Recognizing surplus land in the Cost Approach as obsolescence?

[Pittsburgh Pete]

P.S.

The reduced contributory value of the surplus could be either (functional--the problem is in calling it functional obsolescence whihch creates confusion) as in your example or economic (local conditions won't acknowledge commensurate additional value for the increased square footage). In Detroit's case it could conceivably be a little of both.

 

[PropertyEconomics]

In my experience ... Excess Land has a value often times equal to or sometimes higher than the larger parcel depending where on the tract it is located because of size differences.
Surplus land typically has a considerably lower value because it is simply surplus with little use nor little potential for use.


I reviewed a report on Thursday in which the appraiser determined the land was surplus, about an half an acre, because there is little chance the owner would ever sell it. They then proceeded to give the "surplus" land the full value of the balance of the site and added it to both the income and market approaches. I personally do not believe this is correct because I do not think 1) a buyer would pay more for surplus land with little if any utility or potential for other uses; or 2) if it does have equal value it is not surplus but rather excess given its size and the potential for it to be split from the balance of the parcel (allowable by zoning) and sold separately.

Thoughts?

 

[Terrel L. Shields]

In my area residential lots in the country may be 1 - 5 acres. The market won't recognize the difference in value between a 0.5 acre or a 1.2 acre lot. They are a lot and will be mowed. They may like their "big" lot because they garden, etc. Or they may like their small lot because they don't like to mow....
But with 5 acres, unless it is estate sized, the acreage is often fenced with a horse or a calf for the fair, several barns, etc. There seems to be an "X" size that is ideal lot....and it will bring about $15000 in this market. But the "surplus" site is viewed differently and brings more. OTOH, subdividing a lot of less than 5 acres requires a county planning approval hearing. So those lots are not surplus to the property, just excess to its HBU...
Does it bring a "different" price? I donno. I prefer to value the entire site rather than try to differentiate between that core site value and the unit land value of the excess acreaage.

 

[Howard Klahr]

Ken is quite correct. And the presumption that surplus land is worth less than the land as vacant is based on what market oriented data? You have made a pronouncement without any supporting evidence. How do the current improvements impair the "surplus" land? Also, what may be done to remedy this so called impairment? If the cost to implement the remedy is less than the diminution in value it would then be curable. Have you examined these possibilities?

 

[Nick Chop MAI]

Ken is quite correct. And the presumption that surplus land is worth less than the land as vacant is based on what market oriented data? You have made a pronouncement without any supporting evidence. How do the current improvements impair the "surplus" land? Also, what may be done to remedy this so called impairment? If the cost to implement the remedy is less than the diminution in value it would then be curable. Have you examined these possibilities?

This is not curable without demolishing the building that has created this surplus land, which would not be financially feasible.

Regarding surplus land value - if it was worth more ($/sf), then it likely wouldn't be surplus it would be excess land. If it was worth the same unit value (as improved) then I wouldn't have considered it surplus land.

 

[PropertyEconomics]

This is not curable without demolishing the building that has created this surplus land, which would not be financially feasible.

Regarding surplus land value - if it was worth more ($/sf), then it likely wouldn't be surplus it would be excess land. If it was worth the same unit value (as improved) then I wouldn't have considered it surplus land.

I think this pretty much summarizes the difference between surplus and excess land ... barring market evidence which says otherwise.

 

[Howard Klahr]

We are left solely with your limited descriptions on the facts surrounding this situation that you have asked us for assistance. I would suggest that you provide a complete description of the site and improvements for us to better assist you with our opinions.

I personally doubt that demolition of the entire improvements would be necessary in order to adequately improve the utility of the "Surplus" site to the point where it is no longer significantly impaired. My guess is that there is likely some physical feature of the overall site that is causing your perceived impairment in addition to factors related to the existing improvements.

 

[PropertyEconomics]

We are left solely with your limited descriptions on the facts surrounding this situation that you have asked us for assistance. I would suggest that you provide a complete description of the site and improvements for us to better assist you with our opinions.

I personally doubt that demolition of the entire improvements would be necessary in order to adequately improve the utility of the "Surplus" site to the point where it is no longer significantly impaired. My guess is that there is likely some physical feature of the overall site that is causing your perceived impairment in addition to factors related to the existing improvements.

Howard .. with regard to "significanty impared" how about we take another appraoch and simply say that the land is producing no return. The improvements do not need the surplus site area. Lets say its not impared but that it simply is surplus .....

 

[Nick Chop MAI]

We are left solely with your limited descriptions on the facts surrounding this situation that you have asked us for assistance. I would suggest that you provide a complete description of the site and improvements for us to better assist you with our opinions.

I personally doubt that demolition of the entire improvements would be necessary in order to adequately improve the utility of the "Surplus" site to the point where it is no longer significantly impaired. My guess is that there is likely some physical feature of the overall site that is causing your perceived impairment in addition to factors related to the existing improvements.

I simply want to know how other professionals handle surplus land in the Cost Approach. You are trying to figure out if I have determined surplus land correctly. Take me for my word that it is surplus land and give me your opinion on how to handle it in the Cost Approach.

 

[Howard Klahr]

Lets say its not impared but that it simply is surplus .....

Land has economic value that is based on the highest and best use. The classification of surplus implies that it is not possible to put this land to its highest and best use for some reason. This limitation would be an impairment that is either curable or incurable. Otherwise there would not be a reduction in value as compared to other vacant land comps.

I simply want to know how other professionals handle surplus land in the Cost Approach.

The answer to your question is not as simple as you wish to make it. The determination of surplus land is made in the highest and best use analysis. If surplus land is properly identified then it needs to be addressed in every valuation approach employed. It is not isolated to the cost approach.

However, to answer your question directly, I would simply add the value allocated to the surplus land to the indicated value in each of the approaches. I would also demonstrate the valuation of the surplus land independent to the valuation of the remainder. It is somewhat similar to how I would treat a lease-up analysis for a property below stabilized occupancy or an analysis of the "as is" condition of a property in need of repairs.