Chapter: Land Valuation: Site Analysis & Adjustment Techniques

Introduction

Land valuation is a critical aspect of real estate appraisal and development. Accurately determining land value requires a thorough understanding of site characteristics and the application of appropriate adjustment techniques. This chapter will delve into the scientific principles underlying site analysis and explore various adjustment methods used to arrive at a credible land value estimate.

1. Site Analysis: Unveiling the Land’s Potential

Site analysis involves a comprehensive evaluation of the physical, legal, and economic characteristics of a parcel of land. This process aims to identify factors that contribute to or detract from its potential use and value.

1.1 Physical Characteristics

The physical attributes of a site significantly influence its suitability for various uses and, consequently, its value.

• Topography: The slope and contour of the land affect construction costs and usability. Steep slopes may require extensive grading and stabilization, increasing development expenses.

  • Example: Constructing a building on a site with a 30% slope will require significantly more earthwork and foundation engineering compared to a level site.

• Soil Conditions: Soil composition, drainage, and stability are crucial factors. Poor soil conditions may necessitate soil remediation or specialized foundation designs.

  • Experiment: Soil samples can be analyzed in a laboratory to determine load-bearing capacity, permeability, and presence of contaminants. These tests provide data for assessing construction feasibility and potential environmental concerns.
  • Environmental Factors: Proximity to wetlands, floodplains, or contaminated sites can significantly impact land value. Environmental regulations may restrict development options and impose remediation costs.
  • Concept: Environmental Site Assessment (ESA) is a process that evaluates the potential for contamination.
  • Size and Shape: The dimensions and configuration of a site influence its potential for development. Irregularly shaped or undersized parcels may limit building design and usability.
  • Formula: Lot Coverage Ratio (LCR) = Building Area / Total Lot Area. This metric quantifies the proportion of the lot occupied by buildings.
  • Access and Visibility: Ease of access to transportation networks and visibility from major thoroughfares are essential for commercial properties.
  • Utilities: Availability of essential utilities (water, sewer, electricity, gas, internet) significantly enhances a site’s value.
  • Principle: “Sewer Drives Development”. Areas that lack connectivity to a public water and sewer system are harder to develop and typically have a lower value.

1.2 Legal Considerations

Legal restrictions and entitlements affect the permissible uses and development intensity of a site.

• Zoning Regulations: Zoning ordinances dictate allowable land uses, building height restrictions, setback requirements, and other development standards.

  • Example: A site zoned for single-family residential use will have a different value than a comparable site zoned for commercial use.

  • Deed Restrictions: Private agreements that limit land use or development.

  • Concept: Deed restrictions, such as “There shall be no commercial land use on any lot in this subdivision,” can limit the property’s potential and, therefore, the value.

  • Easements: Legal rights granted to third parties to use a portion of the property for a specific purpose.

  • Example: Utility easements allow utility companies to access and maintain infrastructure on the property. Conservation easements may preclude certain uses or any development at all.

  • Property Rights: Understanding the specific property rights associated with the land, including surface rights, mineral rights, and air rights, is critical for accurate valuation.

  • Transferable Development Rights (TDRs): Programs that allow landowners to sell their development rights to other properties, promoting density in designated areas and preserving open space.

  • Application: In some states, property owners can sell their rights to develop land to another property owner in the same jurisdiction. These transferable development rights (TDRs) foster higher-density development in urban and suburban areas where utilities are available and infrastructure is in place and preclude development in more remote areas.

1.3 Economic Factors

Market conditions and economic trends influence the demand for land and its potential for development.

• Location: Proximity to employment centers, retail amenities, schools, and transportation corridors significantly impacts land value.
• Market Demand: Understanding the demand for different land uses in the area is crucial. High demand for residential development will drive up land prices in residential zones.
• Economic Trends: Economic growth, interest rates, and employment levels can influence real estate values.
• Highest and Best Use (HBU): The most probable and legally permissible use of the land that is physically possible, appropriately supported, financially feasible, and that results in the highest value.
  • Concept: The appraiser must recognize that land is appraised as though vacant and available for development to its highest and best use.
• Off-Site Improvements: External factors not within the property lines, such as new streets, sidewalks, and streetlights in the subject property’s neighborhood can affect the value of the subject property because of their proximity.

2. Adjustment Techniques: Refining Comparables

The sales comparison approach is the preferred method of land valuation. This involves comparing the subject property to similar properties that have recently sold and adjusting for differences in their characteristics.

2.1 Principles of Adjustment

• Market-Based Adjustments: Adjustments should reflect how the market perceives and values differences between the subject and comparable properties.

• Paired Data Analysis: Identifying pairs of comparable sales that are similar in all aspects except for one specific characteristic. The price difference between the paired sales provides an indication of the market value of that characteristic.

2.2 Adjustment Grid

A standardized format for organizing and applying adjustments to comparable sales.

• Example: See Exhibit 17.1 from file content PDF

2.3 Types of Adjustments

• Quantitative Adjustments: Based on objective, measurable differences.

  • Dollar Adjustments: Used when the market perceives differences in absolute dollar amounts.
  • Percentage Adjustments: Applied when the market perceives differences as a percentage of value.

  • Qualitative Adjustments: Subjective assessments of relative differences.

  • Superior/Inferior Ratings: Assigning ratings to indicate whether a comparable property is superior or inferior to the subject property in a specific characteristic.

2.3.1 Common Adjustment Factors

• Size: Adjust for differences in lot size. The principle of diminishing returns suggests that larger lots may not command a proportionally higher price per square foot.
  • Formula: Lot size adjustment = 50% per acre
• Location: Account for differences in location attributes, such as proximity to amenities, traffic patterns, and neighborhood quality.
• Zoning: Adjust for variations in zoning regulations and permitted land uses.
• Topography: Account for differences in terrain and grading requirements.
• Utilities: Adjust for the presence or absence of essential utilities.

• Market Conditions: Account for changes in market conditions over time.

  • Formula: Date of sale adjustment = 0.25% per month
  • Financing Terms: Adjust for differences in financing terms offered in the comparable sales.
  • Conditions of Sale: Adjust for any unusual circumstances surrounding the sale of the comparable property.

2.4 Paired Data Extraction

Paired data sales analysis of land sales measures the difference in the sale prices of two properties and explains it by studying differences in the sites.
* Example: See Exhibits 17.2 and 17.3 from file content PDF.

3. Alternative Valuation Techniques

When comparable sales data is limited, alternative valuation methods can be used.

• Market Extraction: Estimating land value by subtracting the depreciated cost of improvements from the overall property value.
  • Formula: Land Value = Sale Price – Depreciated Cost of Improvements
  • Concept: If X amount is what the house and land sold for, then what’s left over after removing the value of the house from X amount must be land value.
• Allocation Method: Estimating land value as a percentage of the total property value, based on typical ratios observed in the market.
• Land Residual Technique: Estimating land value based on the residual income generated by the property after deducting all other expenses.
• Ground Rent Capitalization: Capitalizing the ground rent income to estimate land value.

Conclusion

Accurate land valuation requires a rigorous site analysis and the application of appropriate adjustment techniques. By understanding the physical, legal, and economic characteristics of a site and utilizing market-based adjustments, appraisers and developers can arrive at credible land value estimates that inform sound real estate decisions. The use of relevant scientific theories and principles, along with practical examples and mathematical formulas, enhances the accuracy and reliability of the land valuation process.