Subdivision Land...assemblage value higher than market value?

[Penelope May]

I am appraising a proposed 140-lot subdivision in a "hot" California market. Based on sales of approved tract maps to builders and a discounted cash flow residual method I am concluding a proposed value (entitled) of about $5.5M. For the "as-is" value, I find many sales of raw land (zoned for residential development, like the subject property) indicating a value of about 2.5M. The only difference between the subject property and the land sales is the fact that it is in an very old (dilapidated) already subdivided area and the developer had to buy 81 small parcels to assemble the 25 acres or so needed for the development. Other land sales are typically one to four parcels in more (previously) rural neighborhoods nearby. The developer paid $3.7M for these 81 parcels. How do I reconcile the $2.5M seems-to-be-indicated as-is value with the $3.7M price the developer paid? Am I missing something here?
Would appreciate all comments...Penelope May

 

[Scott Lanz]

Penelope,

According to your analysis your comps are solid and it would appear on the face that the developer paid a premium.

Now, subdivisions have some nuances I have found, and in some cases the developer may pay a premium if he/she is also the builder. In this case, the profit for their investment value may be a combination coming from both the dirt and improvements, and potentially horizontal improvements.

The costs for the above items would need to be provided along with entrepreneurial incentive to really answer the question if you are missing something.

Raw land value is only part of the problem as density increases due to zoning or pipe could increase your per unit price paid for dirt. Given that all your comps are true, other than the neighborhood condition as stated, then the developer may be missing something, say about 1.2 million from his pocket.


Scott J. Lanz

 

[Howard Klahr]

Location Adjustment ??

I find many sales of raw land (zoned for residential development, like the subject property) indicating a value of about 2.5M. The only difference between the subject property and the land sales is the fact that it {The Subject} is in an very old (dilapidated) already subdivided area and the developer had to buy 81 small parcels to assemble the 25 acres or so needed for the development. Other land sales are typically one to four parcels in more (previously) rural neighborhoods nearby.

Note: I added the bold words above for clarity

I obviously would not have any idea regarding locational factors affecting the subject property or the comparables. However, based on your original post it seems to me that you already know the answer - Is there a location adjustment that you are over looking?

 

[Robert Dunkle]

Assemblage cost vv. market value

I am appraising a proposed 140-lot subdivision in a "hot" California market. Based on sales of approved tract maps to builders and a discounted cash flow residual method I am concluding a proposed value (entitled) of about $5.5M. For the "as-is" value, I find many sales of raw land (zoned for residential development, like the subject property) indicating a value of about 2.5M. The only difference between the subject property and the land sales is the fact that it is in an very old (dilapidated) already subdivided area and the developer had to buy 81 small parcels to assemble the 25 acres or so needed for the development. Other land sales are typically one to four parcels in more (previously) rural neighborhoods nearby. The developer paid $3.7M for these 81 parcels. How do I reconcile the $2.5M seems-to-be-indicated as-is value with the $3.7M price the developer paid? Am I missing something here?
Would appreciate all comments...Penelope May

Welcome to the Forum!! Since this is your first post, we'll promise to be easy on you....or not!! May I suggest filling out your profile so we will know your location and your licensing level.

I believe the title for your post should not have been assemblage "value" greater than market value....it should have been assemblage "cost" greater than market value. I ASSUME that you are CG or working with one as this is above even CRA levels. The fact that there was previous development (improvements), even if dilapidated could have driven the cost above raw land sales prices. Remember, if owners get wind of someone "assembling" some of them become very intransigent, and exorbitant, in their asking prices. Are there any infrastructures that are still usable that could add to the value? If there were 81 properties, there should be streets, possibly sewer, water lines, etc.


To "reconcile" the fact of the $3.7M cost to the developer vv. your indicated value, just state the facts ma'am!! It is not your responsibility to "come to" his cost!!! I'm not even sure that his cost to assemble would rate a mention. What bearing does his cost to assemble have on the market value "as-is"?

 

[aussie ken]

Developer/Builder

G,day Penelope,

You have stumbled onto one of the great conundrums of valuing. The developer/builder.

You are missing nothing but have discovered something.These people do not march to the beat of the valuation or rational market drum. They as a rule at least here in Australia tend to be a little bit seat of the pants in their operations.

Consider this. You feel he paid too much for the land and in large measure you are probably right. But as a developer/builder you will find he can forego developers profit and focus just on the builders profit.

Why would he do this?

Because he wants to keep his construction crews busy and building. A developer/builder gets no efficiency from "stop-start" work flow. He needs to maintain his momentum and keep his work crews together. He is probably a good builder and is prepared to pay a "Premium" for not having to worry about where or when his next project will be. Not having to worry is worth an awful lot to you when your a large builder. Having land ready to go for your crews is of paramount importance. Most of the time they say: "OK I paid a bit too much so what!!. I'll make it up in the building"

Don't worry. Im sure most valuers would have come up with similar figures as your own. You are not necesasarily wrong. But as you have discovered what you have is in simple terms the following:

Actual CMV of Site $2.5M plus Premium or "No-Worries" Value $1.2M= $3.7M Initial Project Cost

I dont mean to be crude or overaly simplistic about it but often its that simple. Why? Because its happened to me. Sure we are talking telephone numbers here at an extra $1.2M but in the broad brush stroke of a total project these amounts are manageable.

For a developer/builder land is no differant than any other costs. His costs are "project costs" not necesarilly CMV. That is an important point. Remember it.

 

[Steve Owen]

Interesting problem, Penelope. Welcome to the Forum.

In my past experience, I have run into several instances where plottage of tracts resulted in a value that was higher (in some cases much higher) than the sale prices or valuation of each of the individual tracts, when added together. I have also run into a couple of instances where the assembled property was less valuable than the individual tracts when added together. That is the primary reason for USPAP Standard 1-4(e)... look it up, if necessary. However, this has always happened in commercial properties in my personal experience and never in residential properties. Consider, however, that I am not in California... there is plenty of residential land available here.

The advice that was best, was to do what your analysis tells you. There are many reasons why developers or promoters might be willing to pay something other than market value. I would however, add one additional bit of advice... be very careful... look at your analysis from every possible angle... research additional market data if necessary. You are in a relatively unusual situation and the analyses required will likely be quite complex.

 

[Terrel L. Shields]

next message please

 

[Terrel L. Shields]

G,day Penelope,

Because he wants to keep his construction crews busy and building. ...
Actual CMV of Site $2.5M plus Premium or "No-Worries" Value $1.2M= $3.7M Initial Project Cost

Well put. Keeping the slaves busy is necessary because letting them lapse, then putting together a "team" quickly next time will be a nightmare in a hot market.

In Oil & Gas leasing, there often is a stage of leasing where the cheap leases go first, and to fill in the blank spots (the landowners not wanting to lease0 often requires a premium to be paid. Is it "market"? perhaps not. But the situation is so predictable, it would be foolhardy to think you could get all the leases at the same price. After all of a block is put together, then the leases can often be "flipped" because the whole is more valuable than a patchwork of leases...

Same principal. I would try to "crunch" a few subdivision numbers however to support an IRR for the project and if that fails to dovetail a little better, try to put it aside for a day or two and "rethunk" what's taking place.

 

[Steve Owen]

...the cheap leases go first, and to fill in the blank spots (the landowners not wanting to lease0 often requires a premium to be paid.

Well, put... and the same thing routinely happens with residential lots. I have seen one subdivision that sold its first lot for $30k and sold its last lot for $75k just a few years later. And... all along, similar lots were selling for $35k in other subdivisions. When appraising proposed subdivisions, I have always considered that the price increase for the last lots is going to be higher than typical appreciation from time.

 

[Penelope May]

Assemblage Value of Subdivision

Thank you everyone who posted some thoughts on this issue I had, which was a great help. THANKS! I eventually wrote the following which seemed to be the reconciliation I was looking for:

Comment Regarding Acquisition Price

The subject 58 lots were purchased from numerous separate owners during an assemblage over the last two years for $3,012,826, which is somewhat more than the estimated “as-is” value.

It is assumed that the highest and best use of each of the acquisition sales (individual house lots) was different from the highest and best use of the assemblage at this time (bulk development land). Furthermore, several of the lots included houses on them. Buying from different sellers precludes the ability to negotiate a bulk sale discount. In addition, smaller lots generally sell for more per acre than large pieces of land which also adds to the initial cost. Presumably, during the assemblage some sellers were more intransigent than others and may have exacted a premium.

At this time the land is in the process of being developed and is in between raw land and entitled land. The temporary loss in value seen now, “as-is”, should ultimately be more than restored when the end result of the venture (approved tentative tract map) is achieved.

Penelope May, MAI
Idyllwild, California