Recognizing surplus land in the Cost Approach as obsolescence?

[Ken B]

Instead of attempting to adjust within each approach for differences in land area, we create graphs plotting FAR and adjusted price per SF of land and adjusted price per square foot of building. Application of trend lines should provide a supportable indication of the subject's value per SF of land and building and a comparison of the two should provide a pretty tight range of value.

The graphs will also provide anecdotal support for the validity of adjustments to comparable sales and rentals as there should be good correlation between the adjusted prices per sf and FAR. If there is an outlier, there is a likelihood that there is something about the property that was missed in the analysis. That can be as informative as a graph with no outliers.

 

[Terrel L. Shields]

The messy part comes into play when attempting to measure the contributory value of the surplus land in the income and sales comparison approaches.

Land has a lower cap rate usually so you need to build a cap rate of the building and a separate one for the land in the income approach.

External would be outside of the site, I would call it functional.

It is an economic obsolescence and I fall back upon Smith's "Valuation of Modern Church Properties" found in "Readings in the Appraisal of Special Purpose Properties" in which he describes the underimprovement of a site (which is what surplus land really means) which he describes as "economic obsolescence" and that falls under "External" not "Functional". The building's function may be fine.

 

[PropertyEconomics]

Land has a lower cap rate usually so you need to build a cap rate of the building and a separate one for the land in the income approach.

It is an economic obsolescence and I fall back upon Smith's "Valuation of Modern Church Properties" found in "Readings in the Appraisal of Special Purpose Properties" in which he describes the underimprovement of a site (which is what surplus land really means) which he describes as "economic obsolescence" and that falls under "External" not "Functional". The building's function may be fine.

Terrel .. I fear Smith is incorrect. Economic obsolescence was changed to External Obsolescence for this exact reason. Functional issues lie within the boundaries of the property while External issues involve everything outside the property boundaries.
Using your quote above ... while the buildings may function just fine ... the surplus land is not functioning properly in that it is not providing an adequate return to its value.

It would, in my opinion, be functional obsolescence.

 

[PL1957]

The subject has a commercial highest and best use for the entire site (3± acres). As improved, it has a highest and best use of retail with surplus $/SF less than the entire $/SF vacant land value.

How do you recognize the reduction in land value as vacant in the Cost Approach. I recognized it as incurable functional obsolescence and calculated it by the surplus land area times the vacant $/SF, less the surplus land value. (i.e. the unit land value is $10/SF and the surplus is $5/SF - this creates the obsolescence) I had a similar parcel that I described the obsolescence as external. I could make an argument for either.

I've reviewed the 13th edition, the Lum library at the Appraisal Institute and have found nothing on this subject. Surplus land is not within the definition of either incurable functional or external obsolescence. However, the reduction in the land value as improved must be accounted for in the Cost Approach. It's easier to recognize in the Market and Income as the surplus land value can be calculated separately and added to your value. The reviewers are not biting off on my analysis. Advice?

Several thoughts on this. If this issue is easier to deal with in the Market/Income approach, why not use the same technique in the Cost Approach?

Second thought, why waste brain cells on the Cost Approach? It's rarely applicable to commercial properties, specifically because of difficulties in estimating total accrued depreciation and because buyers/sellers rarely care about the cost approach.

Finally, IMO, land value is land value. By definition, land does not depreciate. That includes all forms of depreciation, including physical, functional and external. I would apply any depreciation/obsolescence to the improvements. If that doesn't make sense, I'd double check my land value.

 

[BobfromSalem]

Is the surplus land marketable to an abutting land owner??

 

[Mark to market]

If you need some back up for your reviewers you might try Appraising Residential Properties 4th edition p 234, which has reference to surplus land and functional obsolescence or email me and I will fax you a copy of the page.


In the example they have the impaired utility that was accounted for in the sales approach is also accounted for in the cost approach and is done so under incurable functional obsolescence.

 

[Nick Chop MAI]

Several thoughts on this. If this issue is easier to deal with in the Market/Income approach, why not use the same technique in the Cost Approach?

Second thought, why waste brain cells on the Cost Approach? It's rarely applicable to commercial properties, specifically because of difficulties in estimating total accrued depreciation and because buyers/sellers rarely care about the cost approach.

Finally, IMO, land value is land value. By definition, land does not depreciate. That includes all forms of depreciation, including physical, functional and external. I would apply any depreciation/obsolescence to the improvements. If that doesn't make sense, I'd double check my land value.

Required to do the Cost Approach. Having surplus land is only accounted for as improved. The land value as vacant is a simple appraisal problem. Nothing else to check.

 

[Nick Chop MAI]

Is the surplus land marketable to an abutting land owner??

No, but if it was, it likely woulD likely be excess land.

 

[Nick Chop MAI]

If you need some back up for your reviewers you might try Appraising Residential Properties 4th edition p 234, which has reference to surplus land and functional obsolescence or email me and I will fax you a copy of the page.


In the example they have the impaired utility that was accounted for in the sales approach is also accounted for in the cost approach and is done so under incurable functional obsolescence.

Thank you. I had googled this earlier and that text popped up. I'm confident this loss in land value has to be accounted for. The problem is and I am shocked, the Appraisal of Real Estate does not address this. If you consider this functional, the 13th Edition references functional obsolescence's that impact building improvements, not the site. The 13th references external obsolescence as having to do with anything outside the boundaries. So there really is not a correct place to put this 'loss'. I feel it fits in the functional obsolescence linE best. I think the 13th should refer to 'improved site' instead of 'building improvements'.

 

[Kali the Boston Terrier]

Why would you need to account for any obsolescence at all, the opinion of value for the vacant land would already include the value for surplus and normal utility of the site. Techincally it would be surplus because of restriction, i.e. legal, physical...etc. That would already be evident in your vacant land comps. An improvement will not create surplus land...the land had it before the improvement ever got there...or at least it did in your HBU as vacant.