1. Overview of Land and Site Valuation
Chapter 7
Overview of Land and Site Valuation
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2. Chapter 7 Introduction
In this chapter, several different methods utilized for site valuation will be overviewed along with important concepts integral to the site valuation process.
While it is true that valuing land or site most often precedes development of the approaches to value, this topic is appropriate here as the land and site valuation methods reflect one or more of the sales comparison approach, income approach, or cost approach techniques.
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3. Chapter 7 Key Terms Allocation Method Assemblage Excess Site
Extraction Method
Ground Rent Capitalization Method
Land Residual Method
Plottage
Subdivision Analysis Method
Surplus Site
Allocation Method A site valuation method that separates the value of the land from the structures that sit on it by taking a ratio of the land or site value to the total property value based on a typical property in the area.
Assemblage The combining of two or more parcels of land into one larger parcel.
Excess Site Land or site area that is not necessary to support the use of the existing improvements situated on the subject property. However, it may have its own highest and best use for expansion of the current improvement or for sale for another use.
Extraction Method A site valuation method that takes an estimated value of improvements and subtracts it from the total sales price to derive a figure for the land value.
Ground Rent Capitalization Method A method of valuing land based on the rent it generates in a given year divided by an appropriate capitalization rate.
Land Residual Method An income method of site valuation that assigns a certain part of the income produced by a property to the building or other improvement, and then attributes the remaining income to the land.
Plottage The value increase that occurs by combining two or more parcels into one through assemblage.
Subdivision Analysis Method A method of valuing land that could be developed by taking the total projected market value of the finished project and subtracting all costs of development and entrepreneurial profit and incentive.
Surplus Site The portion over and above what is necessary for the highest and best use of the subject property, and does not have a stand-alone highest and best use. Surplus site (land) is not needed to expand the subject improvements.
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4. Valuation Methodology for Land and Site
An appraiser determines the specific method appropriate for developing an opinion of value for land or site as part of the scope of work in an assignment. There are five basic methods:
Sales comparison method
Allocation method
Extraction method
Land residual method
Ground rent capitalization method
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5. Valuation Methodology for Land and Site
The sales comparison, allocation, and extraction methods use an analysis of comparable sales, and can be used for almost any type of property or site.
The extraction method additionally employs costing methods.
The land residual and ground rent capitalization methods use various income analysis methods to arrive at a value and can only be used for commercial or income properties.
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6. Valuation Methodology for Land and Site
A sixth method, the subdivision analysis method, can also be used for some types of site valuations.
The subdivision analysis method is typically used for large tracts of land that will be made into residential lots (although the method could be adapted for use when subdividing land into an office or industrial park).
The similarities of the subdivision analysis method to the cost approach will be evident, as the technique employs many of the same components.
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7. Sales Comparison Method
The sales comparison method is a site valuation method that compares the subject land or site to other similar sites that have recently sold.
Adjustments are made to the sales for differences between those properties and the subject property, and the site value opinion is then based on this comparison to other sales.
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8. Sales Comparison Method
First step for a sales comparison is to obtain data on other similar properties that sold recently in the same market area. The comparable sales should be as similar to the subject property as possible and preferably reflect the most current market conditions.
Next, market evidence is used to derive and apply adjustments to the sale price of the comparables to address the differences between them and the subject.
Finally, the resulting adjusted data is reconciled to arrive at an opinion of value for the subject site or land parcel.
The process mirrors the steps taken in the sales comparison approach, which was discussed in Chapter 4.
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9. Sales Comparison Method
An appraisal is being performed for a residential building lot. First, adjustments are derived through paired data analysis:
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10. Sales Comparison Method
The adjustments derived through the analysis are as follows:
Depth: $1,000 for additional depth, comparing Sales #1 and #2
Easement: $500 for easement influence, comparing Sales #3 and #4
Amenity: $750 for woods, comparing Sales #2 and #3
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11. Sales Comparison Method: Example
Next, the adjustments are applied to the comparables sales, by comparing each comparable sale individually to the subject property:
Obviously, the reconciled value indication of the subject property using the sales comparison approach is $13,750.
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12. Allocation Method
The allocation method  is a method of site valuation whereby the value of the land is determined by establishing a typical ratio of site value to total property value in an area, then applying that same ratio to the subject property.
In other words, the allocation method recognizes that the utility of the site and the utility of the structure both contribute to the value of a property.  
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13. Site Value (Unimproved) / Market Value of Property (Improved)
Allocation Method
The formula is:
Site Value (Unimproved) / Market Value of Property (Improved)
= Allocation Ratio for Site
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14. Allocation Method Step 1: Identify Comparable Data Unimproved sites
The improved and unimproved sales should be located within the same market area, such as a subdivision.
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15. Allocation Method
Step 2: Identify the Ratio of Site Value to Improved Value
Divide the unimproved site value by the improved value.
Step 3: Site Value Indication
A range of value may be possible if several scenarios are examined
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16. Allocation Method: Example
An appraiser is deriving a land value to apply in a highest and best use analysis in an older, established neighborhood.
There have not been any vacant land sales in the subject market for many years.
The appraiser found three lot sales in another similar market area, where there are both improved sales and unimproved sales.
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17. Allocation Method: Example (cont.)
The appraiser probably conclude that 12.5% would be a reasonable allocation ratio to apply to the subject, which he has already concluded has an improved value of $405,000:
$405,000 x 12.5% = $50,625
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18. Work Problem 7.1
Using the mean of the indications from the allocation analysis provided, what is the site value of a property if the improved value is $575,000?
The mean of the allocation ratios is _____. 
The indicted site value of the subject is ______.
Improved Site
Unimproved Site
Allocation Ratio
Sale #1
$560,000
$84,000
Sale #2
$570,000
$91,200
Sale #3
$580,000
$81,200
15%
16%
14%
15%
$86,250
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19. Extraction Method
The extraction method  is a method of site valuation that takes the depreciated cost of property improvements, and subtracts that cost from the market value of comparable properties to result in land value.
The extraction method is most commonly used for new construction but is also commonly utilized when the improvements contribute very little value to the sale property.
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20. Extraction Method
By taking the market value of a comparable property and subtracting the depreciated cost of the improvement, the resulting amount is the site value.
Step 1: Calculate the Depreciated Value of the Improvements  
Step 2: Subtract the Depreciated Improvement Value from the Market Value of the Improved Property
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21. Extraction Method
The total property value of a 110-acre farm is $382,000. The farmhouse has been remodeled, but the barns are very old. The volunteer fire department will burn the barns for practice. Reproduction cost of the 2,600 square-foot farmhouse is estimated at $68 per square foot. Depreciation is estimated to be 60% and the “as is” value of the other site improvements is $6,500.
Using the extraction method, what is the value of the land?
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22. Extraction Method 2,600 x $68 = $176,800 (cost new of farmhouse)
60% x $176,800 = $106,080 (depreciation)
$176,800 – 106,080 = $70,720 (depreciated improvement value)
$382,000 - $70,720 - $6,500 (“as is” value of the other site improvements) = $304,780
The land value is $304,780.
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23. Work Problem 7.2
A rural property contains 142 acres of woodland and is improved with a 30-year old one-story house that has 1,750 square feet. The reproduction cost of the house is estimated to be $95 per square foot and depreciation is estimated at 35%. The “as is” estimated value of the other site improvements is $9,000. What is the land value if the improved value is $275,000? The indicated land value would be ______________.
$157,938
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24. Land Residual Method
The land residual method  is a method of site valuation that assigns a certain part of the income produced by a property to the building or other improvement, and then attributes the remaining income (the residual) to the land.
By using an overall capitalization rate, the value of the land is then calculated. As you will recall, a capitalization rate is a percentage rate of return used to calculate the present value of future income.
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25. Land Residual Method
The complexity is determining how much income is contributed by, and thus attributed to, the land compared to the total property.
This is a variation of an income method, and primarily used for income producing commercial properties.
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26. Land Residual Method
Step 1: Identify Net Operating Income Attributable to the Building
Estimate the value of the building
Allocate the net operating income attributable to the building
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27. Land Residual Method
Step 2: Identify Net Operating Income Attributable to the Land
Subtract the income to the improvements from total net operating income
Residual net operating income will be attributable to the land
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28. Land Residual Method Step 3: Indicate Land Value
Apply direct capitalization of the net operating income to the land
Use market derived capitalization rate
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29. Land Residual Method: Example
An office facility is being appraised. Net operating income is $24,000 per year with 70% being attributable to the building. The market-derived capitalization rate for land is 7.65%.
$24,000 (Net Operating Income to the Property) x 70% = $16,800 (Net Operating Income to Building)
$24,000 - $16,800 = $7,200 (Net Operating Income to Land)
$7,200 / 7.65% (0.0765) = $94,118 (Indicated Land Value)
This method is mainly used as a verification of other income or appraisal methods. Also, the appraiser uses this method as a primary appraisal tool when there are few comparable sales in the area and the market income and capitalization rates can be identified.
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30. Work Problem 7.3
An appraiser is valuing a small industrial building. Net operating income is $47,000 per year. The appraiser estimates that 82% of the income is to the building and that the observed capitalization rate for land is 9.25%. What is the value of the land? $91,459
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31. Ground Rent Capitalization Method
The ground rent capitalization method  is a method of valuing land based on the income it generates in a given year and divided by an appropriate land capitalization rate.
The appropriate land capitalization rate is determined by examining other comparable sales and using the sale price and the annual net operating income that was generated in a year.
Research must be done to obtain comparable sales of leased sites that are similar to the subject site.
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32. Ground Rent Capitalization Method
This is primarily a method used for commercial properties, but could, in some cases, be used for residential properties built on leased land.
Of course, the land capitalization rate to be applied is usually derived after examining data from several comparable sales.
The technique uses the same components and formula as direct capitalization using an overall capitalization rate discussed in Chapter 5.
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33. Ground Rent Capitalization Method
Step 1: Analyze Comparable Site or Land Sales
Lease terms should be similar to the subject
Net operating income should reflect a typical market
Comparable sales should reflect arm’s length transactions
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34. Ground Rent Capitalization Method
Step 2: Calculate the Rate of Return (Capitalization Rate) of the Comparables
Divide the net operating income by the sale price (value) to find the land capitalization rate (IVR)
Step 3: Apply the Capitalization Rate to the Subject’s Net Operating Income
Divide the net operating income by the rate to find the value (IRV)
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35. Ground Rent Capitalization Method: Example
An appraiser is valuing a leased parcel along a busy, high exposure highway.
The site is very similar in size to another site from which the appraiser recently gathered data.
The comparable site is located just north of the subject site.
It was sold for $600,000 and had a net operating income of $48,000 annually.
The subject has a net operating income of $42,000 per year, which appears to be in line with the market.
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36. Ground Rent Capitalization Method: Example (cont.)
Derive the Rate from the Comparable: $48,000 Net Operating Income / $600,000 = The market derived capitalization rate is 8.0%. Apply the Derived Rate to the Subject: $42,000 Net Income / 8.0% (0.080) Rate = $525,000 (Site Value)
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37. Work Problem 7.4
A subject land parcel is producing an annual net operating income of $32,000. A very similar comparable has been located that recently sold for $480,000, with an annual net operating income of $30,000. What is the value of the subject land parcel? $512,000
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38. Subdivision Analysis Method
The subdivision analysis method  is a method of valuing raw land that could be developed by taking the total projected sale value of all finished lots and subtracting out all costs of development.
The result is the value of the raw land.
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39. Subdivision Analysis Method
All direct and indirect costs of development must include many items: Construction of access roads, excavation, providing utilities to each lot, sales people to sell the lots, the interest the property developer must pay to borrow the money, etc.
Any cost the developer will incur before all the lots are sold is included as a development cost.
In addition, entrepreneurial profit and/or entrepreneurial incentive must also be considered.
The calculations are very similar to costing methods illustrated in Chapter 6.
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40. Subdivision Analysis Method: Example
A developer expects a land parcel to accommodate 30 lots, which he plans to sell for $25,000 each. If direct costs are $375,000 and indirect costs are $125,000. What is the land value if entrepreneurial profit is 10% of the gross sales?
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41. Subdivision Analysis Method Example (cont.)
30 (Lots) x $25,000 (Sale Price per Lot) = $750,000 (Total Sales)
$375,000 (Direct Costs) + $125,000 (Indirect Costs) + $75,000 (10% Entrepreneurial Profit) = $575,000 (Total Costs)
$750,000 (Total Sales) - $575,000 (Total Costs) = $175,000 (Land Value)
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42. Other Important Site Valuation Concepts
There are some other concepts that are important to recognize for the valuation of land and site
These concepts may not present themselves in every assignment, however appraisers must be familiar with them. Appraisers must:
consider the potential to combine parcels for greater utility and/or greater value.
recognize how to address extra land included with property, and how this extra land affects value.
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43. Assemblage
Assemblage  is combining two or more parcels of land into one larger parcel.
This is typically done to increase the usefulness (utility) of the land. By allowing one larger building to be constructed on the larger parcel than could have been built on the smaller individual parcels, the value of the land also increases. In fact, this one large parcel is likely worth more than the sum total of the smaller parcels.
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44. Assemblage
Plottage is the increase in value (over the cost of acquiring the parcels) by successful assemblage, usually due to a change in use.
By creating a larger parcel with more utility and higher and better use than the individual sites, the owner typically enjoys an increase in value of the land.  
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45. Assemblage
It should be also noted that on the opposite end of the spectrum, there is also the concept of reverse plottage – when assemblage results in a value decrease of the separate value of the individual parcels assembled.
The amount of decrease in value (below the acquisition cost) is called reverse plottage.
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46. Assemblage: Example
Two side-by-side parcels are available. The parcels each have 25 feet of frontage and are 100 feet deep. Due to zoning and building regulations, a three-foot setback is required on each side of any building on the lots. Thus, the largest building that could be built on either of the lots would be 19 feet wide (25’ – 6’), for which there is a very limited market. If both lots were acquired and their utility were joined, a 43 foot wide building (50’ – 6’) could be built, which would have much more market appeal.
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47. Assemblage: Example (cont.)
If the lots were each acquired for $20,000, the total acquisition cost would be $40,000. If the lots assembled were valued at $50,000, plottage is $10,000.
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48. Surplus and Excess Site
Surplus site  is the portion over and above what is necessary for the highest and best use of the subject property, and does not have a stand-alone highest and best use.
Surplus land is not needed to expand the subject improvements. In other words, it does not have sales potential and value contribution is likely minimal.
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49. Surplus and Excess Site
Consider a house that is built across two lots accommodating a larger yard area.
If the extra yard cannot be legally divided or it is not necessary for the highest and best use, or could not be used to significantly contribute to the expansion of the current improvements, the extra yard is likely surplus and would probably have a minimal contributory value.
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50. Surplus and Excess Site: Example
An appraiser is appraising a house in an older established neighborhood is situated on a 60 x 80 foot lot. Other houses on the street are situated on 40 x 80 foot lots and the size of the dwellings are similar to the subject. Due to its size and local regulations, the extra 20 feet of frontage cannot be sold off. None of the comparable properties in the immediate market evidence an extra large yard. However, the appraiser has located a comparable property that has an extra 15 x 80 feet at one side, similar to the subject, in another similar neighborhood. It sold for $2,000 more than a very similar property on a typical sized lot.
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51. Surplus and Excess Site
Step 1: Derive the Contributory Value of the Surplus Site from the Comparable Property
18 X 80 = 1,440 Square Feet (Surplus Site of Comparable)
$2,000 / 1,440 = $1.39 Per Square Foot Contribution
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52. Surplus and Excess Site
Step 2: Apply the Derived Contribution to the Subject 20 X 80 = 1,600 Square Feet (Surplus Site of Subject) 1,600 X $1.39 = $2,224 Contribution
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53. Surplus and Excess Site
Excess site  is land or site area that is not necessary to support the use of the existing improvements situated on the subject property.
However, it may have its own highest and best use for expansion of the current improvement or for sale for another use.
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54. Surplus and Excess Site
The owner of a house has an additional lot next to the house, which he uses as a large side yard. If the additional lot has its own unique legal description or could be legally divided from the portion of the site on which the house is situated, the site is likely considered excess.
 In such case, the contributory value is probably more inline with what the site could be sold for (minus any cost of subdividing, if applicable).
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55. Summary
An appraiser determines the specific method or technique appropriate for developing an opinion of value for land or site as part of the scope of work in an assignment.
The sales comparison method is a site valuation method that compares the subject land or site to other similar sites that have recently sold. Adjustments are made to the sales for differences between those properties and the subject property, and the site value opinion is then based on this comparison to other sales.
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56. Summary
The allocation method recognizes that the utility of the site and the utility of the structure both contribute to the value of a property. The value of the land is indicated by establishing a typical ratio of site value to total property value in an area, then applying that same ratio to the subject property.
The extraction method is a method of site valuation that takes the depreciated cost of property improvements and subtracts that cost from the market value of comparable properties, to result in land value.
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57. Summary
The land residual method is a method of site valuation that assigns a certain part of the income produced by a property to the building or other improvement, and then attributes the remaining income (the residual) to the land. By using an overall capitalization rate, the value of the land is then calculated.
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58. Summary
The ground rent capitalization method is a method of valuing land based on the income it generates in a given year and dividing by an appropriate overall capitalization rate. The appropriate overall capitalization rate is determined by examining other comparable sales and using the sale price and the annual net operating income that was generated in a year.
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59. Summary
The subdivision analysis method is a method of valuing raw land that could be developed, by taking the total projected sale value of all finished lots and subtracting out all costs of development. The result is the value of the raw land.
Assemblage is combining two or more parcels of land into one larger parcel. This is typically done to increase the usefulness (utility) of the land.
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60. Summary
Plottage is the increase in value (over the cost of acquiring the parcels) by successful assemblage, usually due to a change in use. By creating a larger parcel with more utility and higher and better use than the individual sites, the owner typically enjoys an increase in value of the land.
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61. Summary
Surplus site is the portion over and above what is necessary for the highest and best use of the subject property, and does not have a stand-alone highest and best use. Surplus land is not needed to expand the subject improvements. In other words, it does not have sales potential and value contribution is likely minimal.
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62. Summary
Excess site is land or site area that is not necessary to support the use of the existing improvements situated on the subject property. It may have its own highest and best use for expansion of the current improvement or for sale for another use.
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63. Quiz
1. In analyzing comparable data, if an unimproved vacant lot sold for $30,000 and a lot improved with a dwelling sold for $120,000, the allocation ratio for land is a. 20%. b. 25%. c. 30%. d. 40%.
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64. Quiz
2. A subject land parcel is producing net operating income of $38,000. A very similar comparable has been located that recently sold for $535,000, with net operating income of $45,500. What is the indicated value of the subject land parcel?
$459,254
$465,852
$447,059
$481,068
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65. Quiz
3. A warehouse facility is being appraised. The appraiser is using the land residual method to verify another income approach. The building is valued at $200,000. Net operating income of the property is $25,000 per year with 48% being attributable to the building. The market-derived capitalization rate for land is 8.75%. What is the total indicated value of the improved property?
a. $340,479
b. $348,571
c. $352,584
d. $356,482
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66. Quiz
4. A client purchases two adjacent parcels of land for $20,000 each. The market indicates that the combined larger parcel now has a market value of $40,000. What has occurred? a. assemblage b. frontage c. parcelage d. plottage
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67. Quiz
5. An individual purchases two adjacent parcels of land for $20,000 each. The market indicates that the combined larger parcel is now worth $50,000. Which describes the resulting value increase?
a. assemblage
b. frontage
c. plottage
d. splittage
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68. Quiz
6. The subject site is a rectangular shape with a typical eight-foot utility easement. Sale #1 is rectangular in shape, has a 16-foot utility easement, and sold last week for $11,000. Sale #2 is rectangular in shape, has an eight-foot utility easement, and sold last week for $13,000. Sale #3 is irregular in shape, has an eight-foot utility easement, and sold last week for $15,000. What is the adjustment for a utility easement (16 feet versus 8 feet) to be applied in the sales comparison method? a. $1,000 b. $2,000 c. $26,00 d. $4,000
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69. Quiz
7. A developer has direct and indirect development costs of $800,000 to create a residential subdivision with a potential of generating $1,675,000 from sales of the sites. What is the raw land value if the entrepreneurial profit is $300,000?
a. $275,000
b. $575,000
c. $875,000
d. $1,375,000
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70. Quiz
8. An appraiser found that in a particular residential subdivision, 0.40-acre lots are selling for $35,000. Another residential lot in the same subdivision sold for $38,000, but contained 0.52 acre (the extra 0.12 acre being deemed surplus site). What per square foot adjustment (rounded to the nearest whole cent) for surplus site is derived from the data?
a. $0.28
b. $0.42
c. $0.47
d. $0.57
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