Valuing The Site Basic Real Estate Appraisal: Principles & Procedures – 9 th Edition © 2015 OnCourse Learning Chapter 10

STUDENT LEARNING OUTCOMES Name at least Five Different Uses of Site Valuations List the Five Methods of Valuing Land Name the Physical Characteristics of a Site that Affect its Value Name the Legal and Locational Considerations in Site Value 2 Page 314 © 2015 OnCourse Learning

10.1 PURPOSE OF LAND OR SITE VALUE ESTIMATES Reasons for Land Valuations Sale and Purchase Land Leasing (Rental Value) Development (Feasibility) Financing (Lenders – Loan Security) Agriculture Government Actions (RE Taxes, Eminent Domain) Court Actions 3 Page 315 © 2015 OnCourse Learning

ALLOCATION OF VALUE FOR TAX PURPOSES Ad Valorem Taxes Land and Improvement Values are Often Separated Example – CA Law Requires It Income Taxes Building Value is Allocated for Depreciation “Write-Off” Purposes, thus Balance of Tax Basis is Allocated to the Land 4 Page 316 © 2015 OnCourse Learning

SITE VALUE IN THREE APPROACHES Cost Approach Land + Building = Total Value Indicator Income Approach Certain Techniques Require Allocation to Site Sales Comparison Approach Land Value Estimate is Often Needed for Comparison Techniques 5 Page 316 © 2015 OnCourse Learning

10.2 FIVE METHODS TO VALUE LAND Market or Direct Sales Comparison Allocation Abstraction Development Land Residual Detailed on slides that follow 6 Page 317 © 2015 OnCourse Learning

IMPORTANCE OF HIGHEST & BEST USE Alternate Definition: The Reasonable and Profitable Use that will Support the Highest Land Value as of the Date of Value Four H&B Use Tests/Criteria (Chapter #6) Physically Possible Legally Permissible Economically Feasible Most Productive 7 Page 317 © 2015 OnCourse Learning

VALUING LAND BY MARKET METHOD 8 Page 319 © 2015 OnCourse Learning

ALLOCATION & ABSTRACTION METHODS When to Use When Vacant Land Sale are not Available The Appraisal of Shared Land Interests Allocation Method Allocations by the Assessor may provide some guidance, but not always reliable or up to date Sale Price (Total Property)$450,000 Site Contributes 35%x 0.35 Site Value Indicator$157,500 9 Page 322 © 2015 OnCourse Learning

ALLOCATION & ABSTRACTION METHODS Abstraction Method Identify Comparable Improved Property Sales Estimate Depreciated Cost of Improvements Deduct Depreciated Cost to Abstract Site Value Sale Price (Total Property) $340,000 Depreciated Imp. Cost- $156,000 Abstracted Site Value $184,000 Both the Allocation and Abstraction Methods are Less Accurate than the Market Method 10 Page 322 © 2015 OnCourse Learning

DEVELOPMENT METHOD Used to Estimate Value of Land Ready to be Subdivided (Hypothetical) Used When No Comparable Land Sales are Available, or Detailed Analysis (Feasibility) of a Project is Desired Residential Subdivision – see Example 10.1 Estimate Number of Lots to be Developed Estimate Total Gross Sales (Dollars) Subtract Direct & Indirect Costs of Development Allow for (Deduct) Developer’s Profit Conclude the Value of the Land (i.e. Last $’s go to Land) 11 Page 323 © 2015 OnCourse Learning

LAND RESIDUAL METHOD Version of the Income Approach Based on the Principle of Surplus Productivity Used When there are No Comparable Sales Suitable for Vacant or Improved Income Properties (Actual or Hypothetical) Estimate Net Income for Total Property (L + Imp.) Estimate Income Attributable to Improvements Subtract Income to Improvements from Total Capitalize Residual to Land Cap Rate (R L ) 12 Page 324 © 2015 OnCourse Learning

10.3 HOW TO USE MARKET COMPARISON TECHNIQUES Types and Sources of Data Comparability Criteria Competitive Property / Similar H&B or Intended Use Open-Market Transaction / Conditions of Sale Recent Sale (Close to Date of Value) Current or Prior Sales of the Subject Property Research and Analyze any agreement of Sale, Option, Listing or Transfer close to the date of value All Sales or Transfers within Three Years (USPAP) 13 Page 325 © 2015 OnCourse Learning

TYPES & SOURCES OF DATA (Con’t.) What Data to Include All Physical, Legal and Location Factors Physical – Size, Shape, Frontage, etc. Legal – Zoning, Taxes, Special Assessments, etc. Sales History of the Comparables Research and Analyze all Sales or Transfers within One Year of Most Recent Sale Date Important in Speculative Markets Assess the Relevance to the Most Recent Sale 14 Page 327 © 2015 OnCourse Learning

TYPES & SOURCES OF DATA (Con’t.) Sources of Data Public Records (Recordings, Assessor’s Records) Permits (Demolition/Construction), Maps MLS, Brokers, Developers, Lenders, Databases Verification of the Data Verify with Buyer, Seller &/or Broker Price and Terms (Contingencies), Loans Proposed Rezone and/or Development What Factors Influenced the Price Paid 15 Page 327 © 2015 OnCourse Learning

IMPORTANT SITE CHARACTERISTICS Detailed on slides that follow 16 Page 328 © 2015 OnCourse Learning

PHYSICAL FEATURES 17 Page 329 © 2015 OnCourse Learning

LEGAL AND LOCATIONAL FEATURES Legal Legal Form of Ownership (Detached vs. Condo) Zoning & Other Land-Use Regulations Environmental Protection Laws Rezones / New Use Restrictions / Other Locational Factors Negative – Earthquake, Flood, Hazardous Waste Utilities & Municipal Services – Availability Level of Taxes / Other Economic Factors Quality of Schools, Fire & Police Protection 18 Page 331 © 2015 OnCourse Learning

ANALYZING THE SALES DATA Use the Four Elements of Comparison Terms & Conditions of Sale Time of Sale Location Physical Characteristics Unit of Comparison for Land Physical (per SF, per Acre, etc.) Economic (Per Potential Unit or Building SF) 19 Page 332 © 2015 OnCourse Learning

ANALYZING THE SALES DATA (Con’t.) Which Unit of Comparison is the Best Guide to Value – Per Front Foot or Sq. Ft.? 20 Page 334 © 2015 OnCourse Learning

ANALYZING THE SALES DATA (Con’t.) 21 Page 334 © 2015 OnCourse Learning

CHAPTER SUMMARY The five primary methods for arriving at land values are: 1.The Market Method 2.The Allocation Method 3.The Abstraction Method 4.The Development Method 5.The Land Residual Method 22 Page 335 © 2015 OnCourse Learning

CHAPTER SUMMARY (Con’t.) The most important physical factors include size, shape, frontage, width, depth, plottage, type of lot, and topography. Legal and locational factors include the most likely profitable use, zoning and other land use regulations, as well as utilities and public facilities available. Analysis of the sales data uses the Four Elements of Comparison, and identifies the most common units of comparison. 23 Page 336 © 2015 OnCourse Learning

IMPORTANT TERMS & CONCEPTS Abstraction MethodLand Residual Method Allocation MethodMarket Method Developer’s ProfitPlottage Value Development MethodSales History Elements of ComparisonSite Characteristics Highest & Best Use CriteriaUnits of Comparison Interim Use Value 24 Page 337 © 2015 OnCourse Learning