Site Valuation Methods: Data Collection and Analysis

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Chapter 6: Site Valuation Methods: Data Collection and Analysis

I. Introduction: The Cornerstone of Appraisal - Accurate Site Valuation

An accurate assessment of a site’s value is fundamental to reliable appraisal reports. Underestimating or overestimating site value can significantly skew the conclusions reached using the Cost Approach and the Building Residual Technique within the Income Approach. Furthermore, legal requirements for property tax assessment and condemnation proceedings often necessitate independent site valuations. This chapter delves into the scientific underpinnings of site valuation, emphasizing data collection, rigorous analysis, and the application of appropriate methodologies.

II. Defining the Site and Establishing Context

Before diving into valuation methods, a clear understanding of what constitutes a “site” and its immediate environment is critical.

• Site Definition: A site is more than just raw land. It’s land that has been prepared for a specific use. This preparation may include clearing, grading, provision of access (roads, utilities), and any preliminary infrastructure development.

• Contextual Analysis:

  • Regional and Community Influences: Macroeconomic factors, local zoning regulations, infrastructure developments (e.g., transportation networks), and environmental considerations (e.g., proximity to flood zones) exert significant influence on site value.
  • Neighborhood Analysis: Micro-level factors, such as proximity to amenities (schools, parks, shopping), neighborhood aesthetics, and crime rates, contribute to the perceived value of a site.

III. Highest and Best Use (HBU): The Foundation of Site Valuation

HBU is a critical appraisal concept.

• Formal Definition: The highest and best use is the reasonably probable and legal use of a vacant site (or improved property), which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
  It is a key principle of valuation that the property’s market value is influenced by its ability to be developed in a fashion which allows the highest return.

• Four Tests of HBU:

  1. Legally Permissible: The use must comply with zoning regulations, building codes, environmental restrictions, and private deed restrictions.
  2. Physically Possible: The site’s size, shape, topography, soil conditions, and access to utilities must be suitable for the proposed use.
  3. Financially Feasible: The proposed use must generate sufficient income or value to justify the costs of development (construction, financing, operating expenses).
  4. Maximally Productive: Among all financially feasible uses, the HBU is the one that generates the greatest net return or value.

• HBU as Vacant vs. Improved: It’s vital to differentiate between the HBU of the site as if vacant and the HBU of the property as improved.

  • As if Vacant: Assumes the site is cleared of all existing improvements and available for any potential use.
  • As Improved: Considers the current improvements and whether they contribute to or detract from the site’s potential value.

• Mathematical Consideration for Determining If Highest and Best Use Should Be As Improved Or As Vacant:

Let:

• V_imp = Value of the property as improved
• V_vac = Value of the site as if vacant (considering its HBU as if vacant)
• D = Demolition cost of existing improvements.

Then:

• If V_vac - D > V_imp, then the highest and best use should be to demolish and redevelop the site (use as if vacant is the HBU).
• If V_vac - D <= V_imp, then the highest and best use is to maintain the current improvements (use as improved is the HBU).

Example: A site could generate significant rental income from a high-rise apartment building if vacant. However, the cost of demolishing the existing historic office building exceeds the potential increase in value from the apartment building’s rental income. The HBU, therefore, is to maintain the existing office building.

IV. Data Collection for Site Valuation: A Multi-faceted Approach

Robust data is paramount for accurate site valuation. Data collection should be meticulous and verifiable.

• General Data (Macro-level):
  • Economic Trends: Employment rates, income levels, population growth, interest rates, and construction costs within the region.
  • Government Regulations: Zoning ordinances, building codes, environmental regulations (e.g., wetland restrictions, stormwater management requirements), and property tax rates.

• Specific Data (Micro-level):

  • Site Characteristics:
    • Physical: Dimensions, shape, topography (slope, elevation), soil composition (bearing capacity, permeability), drainage patterns, and potential for environmental hazards (e.g., flood zones, seismic activity).
    • Legal: Easements, deed restrictions, zoning classifications, and any legal encumbrances that affect the site’s use.
    • Location: Proximity to amenities (schools, parks, shopping), transportation infrastructure (roads, public transit), and potential nuisances (e.g., noise, pollution).
  • Comparable Sales Data: Sales prices, dates of sale, financing terms, conditions of sale, and physical characteristics of similar vacant sites in the vicinity.

• Data Sources:

  • Public Records: County assessor’s office, planning department, zoning department, building permit records, environmental agencies❓❓ (for hazardous waste assessments).
  • Real Estate Professionals: Local brokers, developers, and property managers can provide insights into market conditions and comparable sales.
  • Geographic Information Systems (GIS): GIS provides spatial data related to zoning, floodplains, soils, and other site characteristics.
  • Environmental Consultants: Qualified consultants can perform Phase I and Phase II Environmental Site Assessments (ESAs) to identify potential contamination.
    V. Site Valuation Methods: Application and Mathematical Formulations

This section outlines commonly used site valuation methodologies.

• A. sales comparison❓ Approach:

  • Principle: The value of the subject site is derived by comparing it to similar vacant sites that have recently sold in the area.
  • Data: Sales prices of comparable sites, dates of sale, financing terms, conditions of sale, and any unique attributes that might affect value.

  • Adjustments: The appraiser makes adjustments to the sales prices of the comparable sites to account for any differences between them and the subject site (location, size, zoning, topography).

    Formula: Subject Value = Comparable Sales Price +/- Adjustments (for differences in attributes)

    • Example: A comparable site sold for $100,000, but it has better street access than the subject, which is a quantified $5,000. That would make the preliminary adjusted subject property value❓ equal to $95,000.

• B. Allocation Method

  • Principle: Land value is determined based on the typical ratio of land value to total property value for similar improved properties.
  • Data: Sales prices of comparable improved properties and the typical land-to-building value ratio in the market (derived from market studies or historical data).

  • Formula: Land Value = Total Property Value x Allocation Percentage.

    Example: If improved properties are selling for $200,000 and the market ratio of land to building is 20%, then that would make the resulting calculated site value equal to $40,000.

• C. Extraction Method:

  • Principle: The value of the land is extracted from the total property value by deducting the depreciated cost of the improvements.
  • Data: Sales price of comparable improved properties, estimated replacement cost of the improvements, and accrued depreciation (physical deterioration, functional obsolescence, external obsolescence).

  • Formula: Land Value = Total Property Value - Depreciated Cost of Improvements.

    Example: If a recently sold comparable is known to equal $350,000, and the total depreciated value of the current improvements is estimated as $150,000, the extraction method calculation of site value results in a number equal to $200,000.

• D. Development Method (Subdivision Analysis):

  • Principle: The value of the raw land is determined by estimating the revenues from the sale of finished lots, deducting the costs of development (construction, infrastructure, marketing, and profit), and discounting the resulting cash flow to its present value.
  • Data: Market data on sales prices of finished lots, construction costs, development expenses, absorption rates (how quickly lots are sold), and a suitable discount rate❓❓.

  • Mathematical Formulation (simplified):

    PV = Σ [ (Sales Revenue - Development Costs) / (1 + r)^t ]

    Where:

    • PV = Present Value of the land
    • Sales Revenue = Expected revenue from the sale of finished lots in period t.
    • Development Costs = Total costs of development in period t.
    • r = Discount rate (reflecting the risk and opportunity cost of capital)
    • t = Time period (e.g., year)
    • Σ = Summation operator (summing the discounted cash flows over the project’s duration)

    Example: Development of the property over a period of three years, with yearly lot sales after expenses equal to $100,000. With a discount rate of 10%, the site value can be shown as such:

    PV = $100,000/(1+0.10)^1 + $100,000/(1+0.10)^2 + $100,000/(1+0.10)^3.

• E. Land Residual Technique:

  • Principle: A capitalization rate is applied to residual value in the income stream.
  • Data: Rental rates, capitalization rates.

  • Formula: V_L = (I - V_imp * R_imp) / R_L*.
    Where:

    • V_L = Value of the land
    • I = Net Operating Income (NOI) of the property
    • V_imp = Value of improvements
    • R_imp = Capitalization rate for improvements
    • R_L = Capitalization rate for land

    Example:
    An office building with a Net Operating Income of $50,000. Estimated building value equals $400,000, and improvement cap rate equals 0.10. The land cap rate equals 0.08.
    `Land value = [ $50,000 - ($400,000 * 0.10)] / 0.08 = $125,000*.

• F. Ground Rent Capitalization:

  • Principle: The estimated site value based on the rent of the site.
  • Data: Ground rent, capitalization rate of similar sites.
  • Formula: V = I / R
    Where:
    V = value of the site
    I = Rent from the site* *R= Capitalization Rate

• G. Depth Tables:
  * Principle: Table showing how value is related to the depth of a site. Value is often higher on the front part of the site.
  * Example:* Depth Table indicating high value in front.

VI. Reconciliation and Final Value Opinion

After applying various valuation methods, reconciliation is crucial.

• Reconciliation Process: The appraiser analyzes the strengths and weaknesses of each method and gives weight to the most reliable indicators of value.
• Factors Influencing Weighting: The availability of comparable sales data, the reliability of cost data, and the accuracy of income and expense projections.
• Final Value Opinion: The appraiser forms a well-supported and defensible opinion of the site’s value, based on the data, analyses, and methodologies described in the appraisal report.

VII. Conclusion: Data-Driven, Scientifically Sound Site Valuation

Accurate site valuation is essential for reliable appraisal reports, supporting informed decision-making in real estate transactions and financial investments. Through meticulous data collection, rigorous analysis, and the thoughtful application of appropriate methodologies, appraisers❓ can arrive at well-supported and defensible opinions of site value. The utilization of technology such as the mobile app noted in the content provides an excellent and efficient means to quickly organize data and report.