Contributory land value?

[ETex2]

In reviewing eminent domain appraisals, I find it common that land value is nearly always valued as if vacant and ready for development under it's current zoning.

What ever happened to the theory of valuation of land in the cost approach based upon it's contributory value. Now I took all of the Appraisal Institute courses back in the '80s when it was the AIREA. I remember specifically when taking the report writing course, the example we were given that essentially tested this theory. We were to develop a cost approach of an apartment complex with underlying land zoned for development of 30 units per acre (recently rezoned). The units, which were only 5 years old, were built to a density of 20 units per acre which was the maximum density at the time of construction.

The question to the class was - which set of land comparables to use in the cost approach, comps zoned for the 20 upa density or zoned for 30 upa density? The answer given by the instructor, was the 20 upa sales. Because we were to value the contributory value of the land, not necessarily the land value as if vacant and ready for development to it's higher allowable density.

This problem is common with homesites where the underlying land has been rezoned for commercial use, although there is no demand for this commercial use and the existing improvements represent the highest and best use as improved. Thoughts?

 

[Terrel L. Shields]

Land is valued as if vacant and available for its highest and best use and that was, in fact, included in USPAP for years until they decided there is a case for valuing property in its use.

The "spread" between the value as if vacant and the value of its contribution (or land residual) is a measure of the external obsolescence...or if the contributory value is higher, it relates to a business enterprise value or in the cost approach - entreprenuerial profit.

Personally, it does not seem to matter a hoot except to confound the entire appraisal industry with another inconclusive, unwieldy concept that in the real world is, at best, a tiresome rehash of old arguments that plague the industry from day 1.

The prime example I have is a site that for 10 years in the small town near where I live wasn't "worth" $30,000. It was low, needed fill, and was sandwiched between a state highway, a railroad, a mini-storage, and a place that sells stoves. Wal-Mart built their new small Express store there and paid $125,000. Access is awful and wrecks will happen until someone is killed and the powers that be erect a stoplight....but that's a different issue. The gist is that without WM making the decision to seek land in that town which otherwise was never a candidate for a full size store, there is no HBU that would supported such a land value there. Instant value so to speak...

The local grocery store closed within one month, and the Dollar General remodeled....so is this a whackamole for the town? One store increased the tax base and one store just went to zero tax takes? Sorta.

 

[ETex2]

Wouldn't the spread in value be functional obsolescence due to an underimprovement of the site rather than external obsolescence?

I'm with you on obsolescence being measured rather than the contributory value of the land as if vacant. In a perfect world the same thing is accomplished - an adjustment to the overall value indication by the Cost Approach.

The obsolescence theory is referred to on pages 380-381 of the 13th Addition by AI, but I am unaware of any past references by USPAP.

 

[PropertyEconomics]

Wouldn't the spread in value be functional obsolescence due to an underimprovement of the site rather than external obsolescence?

I'm with you on obsolescence being measured rather than the contributory value of the land as if vacant. In a perfect world the same thing is accomplished - an adjustment to the overall value indication by the Cost Approach.

The obsolescence theory is referred to on pages 380-381 of the 13th Addition by AI, but I am unaware of any past references by USPAP.

Not being smart here ... but who is an appraiser to summarily say that the difference between 20 dus and 25 dus, or 30 dus is under utilization of the land?
I find it interesting on theory alone that appraisers wish to second guess developers who for the most part have done market studies to determine specifically that which will work best on a site and that which will provide the highest return.

Of course there are under utilized sites and I dont mean to imply they do not occurr, but that being said, if selection of the vacant land comparables is correct it should well relect the value of the site as vacant. Frankly I have not found much different in my market measureable on a DU basis between 20 and 25 DUs .... your market may be different.

In any event I believe it could potentially be a review searching for a problem rather than simply reviewing the appraisal and determining if its credible and not misleading with the value conclusions reasonable and well supported. If there is a problem certainly identify it but dont go looking for potential "theory" problems where they may not exist.

Determination of depreciation from all sources in this market is VERY difficult at best given the lack of avaialble sales, lack of available good cost data, and a general lack of an abundance of land sales. It can be done but I would nearly bet it seldom is in the type of markets we have experienced over the past four or five years.

 

[ETex2]

Not being smart here ... but who is an appraiser to summarily say that the difference between 20 dus and 25 dus, or 30 dus is under utilization of the land?
I find it interesting on theory alone that appraisers wish to second guess developers who for the most part have done market studies to determine specifically that which will work best on a site and that which will provide the highest return.

Of course there are under utilized sites and I dont mean to imply they do not occurr, but that being said, if selection of the vacant land comparables is correct it should well relect the value of the site as vacant. Frankly I have not found much different in my market measureable on a DU basis between 20 and 25 DUs .... your market may be different.

In any event I believe it could potentially be a review searching for a problem rather than simply reviewing the appraisal and determining if its credible and not misleading with the value conclusions reasonable and well supported. If there is a problem certainly identify it but dont go looking for potential "theory" problems where they may not exist.

Determination of depreciation from all sources in this market is VERY difficult at best given the lack of avaialble sales, lack of available good cost data, and a general lack of an abundance of land sales. It can be done but I would nearly bet it seldom is in the type of markets we have experienced over the past four or five years.

If you'll read the post, the deference in developable units per acre example is from the AI report writing course I took many moons ago. In our example, the density DID make a substantial difference in the price paid per SF and per developable unit.

My review of the eminent domain appraisal has to do with land acquired by the municipality - I've actually seen land valued both ways and I'm wondering what others are thinking. So we're discussing theory, not my specific review.

 

[PropertyEconomics]

If you'll read the post, the deference in developable units per acre example is from the AI report writing course I took many moons ago. In our example, the density DID make a substantial difference in the price paid per SF and per developable unit.

My review of the eminent domain appraisal has to do with land acquired by the municipality - I've actually seen land valued both ways and I'm wondering what others are thinking. So we're discussing theory, not my specific review.

Realizing that "development densities" are essentially assigned by a zoning authority, and most probably done without a great deal of study, I have always taken them with a grain of salt but I have certainly paid attention to the densities available to vacant land sales and their price per DU.
One of the things I have found interesting is to go back to these properties and find out actual densities and then remeasure the "price per DU". During major expansion times maximizing land densities often occurrs, but it is just as reasonable to find that not always that is the case. Measurement then against "potential" and "actual" can be interesting and provide good analysis within an appraisal.
And again dont take this wrong, but I have always found the AI cases often show a difference representing the theory behind an adjustment but in real life, using actual sales data, the theory is not nearly as clear or clean as that found in the class.

 

[Ken B]

A lot of land overvalued down here because it was appraised at its maximum permissible density while the demand for that capacity was ignored.

 

[farmguy]

If the H&BU of the vacant subject land as of the effective date is to build apartments at a density of 30 u/ac (because zoning now allows that), (and I am assuming based on the discussion that land zoned 30 would sell for more than land zoned 20) then the land value estimate in the cost approach should reflect value of land where the economies and the zoning allow for 30 units per acre. The improvements would generally suffer depreciation over and above physical depreciation, essentially equal to the difference in 30 unit land and 20 unit land.

Maybe that is what you are saying and I just don't follow.

Isn't this the same example they always have in classes where a small house is sitting on main street. land on the side street is 10,000 per lot and on main street is 50,000 lot. Similar houses on side street sell for 60,000 so the house contributes 50,000 (60,000 less land 10,000 = 50,000). the same house on main street sells for 60,000 but the house only contributes 10000 (60,000 less land 50,000= 10,000.)

 

[PropertyEconomics]

It easily could be a highest and best use problem ... if all land is zoned for 30 du's but only 20 du's are being constructed, it seems hard to conclude the highest and best use is for 30 du's. And land should be valued based on its highest and best use.

As Ken B points out .. over valuing could be very easily accomplished.

 

[ETex2]

If the H&BU of the vacant subject land as of the effective date is to build apartments at a density of 30 u/ac (because zoning now allows that), (and I am assuming based on the discussion that land zoned 30 would sell for more than land zoned 20) then the land value estimate in the cost approach should reflect value of land where the economies and the zoning allow for 30 units per acre. The improvements would generally suffer depreciation over and above physical depreciation, essentially equal to the difference in 30 unit land and 20 unit land.

Maybe that is what you are saying and I just don't follow.

Isn't this the same example they always have in classes where a small house is sitting on main street. land on the side street is 10,000 per lot and on main street is 50,000 lot. Similar houses on side street sell for 60,000 so the house contributes 50,000 (60,000 less land 10,000 = 50,000). the same house on main street sells for 60,000 but the house only contributes 10000 (60,000 less land 50,000= 10,000.)

In the report writing course example, the assumption was that a higher developable density was more desirable since there was a demonstrated demand, and prices were higher on a per SF basis. (This was afterall, the '80s).

In the eminent domain appraisal, there is really no demand for commercial space at the subject's location, but zoning was recently changed due to the impending roadway widening and new tollway nearby. But any demand will probably be years in the future and the house is fairly new and is representative of the highest and best use as improved in the current market and in the foreseeable future.

So are people here agreeing that land is ALWAYS appraised as if vacant? Or are there members saying that the contributory value as a single family homesite is the proper way to value the underlying land subject to acquisition? In this case, no demand for commercial land at this location would seem to indicate properly valuing the land as a residential site. But let's say that there is some demand for a commercial use, and as if vacant, the land value would as a result be higher on a per SF basis. Same conclusions?