative View Post
So, in other words: In 2009 is there a decline in value of "transitional land" or is the value based on an agricultural HBU (this type of land has not declined).
Its always H&BU, but no need to get stuck in that appraiser rut.

The value of the subject is based on what the likely buyer groups will pay for it.
If speculators outbid ag-users because of anticipated changes, then the value of the subject is transitional.
If the ag-users are outbidding the speculators because the speculators no longer anticipate a change and therefore are no longer willing to pay a premium (outbid the ag-users), then the value of the subject is agricultural.
  #9  
Old 10-13-2010, 12:35 PM
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Heh... I expanded the LoopNet search to Kern and Kings Counties in addition to Tulare and found a half dozen sales listed as commercial potential land and the price per acre is $17k to $20k per acre.

Want to drive down to Tulare with me and argue the 2008 case? lol
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Old 10-13-2010, 12:38 PM
Denis DeSaix Denis DeSaix is offline
 
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Quote:
Originally Posted by CANative View Post
Heh... I expanded the LoopNet search to Kern and Kings Counties in addition to Tulare and found a half dozen sales listed as commercial potential land and the price per acre is $17k to $20k per acre.

Want to drive down to Tulare with me and argue the 2008 case? lol
I wrote a 40% reduction; sounds like you'll have to settle for 33%!
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