Logistics of Excess Land in a Report

[BigBlueGA]

I'm curious to know how the rest of you generally handle excess land in a report. I've (amazingly) never had to deal with it until right now and have developed the value of the excess land without issue, but trying to figure out how it should be incorporated into the final presentation of values. The texts that I have tend to gloss over the actual process of dealing with excess land, so they are of no help. I can't recall anything more than a cursory mention of it in classes that I've taken (of course the ones that would have covered it were years and years ago so maybe my memory is at fault).

The scenario is as straight forward as it gets... commercial building on a large parcel that is literally split in half (with chain link), only the half with the building is in use. Zoning clearly permits use of the other half for development and there is demand.

My assignment is market value of the whole property for foreclosure. Should the value of both the excess land and the portion in-use be combined within the Cost Approach? Should it be adjusted for within the Sales Comparison and Income Approaches (therefore establishing a market value within each approach that reflects the entire property)? Or should I pull it out, perform each approach using just the portion in-use and present two separate value conclusions (one for subject property with portion that is being used and another for the excess land as vacant)? Both parcels have been discounted of course before inclusion in anything.

Probably a stupid question, but not one I've had to consider before.

 

[Eminent Domain]

I think this is a good question. It is something I have not dealt with a great deal either. I have seen it handled both ways. I once followed one of the big boys (an MAI) on a manufacturing plant which was situated on something like 40 acres. In the Letter of Transmittal he reported an opinion of value for the plant and the fifteen or so acres it utilized and a second separate opinion of value for the remaining 25 vacant acres. There was no formal legal description of each individual parcel so it was kind of a guess about the 15 and 25 acre parcels which were combined to create the total 40 acres. Personally I felt this was reasonable but maybe someone down the line having a bad day looking this report may have felt otherwise.

I didn't do that, but simply included the whole property in one overall value allowing for the contributory value of the excess land to the plant itself. Of course the contributory value of the excess land was no where near what the parcel subdivided was worth as a stand alone property.

Is one approach more 'correct' than the other. I guess it would depend on who was reviewing the report and the scope of work of the assignment. Clearly the fact that there was a 25+/- acre parcel which had its own highest and best use above just holding the world together along the subject plant tract would most likely indicate that there was greater value for that tract of vacant land as a stand alone parcel as opposed to it remaining a part of the plant parcel. However, on the other hand there technically was no 'separate' legal description so the invoking of a hypothetical condition would be warranted in this particular case.

In my case most manufacturing plants I researched tended to have some excess land anyway so it was easy to deal with. Basically it really didn't mean very much to the plant property at all so there was very little, if any, contributory value. Plants are a different beast altogether here. My experience with these have basically been that the corporate owner analyzes the cost to build this type of property in relation to the amount of manufactured product they will produce and sale over the improvements expected lifetime and then they dump the properties at a salvage value price because they are not lining up at the door to buy these things. I am in a rural area where you are not going to find many new manufacturing tenants to replace one another so I suspect in more industrialzed areas this may not always hold true.

I know this would not always be the case especially in office or retail areas where tenants come and go more readily and the improvements actually contribute more than some type of salvage value to the property. In the plant scenario above the 'salvage value' of these properties is on the cusp of being less than the value of the land 'as-if' vacant but what holds folks back on this is the demolition cost of these types of improvements and what you might find in 30 to 50 year old plants.

The objectives of the client might make a difference. Maximization of revenue may dictate the breaking apart of the property into separate tracts; thus, the client requests two separate opinions of value. While on the other hand if one is highly motivated to move the property quickly they may use the excess acreage as a lure to liquidate the improved property by suggesting that if you purchased it you can get this extra useable land at practically no cost; thus, the client may only request one value. As always its going to depend on the property and the SOW.

I look forward to the discussion about this as I am sure there will be differing opinions from all over.

 

[PropertyEconomics]

I can only assume the "subject" is the entire property. That being the case I would identify the excess land, provide land sales and an analysis of its value and then add it to the indicated value of the improved portion of the property:

Estimated Market Value of Improved Portion of Subject ..... $X,zzz,zzz
Estimated Market value of Excess Land ........................... $ XX,zzz
Total Market Value of Subject Property ........................... $X,zzz,zzz

 

[AnonApprsr]

Value whatever the deed says is included in the property. Excess land is kind of a misnomer unless you are saying the market treats it as excess and it has no value, if that's the case than it has no value but is still included as part of the site (if it's deeded) on the appraisal, of course.

 

[PropertyEconomics]

Value whatever the deed says is included in the property. Excess land is kind of a misnomer unless you are saying the market treats it as excess and it has no value, if that's the case than it has no value but is still included as part of the site (if it's deeded) on the appraisal, of course.

Anon ... you are a bit confused. Best not to step into the commercial world here ... learning highest and best use along with the definition of excess land would serve you well. Not being rude but your post adds nothing to this thread since it is completely wrong ... on all levels.

 

[Ken B]

The difference between "excess land" and "surplus land" often has even the experts running to the dictionary occasionally. Here is a nice memory trick:

"Excellent excess" land has a separate highest and best use and thus higher value per unit of measurement due to its superior utility compared to

"Sucky surplus" land, which is land that is simply surplus to that needed for a specific use and which does not have a separate highest and best use and which can not be utilized separately from the overall property.

You heard it here first.

 

[Stephen J. Vertin MAI]

Estimated Market Value of Improved Portion of Subject ..... $X,zzz,zzz
Estimated Market value of Excess Land ........................... $ XX,zzz
Total Market Value of Subject Property ........................... $X,zzz,zzz

This is the most used procedure. Be sure to use it in both income and sales. Since land value is given in cost it is intrinsic to the approach.

I do not want to confuse the OP but I have always wondered that if you adjust for land size should you adjust for the final size of the excess land?.

 

[PropertyEconomics]

This is the most used procedure. Be sure to use it in both income and sales. Since land value is given in cost it is intrinsic to the approach.

I do not want to confuse the OP but I have always wondered that if you adjust for land size should you adjust for the final size of the excess land.

Stephen .. you bring up a very good point. If one considers the full size of the land in the sales comparison approach the adjustment would (or should) reflect the value of the excess land as part of the adjustment. If not, and the land size for comparison purposes is limited to exclude the excess land, then adding it back in would be appropriate.
You also make a very good point regarding the income approach. The income attributable to the "improved portion of the property" most probably does not provide a return to the excess land and an adjustment would be appropriate in my opinion (depending upon the market of course).

 

[AnonApprsr]

I didn't notice I was in the Commercial section PE, thought I was helping someone out.

 

[PropertyEconomics]

I didn't notice I was in the Commercial section PE, thought I was helping someone out.

Anon even then ... Excess land may well have value. I believe what you were thinking of was surplus land (which also may contribute additional value by the way). In any event to categorically infer that "additional land" (excess or surplus) does not have contributory value overall to the property is not a correct statement.