How to value surplus land based on future income production

[Steve Pendleton]

I'll try to brief. I am a Realtor and I have a friend who owns a hangar complex at a local airport for recreational aviators. She has asked me to help her determine the value of her property. She has three parcels of land. Parcel 1 has 23 hangars on it that are producing a profit of about $50,000 per year. Parcel 1 also has some surplus land that could be developed further. Parcel 2 and 3 are currently unimproved and could also be developed to generate new revenue. Based on current market conditions, available space, permitted use, etc. we believe that 20 additional hangars could be added to the site to produce approximately $100,000 additional profit per year. I am using the income method to value the portion of Parcel #1 which currently produces revenue. My question is, How do I determine the current value of the surplus land if I know the approximate future profitability?

 

[Pittsburgh Pete]

I'm assuming you are "backing in" to the land value. If the excess land (don't think it's surplus as you indicate it has a separate highest and best use) plus the hangars generate $100,000 per year, I'd capitalize the projected NOI into a value estimate (couldn't even begin to ponder what an appropriate rate might be). Knowing the value of land/building, a deduction of the cost to construct the improvements (including profit) and a deduction for the time required to get it up to generating the income would yield the underlying land value.

 

[Financially Feasible]

I don't disagree with what Pete said, but see if that land residual is supported by market sales or you could have a financial feasibility issue. Just because you can build it doesn't mean that you should.

Also, the other conundrum is this... you mentioned that 23 hangars yields a profit of $50,000... so how are 20 additional hangars going to produce an additional $100,000 in profit? Are you building bigger hangars? Otherwise, the logic of increasing the number of hangars by 87% to yield a 200% increase in profit escapes me.

 

[Deleted member 152047]

I would develop a discounted cash flow model. It will take into consideration the existing revenue over the time that it takes to construct and lease up the additional hangars. The DCF would also consider the timing of the additional income and future costs (construction, leasing, etc.).

I agree with Ed though, your revenue numbers raise an immediate red flag.

 

[Pittsburgh Pete]

Could be talking larger hangars, newer hangars with more features........ Who knows-- but that wasn't his question. He inquired about methodology for valuing--obviously any method requires supportable data.

 

[Steve Pendleton]

I don't disagree with what Pete said, but see if that land residual is supported by market sales or you could have a financial feasibility issue. Just because you can build it doesn't mean that you should.

Also, the other conundrum is this... you mentioned that 23 hangars yields a profit of $50,000... so how are 20 additional hangars going to produce an additional $100,000 in profit? Are you building bigger hangars? Otherwise, the logic of increasing the number of hangars by 87% to yield a 200% increase in profit escapes me.

The existing hangars are not insulated not do they have full height walls. The new hangars will have both and this we can charge more rent.

 

[Steve Pendleton]

Sorry, couple of misspellings in that last note. Pete's methodology sounds like it will work. I have a reliable estimate on the cost of construction for the new improvements, so I should be able to determine the debt service to complete the projected NOI. Of course NP MAI is correct that a cash flow model would probably be more accurate since development and leasing will take time. Thanks to all of you for the advice.

 

[Michael P Jacobs MAI]

If this is on an FAA funded facility then you most likely have a leasehold interest, not fee simple. An FBO operation is a going concern, not real estate, value. These factors limit marketability and the credibility of conventional appraisal methods. You might be better served on an ASA forum dealing with aviation business value and airport leaseholds.

 

[Carnivore]

I don't disagree with what Pete said, but see if that land residual is supported by market sales or you could have a financial feasibility issue. Just because you can build it doesn't mean that you should.

Also, the other conundrum is this... you mentioned that 23 hangars yields a profit of $50,000... so how are 20 additional hangars going to produce an additional $100,000 in profit? Are you building bigger hangars? Otherwise, the logic of increasing the number of hangars by 87% to yield a 200% increase in profit escapes me.

I really agree with the above.

I am just a little ole Residential Guy...but I do have an extensive Aviation Background. Having said that .. Here is a consideration that is unknown at this point.

First question I have is there an actual demand for more Hangar space? Another question would be what type of hangar space You eluded to both of those in your question with 'Current Market Conditions.'

 

[Steve Pendleton]

As to ownership this land happens to be fee simple since it was originally purchased and developed when the airport was a field and received no FAA funding. A good point however. As to demand, there is a shortage of hangar space in this area and the owner has a waiting list for spaces. The current spaces are "T" hangers and that appears to be the best use of the space. This is a general aviation airport in a major metropolitan area, but there are other airports that service corporate jets and those who don't worry about cost.