Subdivision Analysis - Negative Value

[kenmaster]

Hi everyone,

I'm reviewing an appraisal report of a subdivision analysis where the appraiser concluded a negative value for the subject property. I have gone through all the assumptions made by the appraiser and they all appear to be reasonable. The reason for the negative value concluded by the appraiser was that the analysis takes into consideration of the remaining completion costs of paving and the reconstruction costs of storm water retention ponds. In the discounted cash flow sell-out analysis, the appraiser made deductions for the completion costs of those items, which yields a result of negative value for the lots because the completion costs exceeded the anticipated revenue from the sale of the lots. My questions are: a) Does it reasonable or common to conclude a negative value? b) If a negative value is concluded, should the highest and best use of the subject needed to be revised because residential use is not an ideal improvement since it does not provide the highest return of the land? c) Should the appraiser consider selling the land as raw land rather than subdivision lots in the analysis since selling as raw land possess positive value?

Thanks for everyone help!

 

[Pittsburgh Pete]

Sounds like it is not financially feasible or only feasible at a lower profit rate than projected by the appraiser.

Plan B is to hold until the market picks up--sales of similar tracts would indicate that that is the case--if in fact they are selling.

 

[kenmaster]

Sounds like it is not financially feasible or only feasible at a lower profit rate than projected by the appraiser.

Plan B is to hold until the market picks up--sales of similar tracts would indicate that that is the case--if in fact they are selling.

Hi Pete,

Thanks for replying. I agree with your Plan B. However, my client needs to know the market value of the lots to put on their book. What value that should be? Thanks.

 

[Michigan CG]

Highest and Best Use is obviously to not build a subdivision.

 

[Ken B]

Assuming you have the entire report, the only approach to value utilized was the subdivision development approach? That it is not feasible to complete the development is not a surprise. The report did not provide a sales comparison approach utilizing bulk sales of lots and/or vacant land?

 

[Terrel L. Shields]

a) Does it reasonable or common to conclude a negative value?

The negative value is a reflection that the residual land value is negative for that development. The development is a hypothetical at some future moment in time (though not necessarily that far in the future.) So it is telling you that developing the lots is a bad investment at this time. It is really not the "market value".

b) If a negative value is concluded, should the highest and best use of the subject needed to be revised because residential use is not an ideal improvement since it does not provide the highest return of the land?

Exactly. Even if Residential use is ideal, the explicit proposed type of residential use isn't. A buyer of same would not develop but discount the property heavily so as to afford to hold for several more years until the investment "ripens".

c) Should the appraiser consider selling the land as raw land rather than subdivision lots in the analysis since selling as raw land possess positive value?

Yes. The appraiser should offer the value to be the most profitable use, and that would generally be as a vacant investment land. I drove by a 30 acre development with zero developed lots but utilities in place and there were workers constructing a barb wire fence around it. A few days later, I noticed cattle in the property. It will be a long time before this development is economic and I predict that by that time, someone will replat the subdivision into larger and less expensive lots.

 

[kenmaster]

Assuming you have the entire report, the only approach to value utilized was the subdivision development approach? That it is not feasible to complete the development is not a surprise. The report did not provide a sales comparison approach utilizing bulk sales of lots and/or vacant land?

Hi Ken,

Thanks for replying. That's correct. The only approach used by the appraiser in the appraisal report is the subdivision analysis. The appraiser only used the sales comparison approach to estimate the sell price per lot so that it can be used in the subdivision analysis, but he did not considered nor used the bulk sales analysis. This appears to be very strange.

 

[kenmaster]

The negative value is a reflection that the residual land value is negative for that development. The development is a hypothetical at some future moment in time (though not necessarily that far in the future.) So it is telling you that developing the lots is a bad investment at this time. It is really not the "market value".

Exactly. Even if Residential use is ideal, the explicit proposed type of residential use isn't. A buyer of same would not develop but discount the property heavily so as to afford to hold for several more years until the investment "ripens".

Yes. The appraiser should offer the value to be the most profitable use, and that would generally be as a vacant investment land. I drove by a 30 acre development with zero developed lots but utilities in place and there were workers constructing a barb wire fence around it. A few days later, I noticed cattle in the property. It will be a long time before this development is economic and I predict that by that time, someone will replat the subdivision into larger and less expensive lots.

Hi Terrel,

Your answers made a lot of sense to me. Thank you for helping. It appears that I need to conclude the appraisal report performed by the appraisal is inadequate to provide a credible conclusion.

 

[Terrel L. Shields]

It lacks an "As is" value - that is, what would it just sell for now "as is" and FRTs fpr regulated banks now are required to report same. Being under $250,000 however ??? I donno. That's not an FRT.

The value provided was a what if value based on completing the project which suggests the residual to the land is less than zero.

 

[Ken B]

Hi Ken,

Thanks for replying. That's correct. The only approach used by the appraiser in the appraisal report is the subdivision analysis. The appraiser only used the sales comparison approach to estimate the sell price per lot so that it can be used in the subdivision analysis, but he did not considered nor used the bulk sales analysis. This appears to be very strange.

Not only strange, but incorrect if the purpose of the valuation is to provide an opinion of the property in "as is" condition. Using the SCA in developing an opinion of single lot value is an aspect of the ICA. I have valued plenty of dead subdivisions where the value "as is" is less than the cost of the infrastucture in place. That doesn't mean the land had negative value. There was simply little to no value for the site improvements. That is demonstrated in the SCA with analysis of bulk lot sales and/or sales of vacant land.

That said, it is possible for there to be negative land value if there are substantial outstanding liens or high carrying costs. Florida has a CDD program (Community Development District) in which a quasi-governmental agency issues bonds to cover the infrastructure costs. Future owners incur holding costs as a result of the requirement to make payments on the bonds. There is an area north of me which has decades of finished lot supply. If there are CDD payments associated with those projects, it is true there could be negative value associated with the property. I know brokers who have stated they won't even list bulk lots or land with high CDD payments because it is basically a waste of their time and resources.

But there should be an SCA approach which analyzes bulk lot and/or vacant land sales in addition to the subdivision development analysis to develop that opinion of negative value. If an adjustment needs to be applied in the SCA approach for excess holding costs associated with the subject, then so be it.

FWIW, I probably know someone who can do the job right, even if the property isn't in Florida. See the link in my profile.