Commercial land size adjustments

[soub33]

I have been instructed that the process for adjusting for size differences for commercial land is different that what is done for residential lots. For instance, assume a subject commercial lot is 20,000 square feet. Assume that comp 1 is a 16,000 square foot lot and comps 2 and 3 are 24,000 square foot lots.

Given these lot sizes and assuming that the appraiser feels adjustments are necessary based on the market, I have been advised that comp 1 should be adjusted negatively for size and comps 2 & 3 should be adjusted positively for size because we are dealing with commercial lots. Had these lots been residential, then comp 1 would be adjusted positively (inferior in size to the subject) and comps 2 & 3 would be adjusted negatively (superior in size to the subject).

I'm in the state government appraisal world, so our policies and procedures tend to sometimes not be consistent with the fee appraiser world (i.e we have little to no policies or procedures). However, I'd like to understand the theory behind this, if in fact there is a market-based reason why land size adjustments should be handled in a different manner for commercial land vs. residential land. Please help. :icon_question:

 

[Michigan CG]

Someone is pulling your leg.

If a comparable is inferior to the subject then it is given a positive adjustment. If a comparable is superior to the subject it is given a negative adjustment. This is the case for both commercial and residential properties. There is no reason they would be different.

But to add to that....if a property has a lot size that more than serves the needed utility then there might be no adjustment at all; this land would be considered surplus land (more than enough land, but can't be split).

 

[Abester]

It's a $/sf adjustment where smaller lots tend to sell for more per sf than otherwise similar larger lots and larger lots tend to sell for less per sf than otherwise similar smaller lots.

 

[JT1974]

I think what is confusing you is that commercial appraisers tend to compare sites similar to what you are talking about on a price per square foot basis, whereas resi appraisers tend to compare the sites as one economic unit or a "per lot" basis.

It is often the case that larger commercial sites (given all else is equal) will tend to sell for a lower price per square foot than smaller sites. Therefore, you will often see positive adjustments (on a per square foot basis) for larger sites and just the opposite for smaller sites.

In a typical residential assignment, appraisers often look at the "lot" as one economic unit. Lets say they have the following lot sales:

1. 10,000 SF Res. Lot sold for $40,000
2. 12,000 SF Res. Lot sold for $45,000
3. 15,000 SF Res. Lot sold for $50,000

Subject lot is a 12,000 SF Res. lot.

The typical Residential appraiser would likely make a positive adjustment to Sale 1, no adjustment to sale two and a downward adjustment to Sale 3 because they would typically be looking at the sites as one economic unit.

Now, if the appraiser actually broke the residential lots down to a "per square foot" basis, they would adjust down for the smaller lot and up for the larger lot on a per square foot basis.

Here are the three residential lot sales on a Per Square Foot basis.

1. 10,000 SF @ $40,000 = $4.00 PSF
2. 12,000 SF @ $45,000 = $3.75 PSF
3. 15,000 SF @ $50,000 = $3.33 PSF

Let's assume the subject is nearly identical to Sale 2 and it is worth approx. $45,000. Given that, and assuming all other factors are equal, we can see that Sale 1 sold for a higher price per square foot and would require a downward adjustment on a PSF basis, but an upward adjustment on a "per lot" basis. Likewise, Sale 3 sold for a lower price per square foot and would require an upward adjustment on a PSF basis, but a downward adjustment on a "per lot" basis.

I hope this helps clear things up a bit.

 

[JT1974]

Aww shucks, Abester snuck in there and summed it all up in one sentence while I was rambling on. Sorry for the long post..........it's late and my brain is tired.

 

[Michigan CG]

Aww shucks, Abester snuck in there and summed it all up in one sentence while I was rambling on. Sorry for the long post..........it's late and my brain is tired.

But you gave real good examples....diminishing returns.

 

[PropertyEconomics]

I have been instructed that the process for adjusting for size differences for commercial land is different that what is done for residential lots. For instance, assume a subject commercial lot is 20,000 square feet. Assume that comp 1 is a 16,000 square foot lot and comps 2 and 3 are 24,000 square foot lots.

Given these lot sizes and assuming that the appraiser feels adjustments are necessary based on the market, I have been advised that comp 1 should be adjusted negatively for size and comps 2 & 3 should be adjusted positively for size because we are dealing with commercial lots. Had these lots been residential, then comp 1 would be adjusted positively (inferior in size to the subject) and comps 2 & 3 would be adjusted negatively (superior in size to the subject).

I'm in the state government appraisal world, so our policies and procedures tend to sometimes not be consistent with the fee appraiser world (i.e we have little to no policies or procedures). However, I'd like to understand the theory behind this, if in fact there is a market-based reason why land size adjustments should be handled in a different manner for commercial land vs. residential land. Please help. :icon_question:

As Abester noted .. if you are adjusting on a price per square foot basis that would be correct. If you are adjusting on a total dollar basis the instructions would be incorrect.


20,000 sq ft @ $4.00 / sf = $80,000
16,000 sq ft @ $4.50 / sf = $72,000

As you can see above ... the smaller lot would be adjusted downward $.50 per square foot on a per square foot basis if measureing the value of a 20,000 sqft subject, however, would be adjusted upward $8,000 if measuring on a total dollar basis.

I hope this helps.

 

[soub33]

Thanks for the responses, but I'm still confused? What governs whether the appraiser should reflect adjustments on a total dollar basis or price per square foot basis? Does it depend on whether the land is commercial or residential? What book/reference can I go to in order to research the matter further?

 

[Pamela Biggers]

The market is one thing that governs what unit of comparison basis an appraiser should use to make adjustments. In the commercial market lots are typically priced per sq ft...residential lots tend to be priced per site...agricultural lots tend to be priced per acre. Most markets reflect this. As far as books go... The Appraisal of Real Estate (Appraisal Institute) & Property Assessment Valuation (International Association of Assessing Officers) are two good ones. It is up to the appraiser to decide what the appropriate unit of comparison. There is not a rule that you must use a particular one as long as you apply it correctly and equally. Commercial, Residential, & Agg lots are pretty easy to decide on as the market is pretty consistant on how they approach these types of properties. Now take a multi family property. Do you use units, bedrooms, sq ft?

As far as reversing adjustments when adjusting size on a price per sq ft unit- this is based on the economic principle of Economies of Scale (in no way is it diminishing returns). Economies of Scale are the cost advantages that a business obtains due to expansion. They are factors that cause a producer’s average cost per unit to fall as scale is increased.