Valuation of Common Area

[Will Sanford]

Hello everyone, first post here, and it's a whopper.

I'm appraising multiple commercial properties in an office park campus with several common areas consisting of woods, streams, walking paths. The commercial properties are done. The "Declarant" of the development died prior to deeding the common area to the "Owners Association" and we have to value the common area (along with the regular commercial properties) since it was part of his estate on the date of death.

I've heard thoughts and arguements ranging from "its worthless, when we develop, we deed common area as soon as possible to the association because of liability"...to..."the value is included in improved office properties and commercial properties" ...to... "its got to be worth something, go ask someone if they'll simply give you their common area free of charge".

The AI Lum Library seems to have zero on the subject and I've found nothing published on Common Area valuation. I'd love to see any thoughts, comments, or experieces out there on this subject; regardless if it relates to commercial or residential properties.

Thanks,

Will Sanford

 

[Nick Chop MAI]

I'm dumbing this down quite a bit and had added a bit more but here is a recent example...

I valued the common area of a mega subdivision recently. I utilized a retention pond study that analyzed the value having on-site vs off-site retention. Conclusion was approximately 20%. So concluded the common area was worth 20% of the lot value based on an overall square footage.

There is value to the common area. If it were not there and everything was based on purely setbacks, there would certainly be some obsolescence.

 

[Will Sanford]

I valued the common area of a mega subdivision recently. I utilized a retention pond study that analyzed the value having on-site vs off-site retention. Conclusion was approximately 20%. So concluded the common area was worth 20% of the lot value based on an overall square footage.

There is value to the common area. If it were not there and everything was based on purely setbacks, there would certainly be some obsolescence.

Playing devils advocate, wouldn't the value of the offsite detention be captured on-site by the the buildable site being able to have a higher density (commercial, apartments) or larger yard (SFR).

In VA, assessors tax common area at a nominal rate as long as the declarant holds it. There's no assessment (my experience...) once it is transfered to the owners association. Presumably the developer has some benefit hanging on to it.

 

[Hal Mann]

I'm assuming the situation here is that the common areas have no additional development potential.

Then you must answer the question: Does it have an independant value, or is it simply an amenity enhancing the value of the accompanying development?

 

[john mello]

In VA, assessors tax common area at a nominal rate as long as the declarant holds it. There's no assessment (my experience...) once it is transfered to the owners association. Presumably the developer has some benefit hanging on to it.[/QUOTE]

Experience as a general appraiser and an assessor tells me that the Virginia approach you mention is similar (although not uniform state-wide) in Massachusetts. In "shared interest" developments (commercial, industrial or residential), so long as common area title is with the developer, common area is assessed to the developer. The actual value of the common area assessment declines each fiscal exercise as individual "units" are absorbed. The sale prices of those individual units are considered to reflect a contribution to its value that is derived from the common area, according to the unit's common area participation (per master and unit deeds). Once the development is fully absorbed and common area title is conveyed to the unit owners' organization (in what ever form that may take), the common area no longer is an assess-able entity. Its value has been conveyed to the units' aggregate values (sale prices). For the purpose of an estate appraisal, the value (percent basis) of the unabsorbed common area as of the date of demise is the asset value remaining in the estate. The valuation basis for common area, per se, can be similarly zoned residual acreage, for example, adjusted for particular amenities/location influences, for infra-structure (roads, utilities, common civils installations [storm drains, sidewalks, etc.]) on a percent complete basis.

Hope the view from this neck of the woods helps!

 

[Will Sanford]

I'm assuming the situation here is that the common areas have no additional development potential.

Then you must answer the question: Does it have an independant value, or is it simply an amenity enhancing the value of the accompanying development?

The Master Plan has a 30% open space requirement, currently there is 34%, and part of that open space has a grandfathered residence on it which could be broken out on a separate parcel, reducing the 34% open space to, say 33.5%. The grandfathered residence probably has value as either a SFR or converted office.

There is some extra allowable density floating around because the density on the developed sites wasn't maximized. I suppose an optimist would figure 3.5% (33.5%-30% required) of the common area could be developed to a density similar to the improved sites. However, the deceased owner and his property manager have the opinion the remaining area has no true development potential due to steep (unbuildable) slopes, ponds ect.

The original Covenants state the open space will eventually be deeded to the association by the Declarant, so it is not marketable to a 3rd party, even though it has use value or investment value to the Declarant who utilizes some of the area for his semi-private use.

 

[xm4yb7]

From what I have seen, the common areas increase the value of the surrounding buildings due to the higher rental rates that are able to be achieved. Therefore, the common areas have a contributory value but not a market value, in my opinion.

 

[Abester]

In my opinion, the value of the common area, if any, is included in the rents the market will bear for the improvements.

 

[Will Sanford]

The actual value of the common area assessment declines each fiscal exercise as individual "units" are absorbed. The sale prices of those individual units are considered to reflect a contribution to its value that is derived from the common area, according to the unit's common area participation (per master and unit deeds). Once the development is fully absorbed and common area title is conveyed to the unit owners' organization (in what ever form that may take), the common area no longer is an assess-able entity. Its value has been conveyed to the units' aggregate values (sale prices). For the purpose of an estate appraisal, the value (percent basis) of the unabsorbed common area as of the date of demise is the asset value remaining in the estate.

Okay, let's see if I understand your point by phrasing it another way. Although the common area itself is not marketable, it has value to the declarant (ability to sell detention pond rights to adjacent properties, sale of easements ect.) and the the declarant's ownership position is marketable if undeveloped portions of the office park remain. For instance if the Declarant sells a remaining vacant site and assigns the Declarant Rights, that buyer then has the right to slightly adjust the common area boundary, sell off site detention, or store his personal lawn mower in the maintenance shed until the property is deeded to the association.

If the best comps (unbuildable recreation tracts, hunting land, whatever) indicate a value of $X.00 per acre and 10% of the density remains to be built then the indicated value of the common area might be $X.00 x 10%???

 

[john mello]

My point simply was to explain that common area value is 'absorbed' or 'allocated' away from the developer/owner of record's interest toward the individual units' interests as the development is built out over time.

Your rephrased point is a good illustration of how to consider 'remainder' common area valuation. If a developer/owner is unable to complete for whatever reason a shared interest development, clearly there is a component value of the total development that has not been fully conveyed to the existing units and remains with the developer/owner. The common area interest in the already-developed part of the project already has been partially absorbed or allocated to those units that have sold. Whether or not that remainder interest can be conveyed (is marketable) to another, subsequent, ownership entitity depends on local market conditions, local law and the (special) permitting that enabled the shared interest development in the first place.

Some related considerations also may apply. For example, is the value of the common area interest allocated to the already-developed units damaged by the circumstances of the undeveloped portion? Alternatively, could the value of the special permit that may still apply to the unbuilt remainder be considered to be enhanced by a subsequent developer/owner ability to modify the scope of the original permit and the development to achieve a value-added enhancement? Consider what may happen to the values of both common area interest and individual units' interests in case of a casualty loss, e.g. fire partially destroys some, but not all, units or defective or non-conforming construction is found to affect all or part of the already developed units.

While common area interest value includes components such as land, site improvements, infra-structure, exterior structural construction, etc., the value of the undeveloped remainder interest in an approved, partially built complex, includes any number of other intangible economic considerations that you mention such as storing the lawn mower, etc.