In the cost approach, the value of the land simply "is."
In the valuation of the land, one could use a sales comparison approach adjusting for appropriate elements of comparison except for land area. Assuming land sales are used which have a consistency of use, one could create a table with land area and adjusted price per unit of measurement (SF?). When sorted by land area, sales which have no surplus land should show a consistent adjusted price per sf. Sales with surplus land should show decreasing adjusted price per sf. With each incremental increase in surplus land area, the adjusted price per sf should indicate incremental decrease in adjusted price per sf. If a breakpoint is noted where comparables sales with increasing land area suddenly show a substantial increase in adjusted price per sf, one would have discovered the point at which surplus land become excess land.
Given adequate sales of land area which permit the subject's land area to be bracketed, a graph of the tabular data could be created and a trend line applied to the graphed data. The point at which the trend line crosses the axis representing the subject's area would provide a supportable indication of value per square foot for the subject land.
This indicated value would be used in the cost approach as the subject's land value. Given a property with building improvements which do not represent the most productive use of the land, the penalty is to the improvements. If the land valuation indicates the land has excess land which could be subdivided were not the land encumbered with a building, a functional adjustment would be applied to the building. At some point, accrued depreciation would result in the end of the building's economic life, and the building should be razed and the land put to a more productive use.
One does not "handle" the land value in the cost approach. The land value is the land value. If the land is not being used to its most productive use, the penalty is to the building.
