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Developmental Analysis - Excess Land

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post450

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I have a somewhat unusual assignment of 200+ acres which has approximately 40 acres currently being developed into residential lots. The client (a lender) has requested one report including a developmental analysis of the current phase only plus the value of the excess land in its undeveloped state. Due to the reduced demand for vacant lots and growing oversupply, highest and best use of the excess land is to hold for speculation. The developer was unclear on his intentions for the excess land, but is currently offering it for sale by owner. My interpretation of USPAP would forbid simply adding the DCF value to the current value of the excess land.

Based on the assumption the developer will sell the excess land, it would appear rational to include the anticipated sale of the excess land in the DCF to yield a total value. Any thoughts or suggestions?
 

hastalavista

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Based on the assumption the developer will sell the excess land, it would appear rational to include the anticipated sale of the excess land in the DCF to yield a total value. Any thoughts or suggestions?

When you say
it would appear rational to include the anticipated sale of the excess land in the DCF to yield a total value.
does that mean you would add it into the DCF calculation (say, as income in the first or second year)?

Why not value the excess land, as-is, speculative value, current date and add that to the DCF valuation. In other words, two separate calculations: DCF for the development and current as-is value of speculative excess land?

Please note that I am not a commercial appraisal and I'm asking to expand my own knowledge base; so if I've made an ignorant statement, please do not hesitate to point it out to me! :new_smile-l:

Thanks!
 

Howard

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Missouri
I think Denis has it partially right. Value the development part by development comps and/or DCF, to that add the current value of the excess raw land and that gets you to the sum of the parts, which may not equal the whole.

From there, you need to find a sale or sales to tell you what the bulk discount to the sum of the parts is going to be. Do not be shocked if it's a substantial discount.
 

Terrel L. Shields

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Assemblege is discouraged by USPAP but it does not forbid combining excess land with developed land. It does require you test that against common sense and explain it. Personally, I would think you do have the potential of the DCF under CURRENT market conditions as you describe may be a negative figure...that is, this is a money losing subdivision...IF the subdivsion costs have already been spent however, the DCF gets to ignore anything already spent.

So HBU would be to hold for future development. What's its interim use? Agriculture? Hunker down? Since you appear to have the survey of the subdivision, therefore, the remainder property is defined, so long as it has access, it should be salable "as is" (the subdivision is a hypothetical "as proposed"?) I certainly would want to spell that out to be clear.

Question then has to go to marketing time. Our county has a 9 YEAR supply of platted lots. Absorption time is enormous in some towns. DCFing for such a lot period means you have to do a lot of forecasting. When will the market improve? How fast will it turn around? etc. Currently (again this in my market) Lots selling for $18,000 in 2000, then $32,000 in 2003, and $42,000 by 05' are now listing at $28,000 and there are a ton of them that simply have not sold. I just did a new construction in a new subdivision and lot sales in that town over the last 3 years were something like 178, 46, 13...nary a sale since August.
You got your work cut out for you. Again, can you even support a land sale with a marketing time of less than one year? Perhaps a 10 year absorption time for the developed lots...I just hope you charge enough. You have a month long project.
 

Fred

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Assemblege is discouraged by USPAP
Assemblage is something that people do with real estate. I don't find any encouragement or discouragement of that in USPAP.

So HBU would be to hold for future development.
This is the second mention of this in the thread. I didn't know "hold" was a use. The statement raises the question for me: why "hold" is "better" than "sell" (which I also don't believe is a "use").
 
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Michigan CG

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I like Denis's approach. Terrell, I was told/taught that DCF analysis should never be more than 5 years unless there are extreme circumstances, and although our current market is challenging, recovery should be within the next five years.

A ten year DCF is speculation at best (from my teachings) and would indicate the H & B is not for residential development.

For my own reading pleasure can you point to me in USPAP where it discusses assemblage.
 

xm4yb7

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Florida
For my own reading pleasure can you point to me in USPAP where it discusses assemblage.

I think he was talking about Standard 1-4 (e)

When analyzing the assemblage of the various estates or component parts of a property, an appraiser must analyze the effect on value, if any, of the assemblage. An appraiser must refrain from valuing the whole solely by adding together the individual values of the various estates or component parts.

It's not encouraged or discouraged, but states that you shouldn't just add the separate values together to arrive at the overall value.
 

Fred

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It's not encouraged or discouraged, but states that you shouldn't just add the separate values together to arrive at the overall value.
Just as further along in the same SR it says to consider the effect of proposed off-site public projects - which again is neither an encouragement or discouragement about appraising properties affected that way.
 

PropertyEconomics

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New Mexico
I see nothing wrong with adding the sum of the parts as long as you have analized if there would be some further bulk discount. You could very well have two differing uses in this instance and market place which could be marketed separated and may sell within the same time frame more or less. I find that USPAP cautions against potential mistakes but does not dictate how something MUST be done because every market is different.
What does your market tell you? That honestly is the most simple answer to your question and one that so many appraisers overlook.
 
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