Sensitivity Analysis For GLA

[Joe Flacco]

Then you figured it wrong. You have undervalued the land or the RCN, one or the other.

Yes. Exactly.

 

[Terrel L. Shields]

I would bet the land value is the key.
We don't have the urban situation you have but after Crystal Bridges Museum was built, the small downtown of Bentonville (Wallyworld Hdq. if you forgot) exploded in a radical change in land use. When I began some 25+ years ago, I trained there and small homes sold for a pittance but were frequently taken down and a four plex or duplex built. B Ville had a population of 5,500 or so in 1960. In 1990 its population was less than 14,000. It has grown 10x since 1960 and sister city Rogers has grown perhaps 15x in that period. Older homes in B ville were mostly 1200 SF or less except for a few larger estates. Those older homes are now selling for $100,000 - $200,000. I could have bought a whole block for that in 1990. Some homes get extensively remodeled...literally unrecognizable except for the shape...and some are redeveloped into "period" homes, or multifamily sprinkled within. Very strange. Two similar homes side by side, sell for say $150,000. 90 days later one is gone...disappeared. The other is being remodeled down to the foundation itself on basically the same footprint.

That decision is made by the buyer (often a developer) but in any case the land is worth was the property is worth. The building is worth zero. Meanwhile you can go out of that downtown area and buy a lot anywhere for $75,000 or less...probably with a deed restriction for brick, minimum sizes, etc. Same with commercial. If you have the "power" corner or prime lot, its value is a multiple of the lot next to it. That is where your judgment comes in. It is about the utility of the lot. Like view, it is somewhat subjective.

Finally, there is an axiom that applies. It honestly has nothing to do with the cost approach per se. But the very basic principle that drives all three approaches - substitution. Substitution "affirms that no prudent buyer would pay more for a property than the cost to acquire a similar site and construct improvements of equal desirability and utility without undue delay." (Appraisal of Real Estate, 10th ed) Key to that is what would a true "similar site" cost? and what "undue delay" may exist in the form of government permits, environmental etc.? If it takes two years to get a permit, then the time value of money plus the risk associated with regulatory roadblocks comes into play and that feeds the price of a "similar" site. Much of the crowded East and West coasts are constrained in terms of byzantine governmental regulations that drive the cost of building thru the roof compared to fly over America.

When I value a mineral right, I run into an issue that there is a price for minerals related to being in a "play" or area where drilling is active. But prices will jump, often double, in a section where a company is trying to lease and preparing to drill a well. In the region, no one knows when the drillers will actually drill - not even the drillers - until management of same decides to do it. But once that decision is made and an application goes before the regulatory agency, then the mineral buyers will be out front attempting to buy up minerals, even those which are leased. And if someone has a 20% royalty they will pay more than if the mineral owner is leased at 3/16th and even more if the mineral owner has a lease of 1/8th royalty (normally the minimum.) But they realize the well will be drilled very soon and the payback should start in months. But outside those applications, when will it get drilled? Next year? Next decade? Maybe never?