Recognizing surplus land in the Cost Approach as obsolescence?

[Nick Chop MAI]

The subject has a commercial highest and best use for the entire site (3± acres). As improved, it has a highest and best use of retail with surplus $/SF less than the entire $/SF vacant land value.

How do you recognize the reduction in land value as vacant in the Cost Approach. I recognized it as incurable functional obsolescence and calculated it by the surplus land area times the vacant $/SF, less the surplus land value. (i.e. the unit land value is $10/SF and the surplus is $5/SF - this creates the obsolescence) I had a similar parcel that I described the obsolescence as external. I could make an argument for either.

I've reviewed the 13th edition, the Lum library at the Appraisal Institute and have found nothing on this subject. Surplus land is not within the definition of either incurable functional or external obsolescence. However, the reduction in the land value as improved must be accounted for in the Cost Approach. It's easier to recognize in the Market and Income as the surplus land value can be calculated separately and added to your value. The reviewers are not biting off on my analysis. Advice?

 

[Michigan CG]

Just because the current improvements do not utilize the land to its fullest why would the land be worth less?

 

[Nick Chop MAI]

Just because the current improvements do not utilize the land to its fullest why would the land be worth less?

Surplus land is worth less than regular land value, hence, as improved the land would be worth less.

 

[Terrel L. Shields]

My view is to value the land as if vacant and available for its highest and best use. If the building placed upon the land is inappropriate for that utility, then the obsolescence would accrue to the buildings or the overall property but not specifically to the land that is "surplus"...

I would take my external off the buildings but I might calculate the amount of that depreciation by estimating the difference in the site value at its highest and best use at $10/SF and that surplus portion at $5/SF. Say you have 20,000 SF surplus. 20,000 x $5 = ($100,000) external obsolescence

 

[Michigan CG]

Surplus land is worth less than regular land value, hence, as improved the land would be worth less.

I don't think I agree with that. I do however agree with Terrell for the most part except for this:

.......Say you have 20,000 SF surplus. 20,000 x $5 = ($100,000) external obsolescence.

External would be outside of the site, I would call it functional.

When doing a Cost Approach the land as if vacant is estimated then the improvements are added after which depreciation is subtracted.

 

[Nick Chop MAI]

I don't think I agree with that. I do however agree with Terrell for the most part except for this:



External would be outside of the site, I would call it functional.

What don't you agree with? I'm saying surplus land is worth less than the land as vacant. Are you saying surplus is worth more $/SF? Regarding external vs functional, I've used both to describe it.

 

[Pittsburgh Pete]

Could be worth more--could be worth less!! It depends.

Surplus land looked at in isolation would have less value. Surplus land looked at as a function of the larger parcel may result in a higher unit value of the land depending on its utility and the demands of the market. Or, based on the principle of utility is may be worth less on a unit basis.

Hate to cop out but your market should tell you--sometimes the market only whispers and sometimes it screams, but ultimately the market will tell you. I don't know your market.

Nonetheless, it's always a pain in the ..........!!!!

 

[Ken B]

The value of the land is the value of the land. If the nature of the improvements results in a situation where the land is not being utilized to its highest and best use, the penalty is to the improvements, not the land.

 

[Michigan CG]

What don't you agree with? I'm saying surplus land is worth less than the land as vacant. Are you saying surplus is worth more $/SF?......

I think the land is worth what it is worth. Not utilizing it to its full potential is a functional issue of the improvements. I understand what you are trying to say, although referring to the Cost Approach the land is valued as vacant, and you said that the land as vacant does not have surplus land.

I guess the debate is whether improvements can cause land to have surplus land when before the improvements were constructed there was no surplus land.

Interesting thought. More will opine to this I am sure.

 

[Pittsburgh Pete]

The value of the land is the value of the land. If the nature of the improvements results in a situation where the land is not being utilized to its highest and best use, the penalty is to the improvements, not the land.

Agreed! The messy part comes into play when attempting to measure the contributory value of the surplus land in the income and sales comparison approaches.